Modine Manufacturing Co 10-Q for FY2022 Q2
Modine Manufacturing Co (MOD)
10-Q
2021-11-03
For: 2021-09-30
View Original
Added on
April 11, 2026
About this 10-Q
Modine Manufacturing Co filed this 10-Q on November 3, 2021, covering the quarter ended September 30, 2021 (FY2022 Q2).
Headline figures
Quarter ended September 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $478.9M
- up 3.8% from $461.4M a year earlier
- Net income
- $400K
- down 95.3% from net income of $8.6M a year earlier
- Diluted EPS
- $0.01
- down 94.1% from $0.17 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended September 30, 2021
or
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TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from ____________ to ____________
Commission file number 1-1373
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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(Address of principal executive offices)
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(Zip Code)
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Registrant’s telephone number, including area code (262 ) 636-1200
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Trading Symbol(s)
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Name of each exchange on which registered
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an
emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large Accelerated Filer ☐
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Non-accelerated Filer ☐
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Smaller reporting company
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Emerging growth company
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If an emerging growth company, indicate by checkmark if the registrant has not elected to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☑
The number of shares outstanding of the registrant’s common stock, $0.625 par
value, was 51,853,603 at October 29, 2021.
MODINE MANUFACTURING COMPANY
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PART I. FINANCIAL INFORMATION
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1
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26
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39
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40
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PART II. OTHER INFORMATION
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42
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PART I. FINANCIAL INFORMATION
MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and six months ended September 30, 2021 and 2020
(In millions, except per share amounts)
(Unaudited)
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Three months ended
September 30,
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Six months ended
September 30,
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2021
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2020
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2021
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2020
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Net sales
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$
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$
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$ | $ | ||||||||||
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Cost of sales
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Gross profit
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Selling, general and administrative expenses
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Restructuring expenses
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Impairment charges – net
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Loss on sale of assets
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Operating income
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Interest expense
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(
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(
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( |
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Other expense – net
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(
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(
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( |
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Earnings before income taxes
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Provision for income taxes
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(
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(
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( |
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Net earnings
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Net earnings attributable to noncontrolling interest
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(
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(
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Net earnings attributable to Modine
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$
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$
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$ | $ | ||||||||||
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Net earnings per share attributable to Modine shareholders:
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Basic
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$
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$
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$ | $ | ||||||||||
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Diluted
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$
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$
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$ | $ | ||||||||||
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Weighted-average shares outstanding:
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Basic
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Diluted
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The notes to condensed consolidated financial statements are an integral part of these statements.
MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three and six months ended September 30, 2021 and 2020
(In millions)
(Unaudited)
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Three months ended
September 30,
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Six months ended
September 30,
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2021
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2020
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2021
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2020
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Net earnings
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$
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$
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$ | $ | ||||||||||
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Other comprehensive income (loss):
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Foreign currency translation
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(
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( |
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Defined
benefit plans, net of income taxes of $
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Cash
flow hedges, net of income taxes of $
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( |
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Total other comprehensive income (loss)
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(
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Comprehensive income (loss)
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(
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Comprehensive loss (income) attributable to noncontrolling interest
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(
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Comprehensive income (loss) attributable to Modine
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$
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(
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$
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$ | $ | |||||||||
The notes to condensed consolidated financial statements are an integral part of these statements.
MODINE MANUFACTURING COMPANY
CONSOLIDATED BALANCE SHEETS
September 30, 2021 and March 31, 2021
(In millions, except per share amounts)
(Unaudited)
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September 30, 2021
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March 31, 2021
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ASSETS
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Cash and cash equivalents
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$
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$
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Trade accounts receivable – net
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Inventories
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Assets held for sale
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Other current assets
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Total current assets
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Property, plant and equipment – net
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Intangible assets – net
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Goodwill
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Deferred income taxes
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Other noncurrent assets
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Total assets
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$
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$
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LIABILITIES AND SHAREHOLDERS’ EQUITY
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Short-term debt
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$
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$
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Long-term debt – current portion
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Accounts payable
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Accrued compensation and employee benefits
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Liabilities held for sale
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Other current liabilities
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Total current liabilities
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Long-term debt
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Deferred income taxes
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Pensions
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Other noncurrent liabilities
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Total liabilities
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Commitments and contingencies (see Note 18)
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Shareholders’ equity:
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Preferred stock, $
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Common stock, $
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Additional paid-in capital
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Retained earnings
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Accumulated other comprehensive loss
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Treasury stock, at cost,
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(
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Total Modine shareholders’ equity
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Noncontrolling interest
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Total equity
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Total liabilities and equity
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$
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$
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The notes to condensed consolidated financial statements are an integral part of these statements.
MODINE MANUFACTURING COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended September 30, 2021 and 2020
(In millions)
(Unaudited)
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Six months ended
September 30,
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2021
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2020
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Cash flows from operating activities:
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Net earnings
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$
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$
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Adjustments to reconcile net earnings to net cash (used for) provided by operating activities:
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Depreciation and amortization
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Impairment charges – net
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Loss on sale of assets
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Stock-based compensation expense
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Deferred income taxes
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Other – net
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Changes in operating assets and liabilities:
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Trade accounts receivable
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Inventories
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(
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Accounts payable
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Other assets and liabilities
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Net cash (used for) provided by operating activities
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(
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Cash flows from investing activities:
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Expenditures for property, plant and equipment
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(
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Proceeds from (payments for) disposition of assets
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(
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| Disbursements for loan origination (see Note 1) | ( |
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Other – net
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Net cash used for investing activities
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(
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(
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Cash flows from financing activities:
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Borrowings of debt
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Repayments of debt
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(
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(
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Borrowings on bank overdraft facilities – net
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Financing fees paid
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(
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(
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Dividend paid to noncontrolling interest
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(
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Other – net
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(
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Net cash provided by (used for) financing activities
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(
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Effect of exchange rate changes on cash
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(
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Net increase (decrease) in cash, cash equivalents, restricted cash and cash held for sale
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(
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Cash, cash equivalents, restricted cash and cash held for sale – beginning of period
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Cash, cash equivalents, restricted cash and cash held for sale – end of period
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$
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$
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The notes to condensed consolidated financial statements are an integral part of these statements.
MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’
EQUITY
For the three and six months ended September 30,
2021 and 2020
(In millions)
(Unaudited)
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Common stock
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Additional
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Retained
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Accumulated other
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Treasury stock,
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Non- controlling
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Shares
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Amount
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paid-in capital
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earnings
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comprehensive loss
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at cost
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interest
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Total
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Balance, March 31, 2021
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$
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$
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$
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$
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(
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)
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$
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(
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)
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$
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$
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Net earnings
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-
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Other comprehensive income
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-
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Stock options and awards
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Purchase of treasury stock
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-
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(
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(
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Stock-based compensation expense
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-
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Dividend paid to noncontrolling interest
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- |
( |
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( |
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Balance, June 30, 2021
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$
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$
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$
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$
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(
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)
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$
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(
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)
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$
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$
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Net earnings
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-
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Other comprehensive loss
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-
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(
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)
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(
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(
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Stock options and awards
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Stock-based compensation expense
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-
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Balance, September 30, 2021
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$
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$
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$
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$
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(
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)
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$
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(
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)
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$
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$
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Common stock
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Additional
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Retained
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Accumulated other
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Treasury stock,
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Non-
controlling
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Shares
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Amount
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paid-in capital
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earnings
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comprehensive loss
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at cost
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interest
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Total
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Balance, March 31, 2020
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$
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$
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$
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$
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(
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)
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$
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(
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)
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$
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$
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Net (loss) earnings
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-
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(
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)
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(
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)
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Other comprehensive income
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-
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Stock options and awards
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(
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)
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Purchase of treasury stock
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-
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(
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(
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Stock-based compensation expense
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-
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Balance, June 30, 2020
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$
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$
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$
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$
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(
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)
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$
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(
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)
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$
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$
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Net earnings
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-
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Other comprehensive income
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-
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Stock options and awards
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Stock-based compensation expense
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-
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Balance, September 30, 2020
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|
$
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|
$
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|
$
|
|
$
|
(
|
)
|
$
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(
|
)
|
$
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|
$
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The notes to condensed consolidated financial statements are an integral part of these statements.
5
Table of Contents
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MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
|
Note 1: General
The accompanying unaudited condensed consolidated financial statements of Modine
Manufacturing Company (“Modine” or the “Company”) were prepared in conformity with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes necessary for a comprehensive presentation of financial position, results of operations and cash flows required by GAAP for complete financial
statements. The financial statements include all normal recurring adjustments that are, in the opinion of management, necessary for a fair statement of results for the interim periods. Results for the first six months of fiscal 2022 are
not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the consolidated financial statements and related notes in Modine’s Annual Report on Form 10-K for the year ended March 31, 2021.
Disposition of Air-cooled Automotive Business
On April 30, 2021, the Company sold its air-cooled automotive business to Schmid Metall GmbH. As a result of this transaction, the Company recorded a loss of $6.6 million during the first
quarter of fiscal 2022, which included the write-off of $1.7
million of net actuarial losses related to the business’s pension plan. The Company reported this loss within the loss on sale of assets line on the consolidated statement
of operations. Upon transaction closing, $5.9 million of cash within the business transferred to the buyer. The finalization of and payment for the purchase price adjustment for net working capital and certain other items, as defined by the sale agreement, is pending. While the Company does
not expect a material adjustment, it is possible that the loss on sale may increase when the purchase price adjustment is finalized. Prior to the disposition, the Company reported the financial results of this business within the Automotive
segment. The air-cooled automotive business’s net sales were $63.0 million in fiscal 2021.
In connection with the sale of the air-cooled automotive business, the Company provided the buyer with a 5 -year, 4.0 million euro loan facility.
Borrowings under the agreement currently bear interest at 2.5 percent. During the second quarter of fiscal 2022, the Company disbursed
4.0 million euro, or $4.7
million, to the buyer under this facility. As of September 30, 2021, the Company recorded the loan receivable within other noncurrent assets on its consolidated balance sheet because the Company expects to receive the principal repayment more than
twelve months from the balance sheet date.
Disposition of Previously-Closed Facility
During the first quarter of fiscal 2022, the Company signed a definitive agreement to sell a previously-closed manufacturing facility
in the U.S. As a result, the Company recorded an impairment charge of $0.3 million within the Commercial and Industrial Solutions
(“CIS”) segment to write-down the property to fair value less costs to sell. During July 2021, the sale was completed and the Company received net cash proceeds of $0.7 million.
Chief Executive Officer (“CEO”) Transition in Fiscal 2021
In August 2020, Thomas A. Burke stepped down from his position as President and CEO. As a result of Mr. Burke’s departure and in
connection with the search for his successor, the Company recorded costs totaling $5.5 million during the second quarter of fiscal
2021. These costs, which were recorded as selling, general and administrative (“SG&A”) expenses at Corporate, primarily consisted of severance and benefit-related expenses based upon the terms of Mr. Burke’s transition and separation
agreement and costs directly associated with the CEO search, partially offset by the impact of Mr. Burke’s forfeited stock-based compensation awards.
6
Table of Contents
|
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
|
Note 2: Assets Held for Sale
Liquid-cooled Automotive Business
On November 2, 2020, the Company signed a definitive agreement to sell its liquid-cooled automotive business to Dana Incorporated (“Dana”), subject to the receipt of governmental and third-party approvals and satisfaction of other closing conditions. During the first quarter of fiscal 2022, the Company and Dana
withdrew the regulatory filing for approval of the transaction in Germany. The Company and Dana subsequently resubmitted a plan containing a modified sale perimeter for regulatory approval. During the second quarter of fiscal 2022, the Company and
Dana engaged with the regulatory authority in Germany, providing responses and information as requested. As of September 30, 2021, the Company believed it was probable that the sale would close within one year and all held for sale criteria were
met. Accordingly, the Company classified the assets and liabilities within the modified sale perimeter as held for sale on its September 30, 2021 consolidated balance sheet.
On October 25, 2021, the Company announced that it has reached a mutual agreement with Dana to terminate the sale agreement. Both companies have been
actively engaged in the regulatory review process in Germany for many months and mutually decided that it is no longer in the best interest of either party to pursue the transaction further. As a result, the Company expects that the
liquid-cooled automotive business will no longer meet the requirements to be classified as held for sale during the third quarter of fiscal 2022. The Company expects that, upon reverting back to held and used classification during the third
quarter of fiscal 2022, it will measure the asset groups within the modified sale perimeter at the lower of their (i) carrying value, as if held for sale classification had not been met; or (ii) fair value. The long-lived assets within the
liquid-cooled automotive business, primarily property, plant and equipment, have been fully impaired while classified as held for sale. Through September 30, 2021, the Company recorded $119.6 million of cumulative asset impairment charges related to these assets. At this time, the Company is unable to quantify or predict any adjustments to the carrying
value of the liquid-cooled automotive business's long-lived assets to be recorded during the third quarter of fiscal 2022.
At each reporting date while the liquid-cooled automotive business was held for sale, the Company reassessed its fair value less costs to sell. As a
result of these evaluations for the first two quarters of fiscal 2022, the Company recorded a total of $8.6 million of non-cash
impairment charges related to the Automotive segment’s held for sale assets. These impairment charges reduced the net carrying value of property, plant and equipment additions during each quarter to zero 7.4
million of impairment charges to adjust the long-lived asset groups to their estimated fair value as of June 30, 2021. For purposes of its evaluation, the Company estimated the fair value of the businesses primarily using the income approach,
which is a valuation technique that focuses on future cash flows anticipated to be generated by a business. The Company’s determination of fair value involved judgement and the use of significant estimates and assumptions, including
assumptions regarding future revenue projections and operating profit margins, risk-adjusted discount rates, business trends and market conditions. The fair value measurements of these businesses are categorized as Level 3 within the fair
value hierarchy. Refer to Note 4 for the definition of a Level 3 fair value measurement.
7
Table of Contents
|
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
|
Assets and Liabilities Held for Sale
As of September 30, 2021, the Company presented the assets and liabilities within the modified sale perimeter of the liquid-cooled automotive business as held for sale on its consolidated balance sheet.
As of March 31, 2021, the Company presented the assets and liabilities of the liquid- and air-cooled automotive businesses as held for sale. See Note 1 for
additional information regarding the sale of the air-cooled automotive business, which was completed on April 30, 2021.
The major classes of assets and liabilities held for sale were as follows:
|
September 30, 2021
|
March 31, 2021
|
|||||||
|
ASSETS
|
||||||||
|
Cash and cash equivalents
|
$
|
|
$
|
|
||||
|
Trade accounts receivable – net
|
|
|
||||||
|
Inventories
|
|
|
||||||
|
Other current assets
|
|
|
||||||
|
Property, plant and equipment – net
|
|
|
||||||
|
Other noncurrent assets
|
|
|
||||||
|
Impairment of carrying value
|
(
|
)
|
(
|
)
|
||||
|
Total assets held for sale
|
$
|
|
$
|
|
||||
|
LIABILITIES
|
||||||||
|
Short-term debt
|
$
|
|
$
|
|
||||
|
Accounts payable
|
|
|
||||||
|
Accrued compensation and employee benefits
|
|
|
||||||
|
Other current liabilities
|
|
|
||||||
|
Pensions
|
|
|
||||||
|
Other noncurrent liabilities
|
|
|
||||||
|
Total liabilities held for sale
|
$
|
|
$
|
|
||||
Note 3: Revenue Recognition
Disaggregation of Revenue
The table below presents revenue for each of the Company’s business segments,
Building HVAC Systems (“BHVAC”), CIS, Heavy Duty Equipment (“HDE”) and Automotive. Each segment’s revenue is disaggregated by primary end market, by geographic location and based upon the timing of revenue recognition and includes inter-segment
sales.
Effective July 1, 2021, the Company aligned the data center businesses previously managed by and reported within the CIS segment under the BHVAC segment; see
Note 20 for additional information regarding the Company’s operating segments. In connection with this segment realignment, the Company also reassessed end market classifications within the impacted businesses. The primary end market revenue
information presented in the tables below for fiscal 2021 has been recast to conform to the Company’s new classifications for its end markets.
8
Table of Contents
|
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
|
|
Three months ended September 30,
2021
|
Three months ended September 30,
2020
|
|||||||||||||||||||||||||||||||||||||||
|
BHVAC
|
CIS
|
HDE
|
Automotive
|
Segment
Total
|
BHVAC
|
CIS
|
HDE
|
Automotive
|
Segment
Total
|
|||||||||||||||||||||||||||||||
|
Primary end market:
|
||||||||||||||||||||||||||||||||||||||||
|
Commercial HVAC&R
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||||||||||
|
Data center cooling
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||
|
Industrial cooling
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||
|
Commercial vehicle
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||
|
Off-highway
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||
|
Automotive and light vehicle
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||
|
Other
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||
|
Net sales
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||||||||||
|
Geographic location:
|
||||||||||||||||||||||||||||||||||||||||
|
Americas
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||||||||||
|
Europe
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||
|
Asia
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||
|
Net sales
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||||||||||
|
Timing of revenue recognition:
|
||||||||||||||||||||||||||||||||||||||||
|
Products transferred at a point in time
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||||||||||
|
Products transferred over time
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||
|
Net sales
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||||||||||
|
Six months ended
September 30, 2021
|
Six months ended
September 30, 2020
|
|||||||||||||||||||||||||||||||||||||||
|
BHVAC
|
CIS
|
HDE
|
Automotive
|
Segment
Total
|
BHVAC
|
CIS
|
HDE
|
Automotive
|
Segment
Total
|
|||||||||||||||||||||||||||||||
|
Primary end market:
|
||||||||||||||||||||||||||||||||||||||||
|
Commercial HVAC&R
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||||||||||
|
Data center cooling
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||
|
Industrial cooling
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||
|
Commercial vehicle
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||
|
Off-highway
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||
|
Automotive and light vehicle
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||
|
Other
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||
|
Net sales
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||||||||||
|
Geographic location:
|
||||||||||||||||||||||||||||||||||||||||
|
Americas
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||||||||||
|
Europe
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||
|
Asia
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||
|
Net sales
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||||||||||
|
Timing of revenue recognition:
|
||||||||||||||||||||||||||||||||||||||||
|
Products transferred at a point in time
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||||||||||
|
Products transferred over time
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||
|
Net sales
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||||||||||
9
Table of Contents
|
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
|
Contract Balances
Contract assets and contract liabilities from contracts with customers were as follows:
|
September 30, 2021
|
March 31, 2021
|
|||||||
|
Contract assets
|
$
|
|
$
|
|
||||
|
Contract liabilities
|
|
|
||||||
Contract assets, included within other current assets in the consolidated balance sheets, primarily consist of capitalized costs related to customer-owned
tooling contracts, wherein the customer has guaranteed reimbursement, and assets recorded for revenue recognized over time, which represent the Company’s rights to consideration for work completed but not yet billed. The $4.7 million increase in contract assets during the first six months of fiscal 2022 primarily resulted from an increase in contracts assets for revenue
recognized over time and, to a lesser extent, an increase in capitalized costs related to customer-owned tooling contracts.
Contract liabilities, included within other current liabilities in the consolidated balance sheets, consist of payments received in advance of satisfying
performance obligations under customer contracts, including contracts for customer-owned tooling. The $1.5 million increase in contract
liabilities during the first six months of fiscal 2022 was primarily related to customer contracts for which payment was received in advance of the Company’s satisfaction of performance obligations.
Note 4: Fair Value Measurements
Fair value is defined as the price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants. Fair value measurements are classified under the following hierarchy:
| • |
Level 1 – Quoted prices for identical instruments in active markets.
|
| • |
Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived
valuations in which all significant inputs are observable in active markets.
|
| • |
Level 3 – Model-derived valuations in which one or more significant inputs are not observable.
|
When available, the Company uses quoted market prices to determine fair value and classifies such measurements as Level 1. In some cases, where market prices
are not available, the Company uses observable market-based inputs to calculate fair value, in which case the measurements are classified as Level 2. If quoted or observable market prices are not available, the Company determines fair value based
upon valuation models that use, where possible, market-based data such as interest rates, yield curves or currency rates. These measurements are classified as Level 3.
The carrying values of cash, cash equivalents, restricted cash, short-term investments, trade accounts receivable, accounts payable, and short-term debt
approximate fair value due to the short-term nature of these instruments. In addition, the Company assesses the fair value of a disposal group for each reporting period
it is held for sale. See Note 2 for additional information regarding assets held for sale. The fair value of the Company’s long-term debt is disclosed in Note
17.
The Company holds investments in deferred compensation trusts to fund obligations
under certain non-qualified deferred compensation plans. The Company records the fair value of these investments within other noncurrent assets on its consolidated balance sheets. The Company classifies money market investments held by the trusts
within Level 2 of the valuation hierarchy. The Company classifies all other
investments held by the trusts within Level 1 of the valuation hierarchy, as it
uses quoted market prices to determine the investments’ fair value. The Company’s deferred compensation obligations, which are recorded as other noncurrent liabilities, are recorded at the fair values of the investments held by the trust. At September 30, 2021 and March 31, 2021, the fair values of the investments and obligations for the Company’s deferred compensation plans each totaled $2.9 2.8
10
Table of Contents
|
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
|
Note 5: Pensions
Pension cost included the following components:
|
Three months ended
September 30,
|
Six months ended
September 30,
|
|||||||||||||||
|
2021
|
2020
|
2021
|
2020
|
|||||||||||||
|
Service cost
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Interest cost
|
|
|
|
|
||||||||||||
|
Expected return on plan assets
|
(
|
)
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||||
|
Amortization of unrecognized net loss
|
|
|
|
|
||||||||||||
|
Net periodic benefit cost
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
During the six months ended September 30, 2021, the Company contributed $3.5 million to its U.S. pension plans.
Note 6: Stock-Based Compensation
The Company’s stock-based incentive programs consist of the following: (1) a long-term incentive plan (“LTIP”) for officers and other executives that
consists of stock awards, stock options, and performance-based stock awards granted for retention and performance, (2) a discretionary equity program for other management and key employees, and (3) stock awards for non-employee directors.
The Company calculates compensation expense based upon the fair value of the instruments at the time of grant and subsequently recognizes expense ratably
over the respective vesting periods of the stock-based awards. The Company recognized stock-based compensation expense of $2.4 million
and $1.4 million for the three months ended
September 30, 2021 and 2020, respectively. The Company recognized stock-based compensation expense of $3.6 million and $2.1 million for the six months ended September 30, 2021 and 2020, respectively.
The fair value of stock-based compensation awards granted during the six months
ended September 30, 2021 were as follows:
| |
Shares
|
Fair Value
Per Award
|
||||||
|
Stock options
|
|
$
|
|
|||||
|
Restricted stock awards
|
|
$
|
|
|||||
| Unrestricted stock awards | $ | |||||||
In lieu of performance-based stock awards, the Company granted performance cash
awards to the LTIP participants during the first six months of fiscal 2022. The performance metrics for the cash awards are based upon a target three-year average cash flow return on invested capital and a target three-year average growth in consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”) at the end of the three-year performance period ending March 31, 2024.
In fiscal 2021, the Company granted stock-based awards to officers and other executives during the third quarter of the fiscal year.
11
Table of Contents
|
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
|
The Company used the following assumptions in
determining fair value for stock options for the six months
ended September 30, 2021:
|
Expected life of awards in years
|
|
|||
|
Risk-free interest rate
|
|
%
|
||
|
Expected volatility of the Company’s stock
|
|
%
|
||
|
Expected dividend yield on the Company’s stock
|
|
%
|
As of September 30, 2021, unrecognized compensation expense related to
non-vested stock-based compensation awards, which will be amortized over the remaining service periods, was as follows:
| |
Unrecognized
Compensation
Expense
|
Weighted-Average
Remaining Service
Period in Years
|
||||||
|
Stock options
|
$
|
|
|
|||||
|
Restricted stock awards
|
|
|
||||||
|
Performance stock awards
|
|
|
||||||
|
Total
|
$
|
|
|
|||||
Note 7: Restructuring Activities
During the first six months of fiscal 2022, restructuring and repositioning expenses primarily consisted of equipment transfer costs within the HDE segment and
severance-related costs associated with targeted headcount reductions in the Automotive and CIS segments.
During the
first six months of fiscal 2021, the Company recorded $3.0 million of severance expenses related to plant consolidation activities in China within the
CIS segment. The Company also implemented targeted headcount reductions in the HDE and CIS segments.
Restructuring and repositioning expenses were as follows:
|
Three months ended
September 30,
|
Six months ended
September 30,
|
|||||||||||||||
|
2021
|
2020
|
2021
|
2020
|
|||||||||||||
|
Employee severance and related benefits
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Other restructuring and repositioning expenses
|
|
|
|
|
||||||||||||
|
Total
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
Other restructuring and repositioning expenses primarily consist of equipment transfers and plant consolidation costs.
12
Table of Contents
|
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
|
The Company accrues severance in accordance with its written plans, procedures, and relevant statutory requirements. Changes in accrued severance were as
follows:
|
Three months ended September 30,
|
||||||||
|
2021
|
2020
|
|||||||
|
Beginning balance
|
$
|
|
$
|
|
||||
|
Additions
|
|
|
||||||
|
Payments
|
(
|
)
|
(
|
)
|
||||
|
Effect of exchange rate changes
|
(
|
)
|
|
|||||
|
Ending balance
|
$
|
|
$
|
|
||||
| Six months ended September 30, | ||||||||
| 2021 |
2020 |
|||||||
| Beginning balance | $ |
$ | ||||||
| Additions | ||||||||
| Payments | ( |
) | ( |
) | ||||
| Effect of exchange rate changes | ( |
) | ||||||
| Ending balance | $ |
$ | ||||||
Note 8: Other Income and Expense
Other income and expense consisted of the following:
|
Three months ended
September 30,
|
Six months ended
September 30,
|
|||||||||||||||
|
2021
|
2020
|
2021
|
2020
|
|||||||||||||
|
Interest income
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Foreign currency transactions (a)
|
(
|
)
|
|
(
|
)
|
|
||||||||||
|
Net periodic benefit cost (b)
|
(
|
)
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||||
|
Total other expense – net
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
||||
| (a) |
|
| (b) |
|
13
Table of Contents
|
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
|
Note 9: Income Taxes
The Company’s effective tax rate for the three months ended September 30, 2021
and 2020 was 90.0 percent and 61.0 percent, respectively. The Company’s effective tax rate for the six months ended September 30, 2021 and 2020 was 68.2 percent and 96.5 percent, respectively.
The effective tax rate for the second quarter of fiscal 2022 was negatively impacted
by a $1.6 million income tax charge related to a valuation allowance established on deferred tax assets in a foreign jurisdiction. The
effective tax rate for the first six months of fiscal 2022, however, was positively impacted by a net $3.2 million income tax benefit
related to valuation allowances on deferred tax assets in foreign jurisdictions. Compared to the fiscal 2021 periods, the effective tax rates for the fiscal 2022 periods were negatively impacted by changes in the mix and amount of foreign and
U.S. earnings. The effective tax rates for the fiscal 2021 periods were negatively impacted by a $6.6
The Company records valuation allowances against its net deferred tax assets to the extent it determines it is more likely than not that such assets will
not be realized in the future. Each quarter, the Company evaluates the probability that its deferred tax assets will be realized and determines whether valuation allowances or adjustments thereto are needed. This determination involves judgement
and the use of significant estimates and assumptions, including expectations of future taxable income and tax planning strategies. In addition, the Company considers the duration of statutory carryforward periods and historical financial results.
Based upon the Company’s analysis as of June 30, 2021, the Company determined it was more likely than not that the deferred tax assets in a foreign jurisdiction will be
realized. As a result, the need for the valuation allowance recorded thereon was eliminated and the Company recorded an income tax benefit of $
4.8 million in the first quarter of fiscal 2022. The Company’s analysis included consideration of the perimeter modifications for the liquid-cooled automotive business and the
associated reversal of $7.4 million of impairment
charges during the first quarter of fiscal 2022; see Note 2 for additional information. Based upon the Company’s
analysis as of September 30, 2021, the Company determined it was more likely than not that the deferred tax assets in a foreign jurisdiction will not be realized. As a result, the Company recorded an income tax charge of $1.6 million in the second quarter of fiscal 2022. Combined, these fiscal 2022 valuation allowance adjustments resulted in a net income tax benefit of $3.2 million during the first six months of fiscal 2022.
Based
upon the Company’s analysis as of September 30, 2020, the Company recorded an income tax charge of $6.6
As of September 30, 2021, valuation allowances against deferred tax assets in the U.S. and in certain foreign jurisdictions totaled $86.0 million and $11.4 million, respectively. These totals exclude the full valuation allowances recorded for net deferred tax assets classified as held for sale. The Company will maintain the valuation allowances in each
applicable tax jurisdiction until it determines it is more likely than not the deferred tax assets will be realized, thereby eliminating the need for a valuation allowance. Future events or circumstances, such as lower taxable income or unfavorable changes in the financial outlook of the Company’s operations in certain foreign jurisdictions, could necessitate the establishment of further valuation
allowances.
Accounting policies for interim reporting require the Company to adjust its
effective tax rate each quarter to be consistent with its estimated annual effective tax rate. Under this methodology, the Company applies its estimated annual income tax rate to its year-to-date ordinary earnings to derive its income tax
provision each quarter. The Company records the tax impacts of certain significant, unusual or infrequently occurring items in the period in which they occur. The Company excluded the impact of its operations in the U.S. and certain foreign
locations from the overall effective tax rate methodology and recorded them discretely based upon year-to-date results because the Company anticipates net operating losses for the full fiscal year in these jurisdictions. The Company does not
anticipate a significant change in unrecognized tax benefits during the remainder of fiscal 2022.
14
Table of Contents
|
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
|
Note 10: Earnings Per Share
The components of basic and diluted earnings per share were as follows:
|
Three months ended
September 30,
|
Six months ended
September 30,
|
|||||||||||||||
|
2021
|
2020
|
2021
|
2020
|
|||||||||||||
|
Net earnings attributable to Modine
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Weighted-average shares outstanding - basic
|
|
|
|
|
||||||||||||
|
Effect of dilutive securities
|
|
|
|
|
||||||||||||
|
Weighted-average shares outstanding - diluted
|
|
|
|
|
||||||||||||
|
Earnings per share:
|
||||||||||||||||
|
Net earnings per share - basic
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Net earnings per share - diluted
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
For both the three and six months ended September 30, 2021, the calculation of diluted earnings per share
excluded 0.6 0.2
For the three and six months ended September 30, 2020, the calculation of diluted earnings per share
excluded 1.0 million and 1.1 million stock options, respectively, because they were anti-dilutive. In addition, the calculation for both the three and six months ended September
30, 2020 excluded 0.4
Note 11: Cash, Cash Equivalents and Restricted Cash
Cash, cash equivalents and restricted cash consisted of the following:
|
September 30, 2021
|
March 31, 2021
|
|||||||
|
Cash and cash equivalents
|
$
|
|
$
|
|
||||
|
Restricted cash
|
|
|
||||||
|
Cash and restricted cash held for sale
|
|
|
||||||
|
Total cash, cash equivalents, restricted cash and cash held for sale
|
$
|
|
$
|
|
||||
Restricted cash, which is reported within other current assets in the consolidated balance sheets, consists primarily of deposits for contractual guarantees
or commitments required for rents, import and export duties, and commercial agreements.
15
Table of Contents
|
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
|
Note 12: Inventories
Inventories consisted of the following:
|
September 30, 2021
|
March 31, 2021
|
|||||||
|
Raw materials
|
$
|
|
$
|
|
||||
|
Work in process
|
|
|
||||||
|
Finished goods
|
|
|
||||||
|
Total inventories
|
$
|
|
$
|
|
||||
Inventories in the table above exclude amounts classified as held for sale. See Note 2 for additional information.
Note 13: Property, Plant and Equipment
Property, plant and equipment, including depreciable lives, consisted of the following:
|
September 30, 2021
|
March 31, 2021
|
|||||||
|
Land
|
$
|
|
$
|
|
||||
|
Buildings and improvements (
|
|
|
||||||
|
Machinery and equipment (
|
|
|
||||||
|
Office equipment (
|
|
|
||||||
|
Construction in progress
|
|
|
||||||
|
|
|
|||||||
|
Less: accumulated depreciation
|
(
|
)
|
(
|
)
|
||||
|
Net property, plant and equipment
|
$
|
|
$
|
|
||||
Property, plant and equipment in the table above excludes amounts classified as held for sale. See Note 2 for additional information.
16
Table of Contents
|
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
|
Note 14: Goodwill and Intangible Assets
Effective July 1, 2021, the Company aligned the data center businesses previously managed by and reported within the CIS segment under
the BHVAC segment; see Note 20 for additional information. As a result of this segment realignment, the Company reassigned a total of $32.5
million of goodwill from a reporting unit within the segment to the reporting units within the BHVAC segment using the relative fair
value approach. To determine the amount of goodwill to be reassigned, the Company compared the estimated fair values of the businesses transferred to the BHVAC segment with the CIS reporting unit immediately prior to the segment change. The
Company estimated the fair values of the affected businesses based upon the present value of their anticipated future cash flows. The Company’s determination of fair value involved judgment and the use of significant estimates and assumptions,
including assumptions regarding the revenue growth rates and operating profit margins used to calculate estimated future cash flows, risk-adjusted discount rates, business trends and market conditions.
The following table presents a rollforward of the carrying value of goodwill from March 31, 2021 to September 30, 2021. The Company has revised the March 31,
2021 goodwill balances to be comparable with the current segment structure.
|
BHVAC
|
CIS
|
Total
|
||||||||||
|
Goodwill, March 31, 2021
|
$
|
|
$
|
|
$
|
|
||||||
|
Effect of exchange rate changes
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Goodwill, September 30, 2021
|
$
|
|
$
|
|
$
|
|
||||||
In conjunction with the goodwill reassignment evaluation described above, the Company tested its reporting units for potential impairment and concluded that
the estimated fair value of each reporting unit exceeded its respective carrying value.
Although the Company concluded goodwill was not impaired, the Company identified that subsequent to the segment realignment, the estimated fair value of the Coils and Coolers
reporting unit within the CIS segment exceeds its carrying value by approximately 8.0 percent. As such, there is a heightened risk of
a future impairment charge with respect to the $61.0 million of goodwill recorded in this reporting unit as of September 30, 2021. In
estimating the fair value of the Coils and Coolers reporting unit, the Company calculated the present value of its anticipated future cash flows using a discounted cash flow model. The most significant estimates and assumptions inherent in the
discounted cash flow model are forecasted financial results, the terminal growth rate, and the discount rate. These assumptions are classified as level 3 inputs. Refer to Note 4 for the definition of a Level 3 fair value measurement. The
Company utilized its multi-year projections for revenue and operating income margins and considered both historical revenue growth rates and earnings levels as well as its assessment of future market potential and expectations for the future
financial performance of the reporting unit. The Company used a discount rate corresponding to its estimated cost of capital, adjusting for country-specific risks based upon the location of the businesses within the reporting unit.
While the Company believes the assumptions it used in estimating the Coils and Coolers reporting unit’s fair value were appropriate and resulted in a
reasonable estimate of its fair value, future events or circumstances could have a negative effect on its estimated fair value and could trigger an impairment charge. These potential future events or circumstances could include lower than
forecasted revenues or earnings, market trends that fall below the Company’s current expectations, actions of key customers, or increases in the discount rate. The Company cannot predict the occurrence of events or changes in circumstances that
could adversely affect the reporting unit’s future revenue and operating income margins or increase the discount rate, thereby resulting in an impairment charge which could be material to the Company’s consolidated financial statements.
17
Table of Contents
|
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
|
Intangible assets consisted of the following:
|
September 30, 2021
|
March 31, 2021
|
|||||||||||||||||||||||
|
Gross
Carrying
Value
|
Accumulated
Amortization
|
Net
Intangible
Assets
|
Gross
Carrying
Value
|
Accumulated
Amortization
|
Net
Intangible
Assets
|
|||||||||||||||||||
|
Customer relationships
|
$
|
|
$
|
(
|
)
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
||||||||||
|
Trade names
|
|
(
|
)
|
|
|
(
|
)
|
|
||||||||||||||||
|
Acquired technology
|
|
(
|
)
|
|
|
(
|
)
|
|
||||||||||||||||
|
Total intangible assets
|
$
|
|
$
|
(
|
)
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
||||||||||
The Company recorded amortization expense of $2.1 4.2 4.2 million of amortization
expense during the remainder of fiscal 2022 and approximately $8.0
Note 15: Product Warranties
Changes in accrued warranty costs were as follows:
|
Three months ended September 30,
|
||||||||
|
2021
|
2020
|
|||||||
|
Beginning balance
|
$
|
|
$
|
|
||||
|
Warranties recorded at time of sale
|
|
|
||||||
|
Adjustments to pre-existing warranties
|
(
|
)
|
|
|||||
|
Settlements
|
(
|
)
|
(
|
)
|
||||
|
Effect of exchange rate changes
|
|
|
||||||
|
Ending balance
|
$
|
|
$
|
|
||||
|
Six months ended
September 30,
|
||||||||
|
2021
|
2020
|
|||||||
|
Beginning balance
|
$
|
|
$
|
|
||||
|
Warranties recorded at time of sale
|
|
|
||||||
|
Adjustments to pre-existing warranties
|
(
|
)
|
|
|||||
|
Settlements
|
(
|
)
|
(
|
)
|
||||
|
Effect of exchange rate changes
|
|
|
||||||
|
Ending balance
|
$
|
|
$
|
|
||||
18
Table of Contents
|
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
|
Note 16: Leases
Lease Assets and Liabilities
The following table provides a summary of leases recorded on the consolidated balance sheets. The amounts exclude operating lease right of use (“ROU”) assets and liabilities, which each totaled $4.0 6.1
|
Balance Sheet Location
|
September 30, 2021
|
March 31, 2021
|
||||||||
|
Lease Assets
|
||||||||||
|
Operating lease ROU assets
|
|
$
|
|
$
|
|
|||||
|
Finance lease ROU assets (a)
|
|
|
|
|||||||
|
Lease Liabilities
|
||||||||||
|
Operating lease liabilities
|
|
$
|
|
$
|
|
|||||
|
Operating lease liabilities
|
|
|
|
|||||||
|
Finance lease liabilities
|
|
|
|
|||||||
|
Finance lease liabilities
|
|
|
|
|||||||
| (a) |
|
Components of Lease Expense
The components of lease expense were as follows:
|
Three months ended
September 30,
|
Six months ended
September 30,
|
|||||||||||||||
|
2021
|
2020
|
2021
|
2020
|
|||||||||||||
|
Operating lease
expense (a)
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Finance lease
expense:
|
||||||||||||||||
|
Depreciation of
ROU assets
|
|
|
|
|
||||||||||||
|
Interest on
lease liabilities
|
|
|
|
|
||||||||||||
|
Total lease
expense
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
(a)
|
|
19
Table of Contents
|
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
|
Note 17: Indebtedness
Long-term debt consisted of the following:
|
_
|
Fiscal year of maturity
|
September 30, 2021
|
March 31, 2021
|
||||||
|
Term loans
|
|
$
|
|
$
|
|
||||
|
Revolving credit facility
|
|
|
|
||||||
|
|
|
|
|
||||||
|
|
|
|
|
||||||
|
Other (a)
|
|
|
|||||||
|
|
|
||||||||
|
Less: current portion
|
(
|
)
|
(
|
)
|
|||||
|
Less: unamortized debt issuance costs
|
(
|
)
|
(
|
)
|
|||||
|
Total long-term debt
|
$
|
|
$
|
|
|||||
| (a) |
|
Long-term debt, including the current portion of long-term debt, matures as follows:
|
Fiscal Year
|
||||
|
Remainder of 2022
|
$
|
|
||
|
2023
|
|
|||
|
2024
|
|
|||
|
2025
|
|
|||
|
2026
|
|
|||
|
2027 & beyond
|
|
|||
|
Total
|
$
|
|
||
The Company maintains a credit agreement with a syndicate of banks that provides
for a multi-currency $250.0 million revolving credit facility expiring in June 2024. In addition, this credit agreement provides for both U.S. dollar- and euro-denominated term loan facilities and
shorter-duration swingline loans. Borrowings under the revolving credit, swingline and term loan facilities bear interest at a variable rate based upon the applicable reference rate and including a margin percentage dependent upon the Company’s
leverage ratio, as described below. At September 30, 2021, the weighted-average interest rates for revolving credit facility borrowings and the term loans were each 1.6 percent. Based upon the terms of the credit agreement, the Company classifies borrowings under its revolving credit and swingline facilities as long-term and short-term debt, respectively, on its
consolidated balance sheets.
20
Table of Contents
|
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
|
At September 30, 2021, the Company’s revolving credit facility borrowings totaled $67.2 million and domestic letters of credit totaled $5.7 million, resulting in
available borrowings under the revolving credit facility of $177.1 million.
The Company also maintains credit agreements for its foreign subsidiaries. The outstanding short-term borrowings related to these foreign credit agreements
totaled $15.2 million at September 30, 2021, of which $15.0 million was classified as held for sale. The $5.0
Provisions in the Company’s credit agreement, Senior Note agreements, and various foreign credit agreements require the Company to maintain compliance with
various covenants and include certain cross-default clauses. Under its primary debt agreements in the U.S., the Company has provided liens on substantially all domestic assets. Also, as specified in the credit agreement, the term loans may require
prepayments in the event of certain asset sales. In addition, at the time of each incremental borrowing under the revolving credit facility, the Company is required to represent to the lenders that there has been no material adverse effect, as
defined in the credit agreement, on its business, property, or results of operations.
The leverage ratio covenant requires the Company to limit its consolidated indebtedness, less a portion of its cash balances, both as defined by the credit
agreements, to no more than times consolidated net earnings before interest, taxes, depreciation, amortization, and
certain other adjustments (“Adjusted EBITDA”.) The Company is also subject to an interest expense coverage ratio covenant, which requires the Company to maintain Adjusted EBITDA of at least three times consolidated interest expense. As of September
30, 2021, the Company was in compliance with its debt covenants; its leverage ratio and interest coverage ratio were 2.5 and 10.1 , respectively.
The Company estimates the fair value of long-term debt using discounted future cash flows at rates offered to the Company for similar debt instruments of
comparable maturities. As of September 30, 2021 and March 31, 2021, the carrying value of the Company’s long-term debt approximated fair value, with the exception of the Senior Notes, which had an aggregate fair value of $155.1 million and $146.0 million,
respectively. The fair value of the Company’s long-term debt is categorized as Level 2 within the fair value hierarchy. Refer to Note 4 for the definition of a Level 2 fair value measurement.
Note 18: Risks, Uncertainties, Contingencies and Litigation
COVID-19
The COVID-19 pandemic has broadly impacted the global economy and the Company’s key end markets, which were most severely impacted during the first quarter of
fiscal 2021. In connection with local government requirements or customer shutdowns, the Company suspended production at many of its manufacturing facilities in March and April 2020. Beginning largely in April 2020 and to mitigate the negative
impacts of COVID-19, the Company took actions including, but not limited to, production staffing adjustments, furloughs, shortened work weeks, and temporary salary reductions at all levels of the organization. All of the temporarily-closed
facilities reopened in the first or second quarter of fiscal 2021 and have generally returned to more normal production levels. However, since reopening, production at certain of our plants has been negatively affected at times by employee absences
due to COVID-19. The Company is continuing to focus on protecting the health and wellbeing of its employees and the communities in which it operates, while also ensuring the continuity of its business operations and timely delivery of quality
products and services to its customers. While the Company withdrew most of the cost-saving actions in the third quarter of fiscal 2021 as production returned to more normal levels as markets recovered, it remains focused on controlling operating and
administrative expenses.
The Company’s consolidated financial statements reflect estimates and assumptions made by management, including assumptions regarding the future impacts of
the COVID-19 pandemic, that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenue and expenses during the
reporting periods presented. While the Company believes it used appropriate estimates and assumptions to prepare the consolidated financial statements, actual amounts could differ materially, and future events or circumstances could have a potential
negative effect on the assumptions used. If the Company, its suppliers, or its customers experience additional shutdowns or other significant business disruptions associated with the COVID-19 pandemic, its ability to conduct business in the manner
and on the timelines presently planned could be materially and negatively impacted, which could have a material adverse effect on the Company’s business, financial position, results of operations and cash flows.
21
Table of Contents
|
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
|
Environmental
The Company has recorded environmental investigation and remediation accruals related to manufacturing facilities in the U.S., one of which the Company
currently owns and operates, and a former manufacturing facility in the Netherlands. These accruals primarily relate to soil and groundwater contamination at facilities where past operations followed practices and procedures that were considered
acceptable under then-existing regulations, or where the Company is a successor to the obligations of prior owners, and current laws and regulations require investigative and/or remedial work to ensure sufficient environmental compliance. In
instances where a range of loss can be reasonably estimated for a probable environmental liability, but no amount within the range is a better estimate than any other amount, the Company accrues the minimum of the range. The Company’s accruals for
environmental matters totaled $18.9 million and $16.0 million as of September 30, 2021 and March 31, 2021, respectively. During the first quarter of fiscal 2022, the Company increased its remediation accrual related to a former
manufacturing facility in the U.S. by $3.4 million. As additional information becomes available regarding the environmental matters, the
Company will re-assess the liabilities and revise the estimated accruals, if necessary. While it is possible that the ultimate environmental remediation costs may be in excess of amounts accrued, the Company believes, based upon currently available
information, that the ultimate outcome of these matters, individually and in the aggregate, will not have a material adverse effect on its financial position. However, these matters are subject to inherent uncertainties, and unfavorable outcomes
could occur, including significant monetary damages.
Other Litigation
In the normal course of business, the Company and its subsidiaries are named as defendants in various lawsuits and enforcement proceedings by private parties,
governmental agencies and/or others in which claims are asserted against Modine. The Company believes that any additional loss in excess of amounts already accrued would not have a material effect on the Company’s consolidated balance sheet, results
of operations, and cash flows. In addition, management expects that the liabilities which may ultimately result from such lawsuits or proceedings, if any, would not have a material adverse effect on the Company’s financial position.
22
Table of Contents
|
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
|
Note 19: Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss were as follows:
|
Three months ended September 30, 2021
|
Six months ended
September 30, 2021
|
|||||||||||||||||||||||||||||||
|
Foreign
Currency
Translation
|
Defined
Benefit Plans
|
Cash Flow
Hedges
|
Total
|
Foreign
Currency
Translation
|
Defined
Benefit Plans
|
Cash Flow
Hedges
|
Total
|
|||||||||||||||||||||||||
|
Beginning balance
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
|
$
|
(
|
)
|
||||||||||
|
Other comprehensive income (loss) before reclassifications
|
(
|
)
|
|
|
(
|
)
|
(
|
)
|
|
|
(
|
)
|
||||||||||||||||||||
|
Reclassifications:
|
||||||||||||||||||||||||||||||||
|
Amortization of unrecognized net loss (a)
|
-
|
|
-
|
|
-
|
|
-
|
|
||||||||||||||||||||||||
|
Unrecognized net pension loss in disposed business (b)
|
- | - | - | - | ||||||||||||||||||||||||||||
|
Realized losses - net (c)
|
-
|
-
|
(
|
)
|
(
|
)
|
-
|
-
|
(
|
)
|
(
|
)
|
||||||||||||||||||||
|
Income taxes
|
|
(
|
)
|
(
|
)
|
|
|
(
|
)
|
(
|
)
|
|||||||||||||||||||||
|
Total other comprehensive income (loss)
|
(
|
)
|
|
|
(
|
)
|
(
|
)
|
|
(
|
)
|
|
||||||||||||||||||||
|
Ending balance
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
|
$
|
(
|
)
|
||||||||||
|
Three months ended September 30, 2020
|
Six months ended
September 30, 2020
|
|||||||||||||||||||||||||||||||
|
Foreign
Currency
Translation
|
Defined
Benefit Plans
|
Cash Flow
Hedges
|
Total
|
Foreign
Currency
Translation
|
Defined
Benefit Plans
|
Cash Flow
Hedges
|
Total
|
|||||||||||||||||||||||||
|
Beginning balance
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
|||||||||
|
Other comprehensive income before reclassifications
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Reclassifications:
|
||||||||||||||||||||||||||||||||
|
Amortization of unrecognized net loss (a)
|
-
|
|
-
|
|
-
|
|
-
|
|
||||||||||||||||||||||||
|
Realized losses - net (c)
|
-
|
-
|
|
|
-
|
-
|
|
|
||||||||||||||||||||||||
|
Income taxes
|
|
(
|
)
|
(
|
)
|
(
|
)
|
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||||||||||||||
|
Total other comprehensive income
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Ending balance
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
|
$
|
(
|
)
|
||||||||||
| (a) |
|
| (b) |
|
| (c) |
|
23
Table of Contents
|
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
|
Note 20: Segment Information
Effective July 1, 2021, the Company aligned the data center businesses previously
managed by and reported within the CIS segment under the BHVAC segment. The BHVAC segment assumed management of the Company’s business in Guadalajara, Spain and a portion of its business in Grenada, Mississippi.
Through this segment realignment, the Company has aligned all of its data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and
organizational efficiencies. As a result, the Company revised its reporting segments and is reporting the financial results of the transferred businesses within the BHVAC segment, consistent with how the Company’s chief operating decision maker is
assessing operating performance and allocating capital resources. The segment realignment had no impact on the HDE and Automotive segments or on the Company’s consolidated financial position, results of operations, and cash flows. Segment financial
information for the prior periods has been recast to conform to the current presentation.
The following is a summary of net sales, gross profit, operating income, and total assets by segment:
|
Three months ended September 30,
|
||||||||||||||||||||||||
|
2021
|
2020
|
|||||||||||||||||||||||
|
External
Sales
|
Inter-segment
Sales
|
Total
|
External
Sales
|
Inter-segment
Sales
|
Total
|
|||||||||||||||||||
|
Net sales:
|
||||||||||||||||||||||||
|
BHVAC
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||
|
CIS
|
|
|
|
|
|
|
||||||||||||||||||
|
HDE
|
|
|
|
|
|
|
||||||||||||||||||
|
Automotive
|
|
|
|
|
|
|
||||||||||||||||||
|
Segment total
|
|
|
|
|
|
|
||||||||||||||||||
|
Corporate and eliminations
|
-
|
(
|
)
|
(
|
)
|
-
|
(
|
)
|
(
|
)
|
||||||||||||||
|
Net sales
|
$
|
|
$
|
-
|
$
|
|
$
|
|
$
|
-
|
$
|
|
||||||||||||
|
Six months ended
September 30,
|
||||||||||||||||||||||||
|
2021
|
2020
|
|||||||||||||||||||||||
|
External
Sales
|
Inter-segment
Sales
|
Total
|
External
Sales
|
Inter-segment
Sales
|
Total
|
|||||||||||||||||||
|
Net sales:
|
||||||||||||||||||||||||
|
BHVAC
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||
|
CIS
|
|
|
|
|
|
|
||||||||||||||||||
|
HDE
|
|
|
|
|
|
|
||||||||||||||||||
|
Automotive
|
|
|
|
|
|
|
||||||||||||||||||
|
Segment total
|
|
|
|
|
|
|
||||||||||||||||||
|
Corporate and eliminations
|
-
|
(
|
)
|
(
|
)
|
-
|
(
|
)
|
(
|
)
|
||||||||||||||
|
Net sales
|
$
|
|
$
|
-
|
$
|
|
$
|
|
$
|
-
|
$
|
|
||||||||||||
24
Table of Contents
|
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
|
|
Three months ended September 30,
|
Six months ended
September 30,
|
|||||||||||||||||||||||||||||||
|
2021
|
2020
|
2021
|
2020
|
|||||||||||||||||||||||||||||
|
$’s
|
% of sales
|
$’s
|
% of sales
|
$’s
|
% of sales
|
$’s
|
% of sales
|
|||||||||||||||||||||||||
|
Gross profit:
|
||||||||||||||||||||||||||||||||
|
BHVAC
|
$
|
|
|
%
|
$
|
|
|
%
|
$
|
|
|
%
|
$
|
|
|
%
|
||||||||||||||||
|
CIS
|
|
|
%
|
|
|
%
|
|
|
%
|
|
|
%
|
||||||||||||||||||||
|
HDE
|
|
|
%
|
|
|
%
|
|
|
%
|
|
|
%
|
||||||||||||||||||||
|
Automotive
|
|
|
%
|
|
|
%
|
|
|
%
|
|
|
%
|
||||||||||||||||||||
|
Segment total
|
|
|
%
|
|
|
%
|
|
|
%
|
|
|
%
|
||||||||||||||||||||
|
Corporate and eliminations
|
|
|
(
|
)
|
|
|
|
(
|
)
|
|
||||||||||||||||||||||
|
Gross profit
|
$
|
|
|
%
|
$
|
|
|
%
|
$
|
|
|
%
|
$
|
|
|
%
|
||||||||||||||||
|
Three months ended September 30,
|
Six months ended
September 30,
|
|||||||||||||||
|
2021
|
2020
|
2021
|
2020
|
|||||||||||||
|
Operating income:
|
||||||||||||||||
|
BHVAC
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
CIS
|
|
|
|
|
||||||||||||
|
HDE
|
|
|
|
|
||||||||||||
|
Automotive
|
(
|
)
|
|
(
|
)
|
|
||||||||||
|
Segment total
|
|
|
|
|
||||||||||||
|
Corporate and eliminations
|
(
|
)
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||||
|
Operating income
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
September 30, 2021
|
March 31, 2021
|
|||||||
|
Total assets:
|
||||||||
|
BHVAC
|
$
|
|
$
|
|
||||
|
CIS
|
|
|
||||||
|
HDE
|
|
|
||||||
|
Automotive
|
|
|
||||||
|
Corporate and eliminations (a)
|
(
|
)
|
(
|
)
|
||||
|
Total assets
|
$
|
|
$
|
|
||||
|
(a)
|
|
When we use the terms “Modine,” “we,” “us,” the “Company,” or “our” in this report, we are referring to Modine Manufacturing Company. Our fiscal year ends on March 31 and, accordingly, all references to quarters
refer to our fiscal quarters. The quarter ended September 30, 2021 was the second quarter of fiscal 2022.
Recent Announcement
On October 25, 2021, we announced that we have agreed with Dana Incorporated (“Dana”) to terminate the definitive sale agreement for our liquid-cooled automotive business. We have been actively engaged with Dana in the regulatory review
process in Germany for many months and mutually decided that it is no longer in the best interest of either party to pursue the transaction further.
As a result of terminating the sale agreement, we expect that the liquid-cooled automotive business will no longer meet the requirements to be classified as held for sale during the third quarter of fiscal 2022. Accordingly, we expect to
adjust the underlying asset groups to the lower of their (i) carrying value, as if held for sale classification had not been met, or (ii) fair value. At this time, we are unable to quantify or predict any adjustments to the carrying value of the
liquid-cooled automotive business’s long-lived assets to be recorded during the third quarter of fiscal 2022.
Air-cooled Automotive Business
On April 30, 2021, we sold our air-cooled automotive business to Schmid Metall GmbH. As a result of this transaction, we recorded a loss of $6.6 million during the first quarter of fiscal 2022. The finalization of and payment for the
purchase price adjustment for net working capital and certain other items, as defined by the sale agreement, is pending. While we do not expect a material adjustment, it is possible that the loss on sale may increase when the purchase price
adjustment is finalized.
COVID-19
As the COVID-19 pandemic continues, both the health and overall well-being of our employees and delivering quality products and services to our customers remain our top priorities.
The COVID-19 pandemic has broadly impacted the global economy and our key end markets, which were most severely impacted during the first quarter of fiscal 2021. In an effort to mitigate the negative impacts of COVID-19 on our financial
results, we implemented cost-saving actions starting in the first quarter of fiscal 2021 that primarily impacted selling, general and administrative (“SG&A”) expenses and capital expenditures. While we remain focused on controlling expenses,
we withdrew most of the cost-saving actions in the third quarter of fiscal 2021 as production returned to more normal levels as markets recovered. As a result and as anticipated, compensation-related expenses, particularly SG&A expenses,
were higher in the first half of fiscal 2022 compared with the prior year.
The full extent of the impacts of COVID-19, which will largely depend on the length and severity of the pandemic and the resulting impact on the global economy, could have a material adverse effect on our business, results of operations, and
cash flows.
Second Quarter Highlights
Net sales in the second quarter of fiscal 2022 increased $17.5 million, or 4 percent, from the second quarter of fiscal 2021, primarily due to higher sales volume in our Heavy Duty Equipment (“HDE”), Commercial Industrial Solutions (“CIS”),
and Building HVAC (“BHVAC”) segments, partially offset by lower sales in our Automotive segment. Cost of sales increased $32.0 million, or 8 percent, compared with the second quarter of fiscal 2021, primarily due to higher sales volume and
higher raw material prices, including underlying metal prices and related premiums, fabrication, freight, tariff and packaging costs. Gross profit decreased $14.5 million and gross margin declined 370 basis points to 13.8 percent. SG&A
expenses increased $1.1 million. Higher compensation-related expenses were partially offset by lower severance expenses for executive management positions compared with the second quarter of fiscal 2021. Operating income of $10.5 million during
the second quarter of fiscal 2022 decreased $18.0 million from the prior-year, primarily due to lower earnings in our Automotive and HDE segments.
Year-to-date Highlights
Net sales in the first six months of fiscal 2022 increased $164.3 million, or 20 percent, from the same period last year, primarily due to higher sales in our HDE, CIS and BHVAC segments, partially offset by lower sales in our Automotive
segment. Cost of sales increased $151.7 million, or 22 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices. Gross profit increased $12.6 million and gross margin declined 140 basis points
to 14.3 percent. SG&A expenses increased $15.8 million, primarily due to higher compensation-related expenses, as the prior-year benefitted from cost-saving measures implemented in response to COVID-19. Operating income of $19.2 million
during the first six months of fiscal 2022 decreased $6.1 million from the same period in the prior-year, primarily due to the $6.6 million loss from the sale of the air-cooled automotive business and lower earnings in our Automotive and BHVAC
segments, partially offset by the higher earnings in our CIS and HDE segments.
CONSOLIDATED RESULTS OF OPERATIONS
The following table presents our consolidated financial results on a comparative basis for the three and six months ended September 30, 2021 and 2020:
|
Three months ended September 30,
|
Six months ended September 30,
|
|||||||||||||||||||||||||||||||
|
2021
|
2020
|
2021
|
2020
|
|||||||||||||||||||||||||||||
|
(in millions)
|
$'s
|
% of sales
|
$'s
|
% of sales
|
$'s
|
% of sales
|
$'s
|
% of sales
|
||||||||||||||||||||||||
|
Net sales
|
$
|
478.9
|
100.0
|
%
|
$
|
461.4
|
100.0
|
%
|
$
|
973.5
|
100.0
|
%
|
$
|
809.2
|
100.0
|
%
|
||||||||||||||||
|
Cost of sales
|
412.6
|
86.2
|
%
|
380.6
|
82.5
|
%
|
834.0
|
85.7
|
%
|
682.3
|
84.3
|
%
|
||||||||||||||||||||
|
Gross profit
|
66.3
|
13.8
|
%
|
80.8
|
17.5
|
%
|
139.5
|
14.3
|
%
|
126.9
|
15.7
|
%
|
||||||||||||||||||||
|
Selling, general and administrative expenses
|
51.9
|
10.8
|
%
|
50.8
|
11.0
|
%
|
111.3
|
11.4
|
%
|
95.5
|
11.8
|
%
|
||||||||||||||||||||
|
Restructuring expenses
|
0.6
|
0.1
|
%
|
1.5
|
0.3
|
%
|
0.9
|
0.1
|
%
|
6.1
|
0.8
|
%
|
||||||||||||||||||||
|
Impairment charges – net
|
3.3
|
0.7
|
%
|
-
|
-
|
1.5
|
0.1
|
%
|
-
|
-
|
||||||||||||||||||||||
|
Loss on sale of assets
|
-
|
-
|
-
|
-
|
6.6
|
0.7
|
%
|
-
|
-
|
|||||||||||||||||||||||
|
Operating income
|
10.5
|
2.2
|
%
|
28.5
|
6.2
|
%
|
19.2
|
2.0
|
%
|
25.3
|
3.1
|
%
|
||||||||||||||||||||
|
Interest expense
|
(3.8
|
)
|
-0.8
|
%
|
(5.2
|
)
|
-1.1
|
%
|
(8.0
|
)
|
-0.8
|
%
|
(10.6
|
)
|
-1.3
|
%
|
||||||||||||||||
|
Other expense – net
|
(0.7
|
)
|
-0.1
|
%
|
(0.5
|
)
|
-0.1
|
%
|
(0.5
|
)
|
-0.1
|
%
|
(0.5
|
)
|
-0.1
|
%
|
||||||||||||||||
|
Earnings before income taxes
|
6.0
|
1.3
|
%
|
22.8
|
4.9
|
%
|
10.7
|
1.1
|
%
|
14.2
|
1.8
|
%
|
||||||||||||||||||||
|
Provision for income taxes
|
(5.4
|
)
|
-1.1
|
%
|
(13.9
|
)
|
-3.0
|
%
|
(7.3
|
)
|
-0.8
|
%
|
(13.7
|
)
|
-1.7
|
%
|
||||||||||||||||
|
Net earnings
|
$
|
0.6
|
0.1
|
%
|
$
|
8.9
|
1.9
|
%
|
$
|
3.4
|
0.3
|
%
|
$
|
0.5
|
0.1
|
%
|
||||||||||||||||
Comparison of Three Months ended September 30, 2021 and 2020
Second quarter net sales of $478.9 million were $17.5 million, or 4 percent, higher than the second quarter of the prior year, primarily due to higher sales volume and favorable pricing adjustments in response to raw material price increases
in our HDE, CIS, and BHVAC segments, partially offset by lower sales volume in our Automotive segment. Sales in the HDE, CIS, and BHVAC segments increased $30.2 million, $25.3 million, and $9.0 million, respectively. Sales in the Automotive
segment decreased $44.5 million.
Second quarter cost of sales increased $32.0 million, or 8 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $43.0 million. In addition, cost of sales in
the second quarter of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic. These factors, which caused an increase in cost of sales compared with the second quarter of the prior year, were
partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies. As a percentage of sales, cost of sales increased 370 basis points to 86.2 percent.
As a result of higher sales and higher cost of sales as a percentage of sales, second quarter gross profit decreased $14.5 million and gross margin declined 370 basis points to 13.8 percent.
Second quarter SG&A expenses increased $1.1 million. Higher compensation-related expenses in the second quarter of fiscal 2022, as expenses in the second quarter of fiscal 2021 were favorably impacted by cost-saving actions including
furloughs, shortened work weeks and temporary salary reductions that were implemented to mitigate the negative impacts of COVID-19, were partially offset by lower expenses at Corporate related to severance costs for executive management
positions, which decreased $3.9 million.
Restructuring expenses of $0.6 million in the second quarter of fiscal 2022 decreased $0.9 million compared with the second quarter of fiscal 2021, primarily due to lower severance expenses.
The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets held for sale within the Automotive segment.
Operating income of $10.5 million in the second quarter of fiscal 2022 decreased $18.0 million compared with the second quarter of fiscal 2021 and was primarily due to lower earnings in our Automotive and HDE segments.
Interest expense in the second quarter of fiscal 2022 decreased $1.4 million compared with the second quarter of fiscal 2021, primarily due to lower long-term debt outstanding during the period and favorable changes in interest rates.
The provision for income taxes was $5.4 million and $13.9 million in the second quarter of fiscal 2022 and 2021, respectively. The $8.5 million decrease was primarily due to the absence of a $6.6 million income tax charge for a valuation
allowance on certain U.S. deferred tax assets recorded in the prior year and lower operating earnings in the current year, partially offset by a $1.6 million income tax charge recorded during the second quarter of fiscal 2022 for a valuation
allowance in a foreign jurisdiction.
Comparison of Six Months ended September 30, 2021 and 2020
Fiscal 2022 year-to-date net sales of $973.5 million were $164.3 million, or 20 percent, higher than the same period last year, primarily due to higher sales volumes and favorable pricing adjustments in response to raw material price increases
in our HDE, CIS and BHVAC segments. Sales in these segments increased $108.5 million, $62.9 million, and $21.5 million, respectively. Automotive segment sales decreased $20.4 million.
Fiscal 2022 year-to-date cost of sales of $834.0 million increased $151.7 million, or 22 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $78.0 million. In
addition, cost of sales in the first six months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic. These factors, which caused an increase in cost of sales compared with the same period in
the prior year, were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies. As a percentage of sales, cost of sales increased 140 basis points to 85.7 percent.
As a result of higher sales and higher cost of sales as a percentage of sales, gross profit increased $12.6 million and gross margin declined 140 basis points to 14.3 percent.
Fiscal 2022 year-to-date SG&A expenses increased $15.8 million. The increase in SG&A expenses was primarily due to higher compensation-related expenses, as the prior year was favorably impacted by cost-saving actions implemented to
mitigate the negative impacts of COVID-19. In addition, we recorded $3.6 million of environmental charges at Corporate related to a previously-owned manufacturing facility in the U.S. We also incurred $1.3 million of higher costs at Corporate
related to our review of strategic alternatives for the Automotive segment businesses. These increases were partially offset by lower severance expenses for executive management positions, which decreased $3.9 million.
Restructuring expenses of $0.9 million in the first six months of fiscal 2022 decreased $5.2 million compared with the same period last year, primarily due to lower severance expenses in the CIS and HDE segments.
The net impairment charges of $1.5 million during the first six months of fiscal 2022 primarily related to assets held for sale in the Automotive segment.
We sold our air-cooled automotive business on April 30, 2021. As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.
Operating income of $19.2 million during the first six months of fiscal 2022 decreased $6.1 million compared with the same period last year and was primarily due to the $6.6 million loss on sale of the air-cooled automotive business and lower
earnings in our Automotive and BHVAC segments, partially offset by higher earnings in our CIS and HDE segments.
Interest expense during the first six months of fiscal 2022 decreased $2.6 million compared with the same period last year, primarily due to lower long-term debt outstanding during the period and favorable changes in interest rates.
The provision for income taxes was $7.3 million and $13.7 million during the first six months of fiscal 2022 and 2021, respectively. The $6.4 million decrease was primarily due to the absence of a $6.6 million income tax charge for a
valuation allowance on certain U.S. deferred tax assets recorded in the prior year, a net $3.2 million income tax benefit related to valuation allowances on deferred tax assets in foreign jurisdictions recorded during the first six months of
fiscal 2022, partially offset by changes in the mix and amount of foreign and U.S. earnings.
Effective July 1, 2021, we aligned the data center businesses previously managed by and reported within the CIS segment under the BHVAC segment. The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our
business in Grenada, Mississippi. Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.
As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment. The segment realignment had no impact on the HDE and Automotive segments or on our consolidated
financial position, results of operations, and cash flows. Segment financial information for the prior periods has been recast to conform to the current presentation.
As further described in Note 14 of the Notes to Condensed Consolidated Financial Statements and in connection with the segment realignment during the second quarter of fiscal 2022, we
reassigned $32.5 million of goodwill from the CIS segment to the BHVAC segment. In addition, we tested our reporting units for potential impairment and concluded that goodwill was not impaired. However, we identified that the Coils and Coolers
reporting unit within the CIS segment now exhibits a heightened risk of impairment since its excess estimated fair value over carrying value is relatively low, approximately 8.0 percent. The goodwill attributable to the Coils and Coolers
reporting unit was $61.0 million as of September 30, 2021. Key estimates and assumptions used in estimating the reporting unit’s fair value include forecasted financial results, primarily future revenue and operating income margins, a 3.0
percent terminal growth rate and a 12.4 percent discount rate. Future events or circumstances, including lower than forecasted revenues or earnings, market trends that fall below our current expectations, actions of key customers, or increases
in the discount rate could negatively affect the reporting unit’s fair value and could trigger an impairment charge. An approximately 100-basis point increase in the discount rate or an approximately 150-basis point decrease in the terminal
growth assumption could trigger an impairment charge. The estimated fair values for our other reporting units substantially exceeded their carrying value.
The following is a discussion of our segment results of operations for the three months and six months ended September 30, 2021 and 2020:
Building HVAC Systems
|
Three months ended September 30,
|
Six months ended September 30,
|
|||||||||||||||||||||||||||||||
|
2021
|
2020
|
2021
|
2020
|
|||||||||||||||||||||||||||||
|
(in millions)
|
$'s
|
% of sales
|
$'s
|
% of sales
|
$'s
|
% of sales
|
$'s
|
% of sales
|
||||||||||||||||||||||||
|
Net sales
|
$
|
77.5
|
100.0
|
%
|
$
|
68.5
|
100.0
|
%
|
$
|
144.1
|
100.0
|
%
|
$
|
122.6
|
100.0
|
%
|
||||||||||||||||
|
Cost of sales
|
55.9
|
72.2
|
%
|
45.2
|
65.9
|
%
|
106.3
|
73.8
|
%
|
83.5
|
68.1
|
%
|
||||||||||||||||||||
|
Gross profit
|
21.6
|
27.8
|
%
|
23.3
|
34.1
|
%
|
37.8
|
26.2
|
%
|
39.1
|
31.9
|
%
|
||||||||||||||||||||
|
Selling, general and administrative expenses
|
11.6
|
14.9
|
%
|
9.8
|
14.4
|
%
|
22.1
|
15.3
|
%
|
18.4
|
15.0
|
%
|
||||||||||||||||||||
|
Operating income
|
$
|
10.0
|
13.0
|
%
|
$
|
13.5
|
19.7
|
%
|
$
|
15.7
|
10.9
|
%
|
$
|
20.7
|
16.9
|
%
|
||||||||||||||||
Comparison of Three Months ended September 30, 2021 and 2020
BHVAC net sales increased $9.0 million, or 13 percent, from the second quarter of fiscal 2021 to the second quarter of fiscal 2022, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw
material price increases and a $1.6 million favorable impact of foreign currency exchange rates. Compared with the second quarter of the prior year, BHVAC sales to commercial HVAC&R customers increased $7.6 million, primarily due to higher
sales of heating and ventilation products. In addition, sales to data center customers increased $1.6 million.
BHVAC cost of sales increased $10.7 million, or 24 percent, from the second quarter of fiscal 2021 to the second quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $4.0
million. In addition, cost of sales was unfavorably impacted by $1.4 million from foreign currency exchange rate changes. As a percentage of sales, cost of sales increased 630 basis points to 72.2 percent, primarily due to the higher material
costs.
As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit decreased $1.7 million and gross margin declined 630 basis points to 27.8 percent. While we have been
focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.
SG&A expenses increased $1.8 million, or 50 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased $1.3 million.
Operating income of $10.0 million decreased $3.5 million from the second quarter of fiscal 2021 to the second quarter of fiscal 2022, primarily due to higher SG&A expenses and lower gross profit.
Comparison of Six Months ended September 30, 2021 and 2020
BHVAC year-to-date sales increased $21.5 million, or 18 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, a $5.4 million favorable impact of foreign currency exchange rates and pricing
adjustments in response to increasing raw material costs. Sales to commercial HVAC&R customers increased $19.3 million, primarily due to higher sales of heating and air conditioning products.
BHVAC year-to-date cost of sales increased $22.8 million, or 27 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $8.0 million. In addition, cost of
sales was unfavorably impacted by $4.6 million from foreign currency exchange rate changes. As a percentage of sales, cost of sales increased 570 basis points to 73.8 percent, primarily due to the higher material costs.
As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit decreased $1.3 million and gross margin declined 570 basis points to 26.2 percent.
BHVAC year-to-date SG&A expenses increased $3.7 million, or 30 basis points as a percentage of sales, compared with the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses, which
increased $2.8 million.
Operating income of $15.7 million decreased $5.0 million from the same period last year, primarily due to higher SG&A expenses and lower gross profit.
Commercial and Industrial Solutions
|
Three months ended September 30,
|
Six months ended September 30,
|
|||||||||||||||||||||||||||||||
|
2021
|
2020
|
2021
|
2020
|
|||||||||||||||||||||||||||||
|
(in millions)
|
$'s
|
% of sales
|
$'s
|
% of sales
|
$'s
|
% of sales
|
$'s
|
% of sales
|
||||||||||||||||||||||||
|
Net sales
|
$
|
153.5
|
100.0
|
%
|
$
|
128.2
|
100.0
|
%
|
$
|
307.6
|
100.0
|
%
|
$
|
244.7
|
100.0
|
%
|
||||||||||||||||
|
Cost of sales
|
135.2
|
88.1
|
%
|
110.5
|
86.2
|
%
|
268.5
|
87.3
|
%
|
212.8
|
87.0
|
%
|
||||||||||||||||||||
|
Gross profit
|
18.3
|
11.9
|
%
|
17.7
|
13.8
|
%
|
39.1
|
12.7
|
%
|
31.9
|
13.0
|
%
|
||||||||||||||||||||
|
Selling, general and administrative expenses
|
12.3
|
8.0
|
%
|
11.0
|
8.5
|
%
|
25.3
|
8.2
|
%
|
22.9
|
9.3
|
%
|
||||||||||||||||||||
|
Restructuring expenses
|
0.2
|
0.1
|
%
|
1.5
|
1.2
|
%
|
0.2
|
0.1
|
%
|
3.9
|
1.6
|
%
|
||||||||||||||||||||
|
Impairment charge
|
-
|
-
|
-
|
-
|
0.3
|
0.1
|
%
|
-
|
-
|
|||||||||||||||||||||||
|
Operating income
|
$
|
5.8
|
3.8
|
%
|
$
|
5.2
|
4.1
|
%
|
$
|
13.3
|
4.3
|
%
|
$
|
5.1
|
2.1
|
%
|
||||||||||||||||
CIS net sales increased $25.3 million, or 20 percent, from the second quarter of fiscal 2021 to the second quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price
increases. CIS sales in the second quarter of fiscal 2021 were negatively impacted by the COVID-19 pandemic. Compared with the second quarter of the prior year, sales to commercial HVAC&R customers increased $26.3 million.
CIS cost of sales increased $24.7 million, or 22 percent, from the second quarter of fiscal 2021 to the second quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $16.0
million. As a percentage of sales, cost of sales increased 190 basis points to 88.1 percent, as the favorable impacts of the higher sales volume and improved operating efficiencies were more than offset by the impact of the higher material
costs.
As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.6 million and gross margin declined 190 basis points to 11.9 percent.
SG&A expenses increased $1.3 million, yet decreased 50 basis points as a percentage of sales, compared with the second quarter of the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses,
which increased approximately $1.0 million.
Restructuring expenses decreased $1.3 million compared with the second quarter of fiscal 2021, primarily due to lower severance expenses. The severance-related expenses in the second quarter of fiscal 2021 related to plant consolidation
activities in China.
Operating income increased $0.6 million from the second quarter of fiscal 2021 to the second quarter of fiscal 2022, primarily due to lower restructuring expenses and higher gross profit, partially offset by higher SG&A expenses.
Comparison of Six Months ended September 30, 2021 and 2020
CIS year-to-date net sales increased $62.9 million, or 26 percent, from the same period last year, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases. In addition, sales
were favorably impacted by $7.9 million from foreign currency exchange rates. CIS sales during the first six months of fiscal 2021 were negatively impacted by the COVID-19 pandemic. Sales to commercial HVAC&R customers increased $63.0
million during the first six months of fiscal 2022, compared with the same period in the prior year.
CIS year-to-date cost of sales increased $55.7 million, or 26 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $31.0 million. In addition, cost of
sales was unfavorably impacted by $7.0 million from foreign currency exchange rate changes. As a percentage of sales, cost of sales increased 30 basis points to 87.3 percent, as the favorable impacts of the higher sales volume and improved
operating efficiencies were more than offset by the impact of the higher material costs.
As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $7.2 million and gross margin declined 30 basis points to 12.7 percent.
CIS year-to-date SG&A expenses increased $2.4 million, yet decreased 110 basis points as a percentage of sales, from the same period last year. The increase in SG&A expenses was primarily due to higher compensation-related expenses,
which increased approximately $2.0 million.
Restructuring expenses during the first six months of fiscal 2022 decreased $3.7 million, from the same period last year, primarily due to lower severance expenses. The severance-related expenses during the first six months of fiscal 2021
primarily related to plant consolidation activities in China and targeted headcount reductions in North America.
During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write-down a previously-closed manufacturing facility in the U.S to fair value less costs to sell. We sold the facility and received net cash
proceeds of $0.7 million during July 2021.
Operating income during the first six months of fiscal 2022 increased $8.2 million from the same period last year, primarily due to higher gross profit and lower restructuring expenses, partially offset by higher SG&A expenses.
|
Three months ended September 30,
|
Six months ended September 30,
|
|||||||||||||||||||||||||||||||
|
2021
|
2020
|
2021
|
2020
|
|||||||||||||||||||||||||||||
|
(in millions)
|
$'s
|
% of sales
|
$'s
|
% of sales
|
$'s
|
% of sales
|
$'s
|
% of sales
|
||||||||||||||||||||||||
|
Net sales
|
$
|
195.8
|
100.0
|
%
|
$
|
165.6
|
100.0
|
%
|
$
|
397.6
|
100.0
|
%
|
$
|
289.1
|
100.0
|
%
|
||||||||||||||||
|
Cost of sales
|
177.5
|
90.6
|
%
|
142.0
|
85.8
|
%
|
356.7
|
89.7
|
%
|
254.2
|
87.9
|
%
|
||||||||||||||||||||
|
Gross profit
|
18.3
|
9.4
|
%
|
23.6
|
14.2
|
%
|
40.9
|
10.3
|
%
|
34.9
|
12.1
|
%
|
||||||||||||||||||||
|
Selling, general and administrative expenses
|
12.2
|
6.2
|
%
|
10.3
|
6.2
|
%
|
25.7
|
6.5
|
%
|
22.2
|
7.7
|
%
|
||||||||||||||||||||
|
Restructuring expenses
|
0.3
|
0.2
|
%
|
-
|
-
|
0.5
|
0.1
|
%
|
1.9
|
0.6
|
%
|
|||||||||||||||||||||
|
Operating income
|
$
|
5.8
|
3.0
|
%
|
$
|
13.3
|
8.1
|
%
|
$
|
14.7
|
3.7
|
%
|
$
|
10.8
|
3.8
|
%
|
||||||||||||||||
Comparison of Three Months ended September 30, 2021 and 2020
HDE net sales increased $30.2 million, or 18 percent, from the second quarter of fiscal 2021 to the second quarter of fiscal 2022, primarily due to higher sales volume and pricing adjustments associated with raw material price increases.
Sales to off-highway and commercial vehicle customers increased $18.9 million and $15.4 million, respectively.
HDE cost of sales increased $35.5 million, or 25 percent, from the second quarter of fiscal 2021 to the second quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased approximately $19.0
million. While we have provisions within many of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the
price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs. As a percentage of sales, cost of sales increased 480 basis points
to 90.6 percent, primarily due to the higher material prices.
As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit decreased $5.3 million and gross margin declined 480 basis points to 9.4 percent.
SG&A expenses increased $1.9 million, yet remained consistent at 6.2 percent of sales, compared with the second quarter of the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses, which
increased approximately $2.0 million.
Restructuring expenses during the second quarter of fiscal 2022 were $0.3 million, and primarily consisted of equipment transfer costs in North America.
Operating income decreased $7.5 million from the second quarter of fiscal 2021 to the second quarter of fiscal 2022, primarily due to lower gross profit and higher SG&A expenses.
Comparison of Six Months ended September 30, 2021 and 2020
HDE year-to-date net sales increased $108.5 million, or 38 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, pricing adjustments associated with raw material price increases. HDE sales in
fiscal 2021, primarily in the first quarter, were negatively impacted by the COVID-19 pandemic. Sales to commercial vehicle and off-highway customers increased $48.3 million and $45.4 million, respectively.
HDE year-to-date cost of sales increased $102.5 million, or 40 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased approximately $34.0 million. As a percentage of
sales, cost of sales increased 180 basis points to 89.7 percent, primarily due to the higher material prices.
As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $6.0 million and gross margin declined 180 basis points to 10.3 percent.
HDE year-to-date SG&A expenses increased $3.5 million, but decreased 120 basis points as a percentage of sales, compared with the same period in the prior year. The increase in SG&A expenses was primarily due to higher
compensation-related expenses, which increased approximately $4.0 million.
Restructuring expenses decreased $1.4 million from the same period last year and primarily consisted of equipment transfer costs.
Operating income during the first six months of fiscal 2022 increased $3.9 million from the same period last year, primarily due to higher gross profit and lower restructuring expenses, partially offset by higher SG&A expenses.
Automotive
|
Three months ended September 30,
|
Six months ended September 30,
|
|||||||||||||||||||||||||||||||
|
2021
|
2020
|
2021
|
2020
|
|||||||||||||||||||||||||||||
|
(in millions)
|
$'s
|
% of sales
|
$'s
|
% of sales
|
$'s
|
% of sales
|
$'s
|
% of sales
|
||||||||||||||||||||||||
|
Net sales
|
$
|
65.4
|
100.0
|
%
|
$
|
109.9
|
100.0
|
%
|
$
|
151.6
|
100.0
|
%
|
$
|
172.0
|
100.0
|
%
|
||||||||||||||||
|
Cost of sales
|
58.2
|
89.0
|
%
|
93.3
|
84.8
|
%
|
131.2
|
86.6
|
%
|
150.6
|
87.5
|
%
|
||||||||||||||||||||
|
Gross profit
|
7.2
|
11.0
|
%
|
16.6
|
15.2
|
%
|
20.4
|
13.4
|
%
|
21.4
|
12.5
|
%
|
||||||||||||||||||||
|
Selling, general and administrative expenses
|
9.4
|
14.4
|
%
|
8.6
|
7.9
|
%
|
20.4
|
13.4
|
%
|
17.0
|
9.9
|
%
|
||||||||||||||||||||
|
Restructuring expenses
|
0.1
|
0.2
|
%
|
-
|
-
|
0.2
|
0.1
|
%
|
0.2
|
0.1
|
%
|
|||||||||||||||||||||
|
Impairment charges – net
|
3.3
|
5.0
|
%
|
-
|
-
|
1.2
|
0.8
|
%
|
-
|
-
|
||||||||||||||||||||||
|
Operating (loss) income
|
$
|
(5.6
|
)
|
-8.6
|
%
|
$
|
8.0
|
7.3
|
%
|
$
|
(1.4
|
)
|
-0.9
|
%
|
$
|
4.2
|
2.4
|
%
|
||||||||||||||
Comparison of Three Months ended September 30, 2021 and 2020
Automotive net sales decreased $44.5 million, or 40 percent, from the second quarter of fiscal 2021 to the second quarter of fiscal 2022, primarily due to the disposition of the air-cooled automotive business, which closed on April 30, 2021,
and lower sales volume, largely associated with the negative impacts of the global semiconductor chip shortage on the automotive market. The air-cooled automotive business’s sales were $18.0 million during the second
quarter of fiscal 2021. Sales in Europe, North America, and Asia decreased $30.0 million, $9.2 million, and $5.3 million, respectively.
Automotive cost of sales decreased $35.1 million, or 38 percent, from the second quarter of fiscal 2021 to the second quarter of fiscal 2022, primarily due to lower sales volume and, to a lesser extent, lower depreciation expenses, which
decreased $4.5 million. We ceased depreciating the long-lived assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021. These decreases were partially offset
by higher raw material prices, which increased approximately $4.0 million. As a percentage of sales, cost of sales increased 420 basis points to 89.0 percent.
As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $9.4 million and gross margin declined 420 basis points to 11.0 percent.
SG&A expenses increased $0.8 million compared with the second quarter of the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $1.0 million.
The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which was held for sale during the quarter.
The operating loss of $5.6 million during the second quarter of fiscal 2022 represents a $13.6 million decline from the prior-year operating income of $8.0 million and was primarily due to lower gross profit and higher impairment charges.
Comparison of Six Months ended September 30, 2021 and 2020
Automotive year-to-date net sales decreased $20.4 million, or 12 percent, from the same period last year, primarily due to $22.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower
sales volume, partially offset by a $7.9 million favorable impact of foreign currency exchange rate changes. Fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic. Fiscal 2022 year-to-date sales have been negatively
impacted by the impact of the global semiconductor chip shortage on the automotive market. Sales in North America, Asia, and Europe decreased $7.4 million, $6.9 million and $6.1 million, respectively.
Automotive year-to-date cost of sales decreased $19.4 million, or 13 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.0 million. We ceased depreciating the
long-lived assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021. These decreases were partially offset by a $6.7 million unfavorable impact of foreign
currency exchange rate changes and higher raw material prices, which increased approximately $5.0 million. As a percentage of sales, cost of sales decreased 90 basis points to 86.6 percent.
As a result of the lower sales and lower cost of sales as a percentage of sales, gross profit decreased $1.0 million and gross margin improved 90 basis points to 13.4 percent.
Automotive year-to-date SG&A expenses increased $3.4 million compared with the same period last year. The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million,
and a $1.0 million unfavorable impact of foreign currency exchange rate changes.
The year-to-date net impairment charges of $1.2 million primarily related to assets in our liquid-cooled automotive business. During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges
related to the Automotive segment’s held for sale assets. These impairment charges were partially offset by a $7.4 million impairment reversal recorded during the first quarter of fiscal 2022 related to certain manufacturing operations that no
longer met the requirements to be classified as held for sale due to a modification to the transaction perimeter.
The operating loss of $1.4 million during the first six months of fiscal 2022 represents a $5.6 million decline from the operating income of $4.2 million in the same period last year and was primarily due to higher SG&A expenses and
impairment charges.
Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $56.0 million as of September 30, 2021 and an available borrowing capacity of $177.1 million under our revolving credit facility. Given
our extensive international operations, approximately $54.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries. Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be
subject to foreign withholding taxes if repatriated. We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.
Net cash used for operating activities for the six months ended September 30, 2021 was $19.0 million, which represents a $106.3 million decrease compared with net cash provided by operating activities in the same period in the prior year.
This decrease in operating cash flow was primarily due to unfavorable net changes in working capital, including higher inventory levels and higher payments for incentive compensation and employee benefits as compared with the same period in the
prior year. The higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection with global supply chain constraints and challenges.
Capital Expenditures
Capital expenditures of $20.4 million during the first six months of fiscal 2022 increased $5.8 million compared with the same period in the prior year. In fiscal 2021, we delayed certain projects and the purchase of certain program-related
equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.
Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below. Also, as specified in the credit agreement, the term
loans may require prepayments in the event of certain asset sales. In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as
defined in the credit agreement, on our business, property, or results of operations.
The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times
consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”). We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of
at least three times consolidated interest expense. As of September 30, 2021, our leverage ratio and interest coverage ratio were 2.5 and 10.1, respectively. We expect to remain in compliance with our debt covenants during fiscal 2022 and
beyond.
This report, including, but not limited to, the discussion under Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains statements, including information about future financial performance,
accompanied by phrases such as “believes,” “estimates,” “expects,” “plans,” “anticipates,” “intends,” and other similar “forward-looking” statements, as defined in the Private Securities Litigation Reform Act of 1995. Modine’s actual results,
performance or achievements may differ materially from those expressed or implied in these statements, because of certain risks and uncertainties, including, but not limited to, those described under “Risk Factors” in Item 1A. in Part I. of the
Company’s Annual Report on Form 10-K for the year ended March 31, 2021. Other risks and uncertainties include, but are not limited to, the following:
Market Risks:
| • |
The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers, customers, and employees;
|
| • |
Economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including, in particular, foreign currency
exchange rate fluctuations; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); inflation; changes in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with
cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and
trade, the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the short- and long-term implications of “Brexit”;
|
| • |
The impact of potential price increases associated with raw materials, including aluminum, copper, steel and stainless steel (nickel), and other purchased component inventory including, but not limited to, increases in the underlying
material cost based upon the London Metal Exchange and related premiums, fabrication, or freight costs. These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and
significant fluctuations in demand. This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whether through our quotation process or through contract
provisions for prospective price adjustments, as well as the inherent lag in timing of such contract provisions; and
|
| • |
The impact of current and future environmental laws and regulations on our business and the businesses of our customers, including our ability to take advantage of opportunities to supply alternative new technologies to meet
environmental and/or energy standards and objectives.
|
Operational Risks:
| • |
The overall health and continually increasing price-down focus of our vehicular customers in light of economic and market-specific factors, and the potential impact on us from any deterioration in the stability or performance of any of
our major customers;
|
| • |
The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and
willingness to supply our volume demands if their production capacity becomes constrained;
|
| • |
Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offset or otherwise address increasing pricing pressures from competitors and price reduction and overall service
pressures from customers, particularly in the face of macro-economic instability;
|
| • |
The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims and delays or inefficiencies resulting from restrictions imposed in
response to the COVID-19 pandemic;
|
| • |
The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain
challenges, such as the global semiconductor chip shortage;
|
| • |
Our ability to consistently structure our operations in order to develop and maintain a competitive cost base with appropriately skilled and stable labor, while also positioning ourselves geographically, so that we can continue to
support our customers with the technical expertise and market-leading products they demand and expect from Modine;
|
| • |
Our ability to effectively and efficiently modify our cost structure in response to sales volume increases or decreases and to complete restructuring activities and realize the anticipated benefits of those activities;
|
| • |
Costs and other effects of the investigation and remediation of environmental contamination; particularly when related to the actions or inactions of others and/or facilities over which we have no control;
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| • |
Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, in light of tight global labor markets;
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| • |
Our ability to protect our proprietary information and intellectual property from theft or attack by internal or external sources;
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| • |
The impact of any substantial disruption or material breach of our information technology systems, and any related delays, problems or costs;
|
| • |
Increasingly complex and restrictive laws and regulations, including those associated with being a U.S. public company and others present in various jurisdictions in which we operate, and the costs associated with compliance therewith;
|
| • |
Work stoppages or interference at our facilities or those of our major customers and/or suppliers;
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| • |
The constant and increasing pressures associated with healthcare and associated insurance costs; and
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| • |
Costs and other effects of litigation, claims, or other obligations.
|
| • |
Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;
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| • |
Our ability to identify and execute strategies in our automotive businesses to reduce costs and improve operating margins;
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| • |
Our ability to identify and execute growth and diversification opportunities in order to position us for long-term success; and
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| • |
The potential impacts from any actions by activist shareholders, including disruption of our business and related costs.
|
Financial Risks:
| • |
Our ability to fund our global liquidity requirements efficiently for Modine’s current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions
in the global economy;
|
| • |
The impact of potential increases in interest rates, particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations, and of the continued uncertainty around the utilization of
LIBOR or alternative reference rates;
|
| • |
The impact of changes in federal, state or local tax regulations that could have the effect of increasing our income tax expense;
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| • |
Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA
divided by interest expense, as defined in our credit agreements);
|
| • |
The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and
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| • |
Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.
|
Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.
| Item 3. |
Quantitative and Qualitative Disclosures About Market Risk.
|
The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021. The Company’s market risks have not
materially changed since the fiscal 2021 Form 10-K was filed.
| Item 4. |
Controls and Procedures.
|
As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer
and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e). Based
upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a
reasonable assurance level, as of September 30, 2021.
Changes in Internal Control Over Financial Reporting
There have been no changes in internal control over financial reporting during the second quarter of fiscal 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial
reporting.
As previously announced, effective August 10, 2021, Matthew J. McBurney no longer served in the role of Vice President, Building HVAC
of the Company, and effective September 29, 2021, Joel T. Casterton no longer served in the role of Vice President, Heavy Duty Equipment of the Company. The official date of separation for both Mr. McBurney and Mr. Casterton was October 29,
2021. The information in this section is being provided to set forth the material terms of the Company’s separation arrangements with Mr. McBurney and Mr. Casterton, which were definitively determined as of October 31, 2021 and October 29,
2021, respectively.
Under the separation arrangement with Mr. McBurney, he is eligible to receive, without limitation, the following benefits:
| • |
52 weeks of severance pay, paid on a bi-weekly basis at the same rate as his annual base salary at the time of his termination (and subject to
applicable wage and tax deductions) under the Company’s Supplemental Severance Plan;
|
| • |
A lump-sum cash payment equivalent to 40% of his annual salary and 45% of his prevailing Long-term Incentive Plan (“LTIP”) target, under the
terms of the CEO Transition Retention Agreement to which Mr. McBurney was a party; and
|
| • |
The Company will permit Mr. McBurney’s unvested Restricted Stock
Units (“RSUs”) granted under the Company’s fiscal year 2019, 2020 and 2021 LTIP and scheduled to vest in 2022 and 2023, unvested Options granted under the fiscal year 2019, 2020 and 2021 LTIP and scheduled to vest in 2022,
and a pro-rata portion of his unvested Performance Shares applicable to the fiscal 2020 through 2022 period to continue to vest on their normal vesting schedules, and he will be eligible to receive a pro-rated Management Incentive
Plan (“MIP”) payment for fiscal 2022 (if and to the extent approved by the Human Capital and Compensation Committee in the ordinary course).
|
Under the separation arrangement with Mr. Casterton, he is eligible to receive, without limitation, the following:
| • |
52 weeks of severance pay, paid on a bi-weekly basis, at the same rate as his annual base salary at the time of his termination (and subject to
applicable wage and tax deductions) under the Company’s Supplemental Severance Plan; and
|
| • |
The Company will permit Mr. Casterton’s unvested RSUs granted under
the Company’s fiscal year 2019, 2020 and 2021 LTIP and scheduled to vest in 2022 and 2023, unvested Options granted under the fiscal year 2019, 2020 and 2021 LTIP and scheduled to vest in 2022, and a pro-rata portion of his
unvested Performance Shares applicable to the fiscal 2020 through 2022 period to continue to vest on their normal vesting schedule, and he will be eligible to receive a pro-rated MIP payment for fiscal 2022 (if and to the extent approved by the Human Capital and Compensation Committee in the ordinary course).
|
The separation benefits described above are subject to the execution of customary restrictive covenant agreements between the Company
and each of Mr. McBurney and Mr. Casterton, respectively, and other customary conditions. The separation arrangements with each of Mr. McBurney and Mr. Casterton are subject to the respective individual’s execution and non-revocation of a
general release of claims against the Company, and are qualified in their entirety by the respective terms of the Separation Letter Agreement between the Company and Mr. McBurney, effective as of October 31, 2021, and the Separation Letter
Agreement between the Company and Mr. Casterton, effective as of October 29, 2021.
| Item 6. |
Exhibits.
|
|
(a)
|
Exhibits:
|
|
Exhibit No.
|
Description
|
Incorporated Herein By
Reference To
|
Filed
Herewith
|
|
Offer Letter dated as of July 2, 2021, by and between the Company and Adrian Peace.
|
X
|
||
|
Offer Letter dated as of July 16, 2021, by and between the Company and Eric McGinnis.
|
X
|
||
|
First Amendment to Eric S. McGinnis Offer Letter
|
X
|
||
|
Form of Fiscal 2022 Modine Non-Employee Director Restricted Stock Unit Award.
|
X
|
||
|
Form of Make-Whole ISO Award Agreement with Eric McGinnis.
|
X
|
||
|
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
|
X
|
||
|
Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer.
|
X
|
||
|
Section 1350 Certification of Neil D. Brinker, President and Chief Executive Officer.
|
X
|
||
|
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer.
|
X
|
||
|
101.INS
|
Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document).
|
X
|
|
|
101.SCH
|
Inline XBRL Taxonomy Extension Schema
|
X
|
|
|
101.CAL
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document
|
X
|
|
|
101.DEF
|
Inline XBRL Taxonomy Extension Definition Linkbase Document
|
X
|
|
|
10.1.LAB
|
Inline XBRL Taxonomy Extension Label Linkbase Document
|
X
|
|
|
10.1.PRE
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document
|
X
|
|
|
104
|
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
|
X
|
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
MODINE MANUFACTURING COMPANY
(Registrant)
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*
Date: November 3, 2021
* Executing as both the principal financial officer and a duly authorized officer of the Company
42