Modine Manufacturing Co 10-Q for FY2022 Q3
Modine Manufacturing Co (MOD)
10-Q
2022-02-03
For: 2021-12-31
View Original
Added on
April 11, 2026
About this 10-Q
Modine Manufacturing Co filed this 10-Q on February 3, 2022, covering the quarter ended December 31, 2021 (FY2022 Q3).
Headline figures
Quarter ended December 31, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $502.2M
- up 3.7% from $484.3M a year earlier
- Net income
- $74.1M
- compared with a net loss of $195.7M a year earlier
- Diluted EPS
- $1.41
- compared with -$3.81 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 December 31, 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 for 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 check mark if the registrant has elected not 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, $0.625 par
value, was 51,913,896 at January 28, 2022.
MODINE MANUFACTURING COMPANY
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PART I.
FINANCIAL INFORMATION
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1
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27
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41
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42
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PART II. OTHER INFORMATION
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44
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PART I. FINANCIAL INFORMATION
MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and nine months ended December 31, 2021 and 2020
(In millions, except per share amounts)
(Unaudited)
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Three months ended
December 31,
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Nine months
ended
December 31,
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2021
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2020
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2021
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2020
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Net sales
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$
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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 (reversals) – net
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(
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( |
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Loss on sale of assets
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Operating income (loss)
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(
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Interest expense
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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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Earnings (loss) before income taxes
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(
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( |
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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 (loss)
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(
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( |
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Net earnings attributable to noncontrolling interest
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(
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(
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( |
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Net earnings (loss) attributable to Modine
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$
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$
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(
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$ | $ | ( |
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Net earnings (loss) 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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)
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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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$ | $ | ( |
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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 nine months ended December 31, 2021 and 2020
(In millions)
(Unaudited)
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Three months ended
December 31,
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Nine months
ended
December 31,
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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 (loss)
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$
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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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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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( |
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Comprehensive income attributable to noncontrolling interest
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(
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(
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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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)
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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
December 31, 2021 and March 31, 2021
(In millions, except per share amounts)
(Unaudited)
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December 31, 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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(
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Treasury stock, at cost,
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(
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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 nine months ended December 31, 2021 and 2020
(In millions)
(Unaudited)
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Nine months
ended December 31,
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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 (loss)
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$
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$
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(
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Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
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Depreciation and amortization
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Impairment charges (reversals) – 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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(
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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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(
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Net cash provided by operating activities
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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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(
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Proceeds from (payments for) disposition of assets
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(
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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 (repayments) on bank overdraft facilities – net
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(
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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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(
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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 in cash, cash equivalents, restricted cash and cash held for sale
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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 nine months ended December 31,
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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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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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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Net earnings
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-
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Other comprehensive income (loss)
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-
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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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Stock-based compensation expense
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-
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Balance, December 31, 2021
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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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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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(
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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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|||||||||||||||
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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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||||||||||||||||||||||||||||||||
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Stock-based compensation expense
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-
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|||||||||||||||||||||||||||||||
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Balance, September 30, 2020
|
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | $ | |||||||||||||||||||||
|
Net (loss) earnings
|
-
|
( |
) | ( |
) | |||||||||||||||||||||||||||
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Other comprehensive income
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-
|
|||||||||||||||||||||||||||||||
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Stock-based compensation expense
|
-
|
|||||||||||||||||||||||||||||||
|
Balance, December 31, 2020
|
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | $ | |||||||||||||||||||||
The notes to condensed consolidated financial statements are an integral part of these statements.
5
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 nine 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. During the third quarter of fiscal 2022, a purchase price adjustment for net working capital and certain other items was finalized and the
Company paid the buyer $2.4 million. The final purchase price adjustment was consistent with the Company’s prior estimate and no
adjustment was required to the $6.6 million loss on sale recorded during the first quarter fiscal 2022. 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 loan facility.
Borrowings under the agreement currently bear interest at 2.6 percent. During the second quarter of fiscal 2022, the Company disbursed
€4.0 million ($4.7
million) to the buyer under this facility. 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. The Board of Directors subsequently conducted a
search for his successor and, effective December 1, 2020, appointed Neil D. Brinker 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 $5.9 million during the first nine months 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 October 25, 2021, the Company announced that it agreed with Dana Incorporated (“Dana”)
to terminate an agreement for the sale of the liquid-cooled automotive business. Both companies had been actively engaged in the regulatory review process in Germany for many months and agreed that it was no longer in the best interest of either
party to pursue the sale transaction further.
In connection with the termination of the sale agreement,
the Company determined that the liquid-cooled automotive business no longer met the requirements to be classified as held for sale during the third quarter of fiscal 2022. As a result, the Company remeasured the long-lived assets reverting back to held and used classification at the
lower of their (i) carrying value, as if held for sale classification had not been met; or (ii) fair value at the date of the decision not to sell. These long-lived assets consisted primarily of property, plant and equipment assets and were
fully impaired while classified as held for sale.
During the third quarter of fiscal 2022, the Company reversed $57.2 million of held for sale impairment charges based on the remeasurement of the long-lived assets of the liquid-cooled automotive business. The Company engaged third-party valuation specialists to assist in
estimating the fair values of the assets. The Company primarily used the market and cost valuation approaches and utilized third-party information from various industry-accepted sources, including applicable government-published statistics and
data from appraisal and resale service providers. The market approach focused on prices for comparable assets in arm’s length transactions. For land and building assets, for example, sales of similar properties near the Company’s facilities
were analyzed. For machinery and equipment assets, the Company referenced available third-party information regarding the selling prices of similar equipment. The cost approach focused on the amount for which an asset could be replaced or
reproduced. The cost of an asset was then adjusted downward based on various factors including, but not limited to, age, location, and physical condition. After estimating the fair values of the assets reverting back to held and used
classification, the Company compared the fair value for each asset to its carrying value. Carrying value represented each asset’s carrying value before the initial impairment charge, reduced for depreciation that would have been recorded if the
asset had not been classified as held for sale. The Company then adjusted each asset to the lower of fair value or carrying value, resulting in the reversal of $57.2 million of previous impairment charges. In addition, the Company resumed depreciating the property, plant and equipment assets of the liquid-cooled automotive business based on the remeasured asset values
during the third quarter of fiscal 2022.
On a year-to-date basis, the $57.2 million held for sale impairment reversal during the
third quarter of fiscal 2022 was partially
offset by $1.2 million of net held
for sale impairment charges recorded during the first six months of fiscal 2022. At both June 30, 2021 and September 30, 2021, 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,
the Company recorded a total of $8.6 million of impairment charges during the first and second quarters of fiscal 2022. These impairment charges reduced the net carrying value of property, plant and equipment additions
during each quarter to zero 7.4
million of previous impairment charges to adjust the long-lived assets within the asset groups impacted by the sale perimeter change to their estimated
fair value as of June 30, 2021. The
Company’s determination of fair value for the long-lived assets within these businesses 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 Company’s fair value measurements of the property, plant
and equipment assets within the liquid-cooled automotive business are categorized as Level 3 within the fair value hierarchy. Refer to Note 4 for the definition of a Level 3 fair value measurement.
The liquid-cooled automotive business was initially classified
as held for sale during the third quarter of fiscal 2021. At that time, the Company recorded $134.4 million of impairment charges primarily related to the long-lived assets within the liquid-cooled automotive business. Upon classification as held for sale, the Company assessed the disposal group’s fair value
less costs to sell and reduced the net carrying value of the disposal group’s long-lived assets to zero .
The Company reported all impairment charges and reversals
during fiscal 2021 and 2022 within the
impairment charges (reversals) line on the consolidated statements of operations.
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 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 at March 31, 2021 were as follows:
|
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 December 31,
2021
|
Three months ended December 31,
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
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||||||||||
|
Nine months
ended December 31, 2021
|
Nine months
ended December 31, 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:
|
December 31, 2021
|
March 31, 2021
|
|||||||
|
Contract assets
|
$
|
|
$
|
|
||||
|
Contract liabilities
|
|
|
||||||
At March 31, 2021, $7.1 million and $2.9 million of contract
assets and contract liabilities, respectively, were classified as held for sale and excluded from the amounts above. See Note 2 for additional information.
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 $12.3 million increase in contract assets during the first nine months of fiscal 2022 primarily resulted from the reclassification of contract assets
previously held for sale and an increase in contract assets for revenue recognized over time.
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 $4.3 million increase in contract
liabilities during the first nine months of fiscal 2022 primarily resulted from the reclassification of contract liabilities previously held for sale and payments 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 December 31, 2021 and March 31, 2021, the fair values of the investments and obligations for the
Company’s deferred compensation plans each totaled $3.0 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
December 31,
|
Nine months ended
December 31,
|
|||||||||||||||
|
2021
|
2020
|
2021
|
2020
|
|||||||||||||
|
Service cost
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Interest cost
|
|
|
|
|
||||||||||||
|
Expected return on plan assets
|
(
|
)
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||||
|
Amortization of unrecognized net loss
|
|
|
|
|
||||||||||||
|
Net periodic benefit cost
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
During the nine months ended December 31, 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 $1.1 million
and $2.1 million for the three months ended
December 31, 2021 and 2020, respectively. The Company recognized stock-based compensation expense of $4.7 million and $4.2 million for the nine months ended December 31, 2021 and 2020, respectively.
The fair value of stock-based compensation awards granted during the nine months
ended December 31, 2021 and 2020 were as follows:
| Nine months ended December 31, |
||||||||||||||||
| 2021 | 2020 | |||||||||||||||
|
Shares
|
Fair Value
Per Award
|
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 nine 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.
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:
| Nine months ended December 31, |
||||||||
| 2021 |
2020 | |||||||
|
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 December 31, 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
nine months of fiscal 2022, restructuring and repositioning expenses primarily consisted of severance-related costs associated with targeted headcount reductions in the CIS and Automotive segments and equipment transfer costs within the HDE
segment.
During the
first nine months of fiscal 2021, the Company recorded $3.1 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
December 31,
|
Nine months ended
December 31,
|
|||||||||||||||
|
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 December 31,
|
||||||||
|
2021
|
2020
|
|||||||
|
Beginning balance
|
$
|
|
$
|
|
||||
|
Additions
|
|
|
||||||
|
Payments
|
(
|
)
|
(
|
)
|
||||
| Reclassified from (to) held for sale |
( |
) | ||||||
|
Effect of exchange rate changes
|
(
|
)
|
|
|||||
|
Ending balance
|
$
|
|
$
|
|
||||
| Nine months ended December 31, | ||||||||
| 2021 |
2020 |
|||||||
| Beginning balance | $ | $ | ||||||
| Additions | ||||||||
| Payments | ( |
) | ( |
) | ||||
| Reclassified from (to) held for sale |
( |
) | ||||||
| Effect of exchange rate changes | ( |
) | ||||||
| Ending balance | $ | $ | ||||||
Note 8: Other Income and Expense
Other income and expense consisted of the following:
|
Three months ended
December 31,
|
Nine months
ended
December 31,
|
|||||||||||||||
|
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 December 31, 2021
and 2020 was 0.1 percent and (71.7 ) percent, respectively. The Company’s effective tax rate for the nine months ended December 31, 2021 and 2020 was 8.7 percent and (95.7 ) percent, respectively.
The effective tax rates in the fiscal 2021 and 2022 periods were significantly impacted by the Company’s accounting for the liquid-cooled automotive business. During the third
quarter of fiscal 2021, the Company initially classified its liquid-cooled automotive business as held for sale and recorded $134.4
million of impairment charges. The income tax benefits associated with these impairment charges totaled $37.7 million and increased
the deferred tax assets in the applicable jurisdictions. Upon evaluating the deferred tax assets for realizability, the Company recorded income tax charges totaling $109.9 million related to valuation allowances in the third quarter of fiscal 2021. In fiscal 2022, the Company recorded net impairment reversals totaling $56.0 million related to this business, primarily driven by the remeasurement of its property, plant and equipment assets upon reverting back to held
and used classification during the third quarter of fiscal 2022. In addition, the effective tax rates for the third quarter and the first nine months of fiscal 2022 were favorably impacted by $8.2 million and $11.4 million, respectively, from income tax
benefits related to valuation allowances on deferred tax assets in foreign jurisdictions, as further described below. See Note 2 for additional information regarding the impairment charges and reversals related to the liquid-cooled automotive
business.
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 its quarterly analyses in fiscal 2022, the Company determined it was more likely than not that the deferred tax assets in certain foreign
jurisdictions will be realized. As a result, the need for the valuation allowances recorded thereon was eliminated and the Company recorded income tax benefits of $4.8
million and $8.2 million during the first and third quarters of fiscal 2022, respectively. The Company’s analyses in these quarters included consideration
of the transaction perimeter modification during the first quarter and the termination of the sale agreement during the third quarter for the liquid-cooled automotive business and the related impairment reversals. Based upon its analysis as of
September 30, 2021, the Company recorded an income tax charge of $1.6 million in the second quarter of fiscal 2022 since it determined it was more likely than not
that the deferred tax assets in a foreign jurisdiction would not be realized. This income tax charge partially offset the $13.0 million
of income tax benefits recorded during the first and third quarters. Together, these valuation allowance adjustments resulted in a net income tax benefit of $11.4
million during the first nine months of fiscal 2022.
Based upon its quarterly analyses for the first three quarters of fiscal 2021, the Company determined it was more likely than not that deferred tax assets in the U.S. and in certain foreign
jurisdictions would not be realized and, as a result, recorded income tax charges of $6.6 million and $109.9 million during the second and third quarters of fiscal 2021, respectively. These fiscal 2021 valuation allowance adjustments resulted in income
tax charges totaling $116.5 million during the first nine months of fiscal 2021.
As of December 31, 2021, valuation allowances against deferred tax assets in the
U.S. and in certain foreign jurisdictions totaled $90.1 million and $21.9 million, respectively.
These totals include the valuation allowances recorded for certain net deferred tax assets of the liquid-cooled automotive business which was previously 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
December 31,
|
Nine months ended
December 31,
|
|||||||||||||||
|
2021
|
2020
|
2021
|
2020
|
|||||||||||||
|
Net earnings (loss) attributable to Modine
|
$
|
|
$
|
(
|
)
|
$
|
|
$
|
(
|
)
|
||||||
|
Weighted-average shares outstanding - basic
|
|
|
|
|
||||||||||||
|
Effect of dilutive securities
|
|
|
|
|
||||||||||||
|
Weighted-average shares outstanding - diluted
|
|
|
|
|
||||||||||||
|
Earnings (loss) per share:
|
||||||||||||||||
|
Net earnings (loss) per share - basic
|
$
|
|
$
|
(
|
)
|
$
|
|
$
|
(
|
)
|
||||||
|
Net earnings (loss) per share - diluted
|
$
|
|
$
|
(
|
)
|
$
|
|
$
|
(
|
)
|
||||||
For both the three and nine months ended December 31, 2021, the calculation of diluted earnings per share
excluded 0.6 0.2
For the three and nine months ended December 31, 2020, the calculation of diluted earnings per share
excluded 1.4 million and 1.5 million stock
options, respectively, because they were anti-dilutive. In addition, the calculation for the three and nine months ended December 31, 2020 excluded 0.5 million and 0.6 million restricted stock awards, respectively, because they were anti-dilutive. For the three
months and nine months ended December 31, 2020, the total number of potentially-dilutive securities was 0.2 million and 0.1 million, respectively. However, these securities were not included in the computation of diluted net loss per share since to do so would have
decreased the loss per share.
Note 11: Cash, Cash Equivalents and Restricted Cash
Cash, cash equivalents and restricted cash consisted of the following:
|
December 31, 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:
|
December 31, 2021
|
March 31, 2021
|
|||||||
|
Raw materials
|
$
|
|
$
|
|
||||
|
Work in process
|
|
|
||||||
|
Finished goods
|
|
|
||||||
|
Total inventories
|
$
|
|
$
|
|
||||
Inventories in the table above as of March 31, 2021 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:
|
December 31, 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 as of March 31, 2021 exclude 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 estimated 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 December 31, 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, December 31, 2021
|
$
|
|
$
|
|
$
|
|
||||||
In conjunction with the goodwill reassignment evaluation described above, the Company tested its reporting units for potential impairment during the second
quarter of fiscal 2022 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 exceeded its carrying value by approximately 8.0 percent. As such, there is a heightened risk
of a future impairment charge with respect to the $63.0 million of goodwill recorded in this reporting unit as of December 31, 2021.
In estimating the fair value of the Coils and Coolers reporting unit, the Company calculated the present value of its estimated 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 suppliers, 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:
|
December 31, 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 million and $2.2 million for the three months ended December 31, 2021 and 2020, respectively. The Company recorded amortization expense of $6.3 million and $6.4 million for the nine months ended December 31, 2021 and
2020, respectively. The Company estimates that it will record $2.1
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 December 31,
|
||||||||
|
2021
|
2020
|
|||||||
|
Beginning balance
|
$
|
|
$
|
|
||||
|
Warranties recorded at time of sale
|
|
|
||||||
|
Adjustments to pre-existing warranties
|
(
|
)
|
(
|
)
|
||||
|
Settlements
|
(
|
)
|
(
|
)
|
||||
| Reclassified from (to) held for sale |
( |
) |
||||||
|
Effect of exchange rate changes
|
|
|
||||||
|
Ending balance
|
$
|
|
$
|
|
||||
|
Nine months
ended December 31,
|
||||||||
|
2021
|
2020
|
|||||||
|
Beginning balance
|
$
|
|
$
|
|
||||
|
Warranties recorded at time of sale
|
|
|
||||||
|
Adjustments to pre-existing warranties
|
(
|
)
|
(
|
)
|
||||
|
Settlements
|
(
|
)
|
(
|
)
|
||||
| Reclassified from (to) held for sale |
( |
) | ||||||
|
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 as of March 31, 2021 exclude operating lease right of use (“ROU”) assets and liabilities, which each totaled $6.1
|
Balance Sheet Location
|
December 31, 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
December 31,
|
Nine months ended
December 31,
|
|||||||||||||||
|
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
|
December 31, 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 December 31, 2021, the weighted-average interest rates for revolving credit facility borrowings and the term loans were 1.7 and 1.8 percent,
respectively. 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 December 31, 2021, the Company’s revolving credit facility borrowings totaled $81.2 million and domestic letters of credit totaled $5.7 million,
resulting in available borrowings under the revolving credit facility of $163.1 million. At March 31, 2021, swingline borrowings totaled $1.4 million. There were no swingline borrowings outstanding as of December 31, 2021.
The Company also maintains credit agreements for its foreign subsidiaries. There were no outstanding short-term borrowings related to these foreign credit agreements at December 31, 2021. At March 31, 2021, $5.0 million of outstanding short-term foreign borrowings were classified as held for sale. See Note 2 for additional information.
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 December
31, 2021, the Company was in compliance with its debt covenants; its leverage ratio and interest coverage ratio were 2.5 and 10.0 , 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 December 31, 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 $146.5 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 Pandemic and Supply Chain Disruptions
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. During fiscal 2022, the direct effects on the Company from the COVID-19 pandemic have lessened. Although the Company’s manufacturing locations are open and operating, production has been negatively affected at times by employee
absences due to COVID-19.
The COVID-19 pandemic and other market and economic dynamics have contributed to global supply chain challenges and inflationary market conditions. The Company is focused on mitigating the negative impacts of
labor shortages and supply chain challenges, which have included rising raw material and logistic prices as well as delays and shortages in certain purchased commodities and components. The Company has implemented selling price increases for its
products in response to raw material and other price increases and is engaged with suppliers to ensure availability of purchased commodities and components. In addition, the Company’s Automotive segment has been impacted by lower order volume
associated with semiconductor shortages, which have caused lower global automotive production.
At this time, the Company cannot reasonably estimate the full
impact of the COVID-19 pandemic or the ongoing supply chain challenges. If the Company, its suppliers, or its customers experience prolonged
shutdowns or other significant business disruptions, it is possible that the Company’s 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 $18.7 million and $16.0 million as of December 31, 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 December 31, 2021
|
Nine months ended
December 31, 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 gains - net (c)
|
-
|
-
|
(
|
)
|
(
|
)
|
-
|
-
|
(
|
)
|
(
|
)
|
||||||||||||||||||||
|
Income taxes
|
|
|
|
|
|
(
|
)
|
(
|
)
|
|||||||||||||||||||||||
|
Total other comprehensive income (loss)
|
(
|
)
|
|
|
(
|
)
|
(
|
)
|
|
(
|
)
|
|
||||||||||||||||||||
|
Ending balance
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
|
$
|
(
|
)
|
||||||||||
|
Three months ended December 31, 2020
|
Nine months ended
December 31, 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 (gains) 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 December 31,
|
||||||||||||||||||||||||
|
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
|
$
|
|
$
|
-
|
$
|
|
$
|
|
$
|
-
|
$
|
|
||||||||||||
|
Nine months
ended December 31,
|
||||||||||||||||||||||||
|
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 December 31,
|
Nine months
ended December 31,
|
|||||||||||||||||||||||||||||||
|
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 December 31,
|
Nine months
ended December 31,
|
|||||||||||||||
|
2021
|
2020
|
2021
|
2020
|
|||||||||||||
|
Operating income:
|
||||||||||||||||
|
BHVAC
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
CIS
|
|
(
|
)
|
|
|
|||||||||||
|
HDE
|
|
|
|
|
||||||||||||
|
Automotive
|
|
(
|
)
|
|
(
|
)
|
||||||||||
|
Segment total
|
|
(
|
)
|
|
(
|
)
|
||||||||||
|
Corporate and eliminations
|
(
|
)
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||||
|
Operating income (loss)
|
$
|
|
$
|
(
|
)
|
$
|
|
$
|
(
|
)
|
||||||
|
December 31, 2021
|
March 31, 2021
|
|||||||
|
Total assets:
|
||||||||
|
BHVAC
|
$
|
|
$
|
|
||||
|
CIS
|
|
|
||||||
|
HDE
|
|
|
||||||
|
Automotive
|
|
|
||||||
|
Corporate and eliminations (a)
|
(
|
)
|
(
|
)
|
||||
|
Total assets
|
$
|
|
$
|
|
||||
|
(a)
|
|
25
| Table of Contents |
|
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
|
Note 21: Subsequent Event
The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under
this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The
Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of
restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.
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 December 31, 2021 was the third quarter of fiscal 2022.
COVID-19 Pandemic and Supply Chain Disruptions
During fiscal 2022, the effects on our company from the COVID-19 pandemic have lessened, particularly compared with the heavily-impacted first half of fiscal 2021. Although our
manufacturing locations are open and operating, production has been negatively affected at times by employee absences due to COVID-19.
The COVID-19 pandemic and other market and economic dynamics have contributed to global supply chain challenges and inflationary market conditions. We, like many companies, have
experienced labor shortages and negative impacts from supply chain challenges, including rising prices for raw materials and logistics, as well as delays and shortages in certain commodities and components we purchase from suppliers. In
addition, our Automotive segment has been impacted by lower order volume associated with semiconductor shortages, which have caused lower global automotive production. We are focused on mitigating the negative impacts of these supply chain
challenges. We have implemented selling price increases for our products in response to raw material and other price increases and are engaged with suppliers to ensure availability of key raw materials.
We expect temporary disruptions due to illness-related employee absences and the pressures associated with supply chain challenges will continue, at least in the near term. We cannot
reasonably estimate the full impact that the COVID-19 pandemic or the ongoing supply chain challenges could have on our business, results of operations, or cash flows in the future.
Liquid-cooled Automotive Business
On October 25, 2021, we announced that we agreed with Dana Incorporated (“Dana”) to terminate an agreement for the sale of the liquid-cooled automotive business. We agreed that it was no
longer in the best interest of either party to pursue the sale transaction further after being actively engaged in the regulatory review process in Germany for many months.
In connection with the termination of the sale agreement, we determined that the liquid-cooled automotive business no longer met the requirements to be classified as held for sale during
the third quarter of fiscal 2022. While held for sale, we had fully impaired the liquid-cooled automotive business’s long-lived assets, which primarily consisted of property, plant and equipment assets. Upon reverting back to held and used
classification, we adjusted the long-lived assets to the lower of their (i) carrying value, as if held for sale classification had not been met; or (ii) fair value. As a result, we reversed $57.2 million of previous impairment charges during the
third quarter of fiscal 2022 within the Automotive segment. In addition, we resumed depreciating the property, plant and equipment assets based upon the remeasured asset values 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.
Third Quarter Highlights
Net sales in the third quarter of fiscal 2022 increased $17.9 million, or 4 percent, from the third quarter of fiscal 2021, primarily due to higher sales in our Commercial Industrial
Solutions (“CIS”), Building HVAC Systems (“BHVAC”), and Heavy Duty Equipment (“HDE”) segments, partially offset by lower sales in our Automotive segment. Cost of sales increased $26.0 million, or 6 percent, compared with the third quarter of
fiscal 2021, primarily due to higher raw material prices, including underlying metal prices and related premiums, fabrication, freight, and packaging costs. Gross profit decreased $8.1 million and gross margin declined 220 basis points to 14.9
percent. Selling, general and administrative (“SG&A”) expenses decreased $5.8 million, primarily due to lower expenses for our review of strategic alternatives for the Automotive segment and lower compensation-related expenses. Operating
income of $79.4 million during the third quarter of fiscal 2022 represents an improvement of $188.1 million from the prior-year operating loss of $108.7 million. The operating income and operating loss during the third quarters of fiscal 2022
and 2021 include $57.2 million of impairment reversals and $134.4 million of impairment charges, respectively, related to the liquid-cooled automotive business.
Year-to-date Highlights
Net sales in the first nine months of fiscal 2022 increased $182.2 million, or 14 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 $177.7 million, or 16 percent, from the same period last year, primarily due to higher raw material prices and higher sales volume. Gross profit increased $4.5
million and gross margin declined 170 basis points to 14.5 percent. SG&A expenses increased $10.0 million, primarily due to higher compensation-related expenses as the prior-year benefitted from cost-saving actions implemented in response to
COVID-19. We withdrew most of these cost-saving actions in the third quarter of fiscal 2021 as production returned to more normal levels. Operating income of $98.6 million during the first nine months of fiscal 2022 represents an improvement of
$182.0 million from the prior-year operating loss of $83.4 million. The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods include $55.7 million of impairment reversals and $134.4 million of impairment
charges, respectively, primarily related to the liquid-cooled automotive business.
Restructuring
We have committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, we are
targeting approximately $20.0 million of annual cost savings on a consolidated basis. We are currently determining the specific actions necessary to achieve our objectives. At this time, we are unable to precisely estimate the timing and amount
of the associated costs, but currently expect to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. We expect most of the restructuring expenses
will be related to severance for headcount reductions.
CONSOLIDATED RESULTS OF OPERATIONS
The following table presents our consolidated financial results on a comparative basis for the three and nine months ended December 31, 2021 and 2020:
|
Three months ended December 31,
|
Nine months ended December 31,
|
|||||||||||||||||||||||||||||||
|
2021
|
2020
|
2021
|
2020
|
|||||||||||||||||||||||||||||
|
(in millions)
|
$'s
|
% of sales
|
$'s
|
% of sales
|
$'s
|
% of sales
|
$'s
|
% of sales
|
||||||||||||||||||||||||
|
Net sales
|
$
|
502.2
|
100.0
|
%
|
$
|
484.3
|
100.0
|
%
|
$
|
1,475.7
|
100.0
|
%
|
$
|
1,293.5
|
100.0
|
%
|
||||||||||||||||
|
Cost of sales
|
427.6
|
85.1
|
%
|
401.6
|
82.9
|
%
|
1,261.6
|
85.5
|
%
|
1,083.9
|
83.8
|
%
|
||||||||||||||||||||
|
Gross profit
|
74.6
|
14.9
|
%
|
82.7
|
17.1
|
%
|
214.1
|
14.5
|
%
|
209.6
|
16.2
|
%
|
||||||||||||||||||||
|
Selling, general and administrative expenses
|
50.3
|
10.0
|
%
|
56.1
|
11.6
|
%
|
161.6
|
11.0
|
%
|
151.6
|
11.7
|
%
|
||||||||||||||||||||
|
Restructuring expenses
|
2.1
|
0.4
|
%
|
0.9
|
0.2
|
%
|
3.0
|
0.2
|
%
|
7.0
|
0.5
|
%
|
||||||||||||||||||||
|
Impairment charges (reversals) – net
|
(57.2
|
)
|
-11.4
|
%
|
134.4
|
27.8
|
%
|
(55.7
|
)
|
-3.8
|
%
|
134.4
|
10.4
|
%
|
||||||||||||||||||
|
Loss on sale of assets
|
-
|
-
|
-
|
-
|
6.6
|
0.4
|
%
|
-
|
-
|
|||||||||||||||||||||||
|
Operating income (loss)
|
79.4
|
15.8
|
%
|
(108.7
|
)
|
-22.5
|
%
|
98.6
|
6.7
|
%
|
(83.4
|
)
|
-6.5
|
%
|
||||||||||||||||||
|
Interest expense
|
(3.8
|
)
|
-0.8
|
%
|
(4.6
|
)
|
-0.9
|
%
|
(11.8
|
)
|
-0.8
|
%
|
(15.2
|
)
|
-1.2
|
%
|
||||||||||||||||
|
Other expense – net
|
(1.1
|
)
|
-0.2
|
%
|
(0.5
|
)
|
-0.1
|
%
|
(1.6
|
)
|
-0.1
|
%
|
(1.0
|
)
|
-0.1
|
%
|
||||||||||||||||
|
Earnings (loss) before income taxes
|
74.5
|
14.8
|
%
|
(113.8
|
)
|
-23.5
|
%
|
85.2
|
5.8
|
%
|
(99.6
|
)
|
-7.7
|
%
|
||||||||||||||||||
|
Provision for income taxes
|
(0.1
|
)
|
-
|
(81.6
|
)
|
-16.8
|
%
|
(7.4
|
)
|
-0.5
|
%
|
(95.3
|
)
|
-7.4
|
%
|
|||||||||||||||||
|
Net earnings (loss)
|
$
|
74.4
|
14.8
|
%
|
$
|
(195.4
|
)
|
-40.3
|
%
|
$
|
77.8
|
5.3
|
%
|
$
|
(194.9
|
)
|
-15.1
|
%
|
||||||||||||||
Comparison of Three Months ended December 31, 2021 and 2020
Third quarter net sales of $502.2 million were $17.9 million, or 4 percent, higher than the third quarter of the prior year, primarily due to higher sales volume and favorable pricing
adjustments in response to raw material price increases in our CIS, BHVAC, and HDE segments, partially offset by lower sales volume in our Automotive segment. Sales in the CIS, BHVAC, and HDE segments increased $23.7 million, $16.9 million, and
$15.2 million, respectively. Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor
shortages on the global automotive market.
Third quarter cost of sales increased $26.0 million, or 6 percent, primarily due to higher raw material prices, which increased approximately $39.0 million, and higher sales volume in our
CIS, BHVAC, and HDE segments. These drivers, which increased cost of sales, were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies. As a percentage of sales, cost of sales increased 220 basis
points to 85.1 percent.
As a result of higher sales and higher cost of sales as a percentage of sales, third quarter gross profit decreased $8.1 million and gross margin declined 220 basis points to 14.9 percent.
Third quarter SG&A expenses decreased $5.8 million, primary driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment
businesses and lower compensation-related expenses, which decreased approximately $2.0 million. The lower compensation-related expenses were primarily due to lower incentive compensation expenses at Corporate in the current year.
Restructuring expenses of $2.1 million in the third quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses
in the CIS segment.
During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of
previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value. During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for
sale, we recorded $134.4 million of impairment charges and reduced the carrying value of the disposal group’s long-lived assets to zero.
Operating income of $79.4 million in the third quarter of fiscal 2022 represents a $188.1 million improvement from the prior-year operating loss of $108.7 million. The operating income and
operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment. In addition, as compared with the third quarter of fiscal
2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.
Interest expense in the third quarter of fiscal 2022 decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorable changes in interest rates.
The provision for income taxes was $0.1 million and $81.6 million in the third quarter of fiscal 2022 and 2021, respectively. The $81.5 million decrease was primarily due to the absence of
$109.9 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year
resulting from the reversal of tax valuation allowances in foreign jurisdictions. These drivers, which decreased the provision for income taxes, were partially offset by the absence of $37.7 million of income tax benefits recorded during the
prior year related to the Automotive segment impairment charges.
Comparison of Nine Months ended December 31, 2021 and 2020
Fiscal 2022 year-to-date net sales of $1,475.7 million were $182.2 million, or 14 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 $123.7 million, $86.6 million, and $38.4 million, respectively. Automotive segment sales decreased $61.9 million.
Fiscal 2022 year-to-date cost of sales of $1,261.6 million increased $177.7 million, or 16 percent, primarily due to higher raw material prices, which increased approximately $117.0
million, and higher sales volume. In addition, cost of sales in the first nine 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 170 basis points to 85.5
percent.
As a result of higher sales and higher cost of sales as a percentage of sales, gross profit increased $4.5 million and gross margin declined 170 basis points to 14.5 percent.
Fiscal 2022 year-to-date SG&A expenses increased $10.0 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, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million. These increases were
partially offset by lower strategic reorganization costs and lower costs related to our review of strategic alternatives for the Automotive segment businesses, which decreased $2.8 million and $1.3 million, respectively. The lower strategic
reorganization costs primarily resulted from lower severance expenses for executive management positions.
Restructuring expenses of $3.0 million in the first nine months of fiscal 2022 decreased $4.0 million compared with the same period last year, primarily due to lower severance expenses in
the CIS and HDE segments.
The net impairment reversals of $55.7 million during the first nine months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment. In the
prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale. In the current year, we adjusted the assets to the lower of carrying
or fair value once they no longer met the held for sale classification criteria.
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 $98.6 million during the first nine months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million. The operating
income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business. In addition, as compared with the
first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses. Operating income was negatively impacted by higher SG&A expenses and the loss on
sale of the air-cooled automotive business.
Interest expense during the first nine months of fiscal 2022 decreased $3.4 million compared with the same period last year, primarily due to favorable changes in interest rates and lower
debt outstanding during the current-year.
The provision for income taxes was $7.4 million and $95.3 million during the first nine months of fiscal 2022 and 2021, respectively. The $87.9 million decrease was primarily due to the
absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4 million income tax benefit recorded in the
current year related to valuation allowances on deferred tax assets in foreign jurisdictions. These drivers, which decreased the provision for income taxes, were partially offset by the absence of $37.7 million of income tax benefits recorded
during the prior year related to the Automotive segment impairment charges.
SEGMENT RESULTS OF OPERATIONS
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 part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.
While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment. See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.
The following is a discussion of our segment results of operations for the three months and nine months ended December 31, 2021 and 2020:
Building HVAC Systems
|
Three months ended December 31,
|
Nine months ended December 31,
|
|||||||||||||||||||||||||||||||
|
2021
|
2020
|
2021
|
2020
|
|||||||||||||||||||||||||||||
|
(in millions)
|
$'s
|
% of sales
|
$'s
|
% of sales
|
$'s
|
% of sales
|
$'s
|
% of sales
|
||||||||||||||||||||||||
|
Net sales
|
$
|
90.6
|
100.0
|
%
|
$
|
73.7
|
100.0
|
%
|
$
|
234.7
|
100.0
|
%
|
$
|
196.3
|
100.0
|
%
|
||||||||||||||||
|
Cost of sales
|
63.2
|
69.7
|
%
|
48.3
|
65.5
|
%
|
169.5
|
72.2
|
%
|
131.8
|
67.1
|
%
|
||||||||||||||||||||
|
Gross profit
|
27.4
|
30.3
|
%
|
25.4
|
34.5
|
%
|
65.2
|
27.8
|
%
|
64.5
|
32.9
|
%
|
||||||||||||||||||||
|
Selling, general and administrative expenses
|
13.0
|
14.4
|
%
|
10.5
|
14.3
|
%
|
35.1
|
15.0
|
%
|
28.9
|
14.8
|
%
|
||||||||||||||||||||
|
Operating income
|
$
|
14.4
|
15.9
|
%
|
$
|
14.9
|
20.1
|
%
|
$
|
30.1
|
12.8
|
%
|
$
|
35.6
|
18.1
|
%
|
||||||||||||||||
Comparison of Three Months ended December 31, 2021 and 2020
BHVAC net sales increased $16.9 million, or 23 percent, from the third quarter of fiscal 2021 to the third 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. Compared with the third quarter of the prior year, BHVAC sales to data center customers increased $11.6 million. In addition, sales to commercial HVAC customers
increased $5.2 million, primarily due to higher sales of ventilation and heating products in North America.
BHVAC cost of sales increased $14.9 million, or 31 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume, higher raw
material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs. As a percentage of sales, cost of sales increased 420 basis points to 69.7 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 increased $2.0 million and gross margin declined 420 basis points to 30.3 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 $2.5 million, or 10 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.
Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially
offset by higher gross profit.
Comparison of Nine Months ended December 31, 2021 and 2020
BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments
in response to raw material price increases and a $5.7 million favorable impact of foreign currency exchange rates. Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning
products. In addition, sales to data center customers increased $13.0 million.
BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased
by approximately $12.0 million. In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes. As a percentage of sales, cost of sales increased 510 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 increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.
BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 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 approximately $4.0 million.
Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.
Commercial and Industrial Solutions
|
Three months ended December 31,
|
Nine months ended December 31,
|
|||||||||||||||||||||||||||||||
|
2021
|
2020
|
2021
|
2020
|
|||||||||||||||||||||||||||||
|
(in millions)
|
$'s
|
% of sales
|
$'s
|
% of sales
|
$'s
|
% of sales
|
$'s
|
% of sales
|
||||||||||||||||||||||||
|
Net sales
|
$
|
148.6
|
100.0
|
%
|
$
|
124.9
|
100.0
|
%
|
$
|
456.2
|
100.0
|
%
|
$
|
369.6
|
100.0
|
%
|
||||||||||||||||
|
Cost of sales
|
130.9
|
88.1
|
%
|
112.0
|
89.7
|
%
|
399.4
|
87.5
|
%
|
324.8
|
87.9
|
%
|
||||||||||||||||||||
|
Gross profit
|
17.7
|
11.9
|
%
|
12.9
|
10.3
|
%
|
56.8
|
12.5
|
%
|
44.8
|
12.1
|
%
|
||||||||||||||||||||
|
Selling, general and administrative expenses
|
12.4
|
8.4
|
%
|
13.1
|
10.4
|
%
|
37.7
|
8.3
|
%
|
36.0
|
9.7
|
%
|
||||||||||||||||||||
|
Restructuring expenses
|
1.9
|
1.3
|
%
|
0.5
|
0.4
|
%
|
2.1
|
0.5
|
%
|
4.4
|
1.2
|
%
|
||||||||||||||||||||
|
Impairment charge
|
-
|
-
|
-
|
-
|
0.3
|
0.1
|
%
|
-
|
-
|
|||||||||||||||||||||||
|
Operating income (loss)
|
$
|
3.4
|
2.2
|
%
|
$
|
(0.7
|
)
|
-0.5
|
%
|
$
|
16.7
|
3.6
|
%
|
$
|
4.4
|
1.2
|
%
|
|||||||||||||||
Comparison of Three Months ended December 31, 2021 and 2020
CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product
pricing adjustments in response to raw material price increases. Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.
CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw
material prices, which increased by approximately $12.0 million. As a percentage of sales, cost of sales decreased 160 basis points to 88.1 percent, primarily due to the favorable impacts of the higher sales volume and improved operating
efficiencies, partially offset by higher material costs.
As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8 million and gross margin improved 160 basis points to 11.9 percent.
SG&A expenses decreased $0.7 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.
Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses. The severance expenses in the third quarter of
fiscal 2022 primarily related to targeted headcount reductions in Europe and China.
Operating income of $3.4 million represents a $4.1 million improvement from the prior-year operating loss of $0.7 million and was primarily due to higher gross profit.
Comparison of Nine Months ended December 31, 2021 and 2020
CIS year-to-date net sales increased $86.6 million, or 23 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 $5.7 million from foreign currency exchange rates. The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the
fiscal year. Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, compared with the same period in the prior year.
CIS year-to-date cost of sales increased $74.6 million, or 23 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased
by approximately $43.0 million. In addition, cost of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes. As a percentage of sales, cost of sales decreased 40 basis points to 87.5 percent, primarily due to
the favorable impacts of the higher sales volume and improved operating efficiencies, partially offset by higher material costs.
As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0 million and gross margin improved 40 basis points to 12.5 percent.
CIS year-to-date SG&A expenses increased $1.7 million, yet decreased 140 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.
Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3 million from the same period last year, primarily due to lower severance expenses. The severance expenses
during the first nine months of fiscal 2022 primarily related to targeted headcount reductions in Europe and China. The severance-related expenses during the first nine 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 nine months of fiscal 2022 increased $12.3 million from the same period last year, primarily due to higher gross profit and lower restructuring expenses,
partially offset by higher SG&A expenses.
Heavy Duty Equipment
|
Three months ended December 31,
|
Nine months ended December 31,
|
|||||||||||||||||||||||||||||||
|
2021
|
2020
|
2021
|
2020
|
|||||||||||||||||||||||||||||
|
(in millions)
|
$'s
|
% of sales
|
$'s
|
% of sales
|
$'s
|
% of sales
|
$'s
|
% of sales
|
||||||||||||||||||||||||
|
Net sales
|
$
|
200.8
|
100.0
|
%
|
$
|
185.6
|
100.0
|
%
|
$
|
598.4
|
100.0
|
%
|
$
|
474.7
|
100.0
|
%
|
||||||||||||||||
|
Cost of sales
|
178.6
|
88.9
|
%
|
159.6
|
86.0
|
%
|
535.3
|
89.5
|
%
|
413.8
|
87.2
|
%
|
||||||||||||||||||||
|
Gross profit
|
22.2
|
11.1
|
%
|
26.0
|
14.0
|
%
|
63.1
|
10.5
|
%
|
60.9
|
12.8
|
%
|
||||||||||||||||||||
|
Selling, general and administrative expenses
|
11.7
|
5.9
|
%
|
13.2
|
7.1
|
%
|
37.4
|
6.2
|
%
|
35.4
|
7.4
|
%
|
||||||||||||||||||||
|
Restructuring expenses
|
0.2
|
0.1
|
%
|
-
|
-
|
0.7
|
0.1
|
%
|
1.9
|
0.4
|
%
|
|||||||||||||||||||||
|
Operating income
|
$
|
10.3
|
5.1
|
%
|
$
|
12.8
|
6.8
|
%
|
$
|
25.0
|
4.2
|
%
|
$
|
23.6
|
5.0
|
%
|
||||||||||||||||
Comparison of Three Months ended December 31, 2021 and 2020
HDE net sales increased $15.2 million, or 8 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to pricing adjustments associated with raw
material price increases and higher sales volume. Sales to off-highway and commercial vehicle customers increased $12.3 million and $10.7 million, respectively. Sales to automotive and light vehicle customers decreased $7.7 million.
HDE cost of sales increased $19.0 million, or 12 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher raw material prices, which
increased approximately $19.0 million, and to a lesser extent, higher sales volume. These drivers, which increased cost of sales, were partially offset by improved operating efficiencies. 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 290 basis points to 88.9 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 $3.8 million and gross margin declined 290 basis points to 11.1 percent.
SG&A expenses decreased $1.5 million, or 120 basis points as a percentage of sales, compared with the third quarter of the prior year. The decrease in SG&A expenses was primarily
due to lower development costs and environmental charges. These decreases were partially offset by higher compensation-related expenses, which increased approximately $1.0 million.
Restructuring expenses during the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.
Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower gross profit, partially offset by lower SG&A
expenses.
Comparison of Nine Months ended December 31, 2021 and 2020
HDE year-to-date net sales increased $123.7 million, or 26 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 $59.0 million and $57.7
million, respectively.
HDE year-to-date cost of sales increased $121.5 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased
approximately $53.0 million. As a percentage of sales, cost of sales increased 230 basis points to 89.5 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 $2.2 million and gross margin declined 230 basis points to 10.5 percent.
HDE year-to-date SG&A expenses increased $2.0 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 $5.0 million, partially offset by lower development and other administrative costs.
Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.
Operating income during the first nine months of fiscal 2022 increased $1.4 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 December 31,
|
Nine months ended December 31,
|
|||||||||||||||||||||||||||||||
|
2021
|
2020
|
2021
|
2020
|
|||||||||||||||||||||||||||||
|
(in millions)
|
$'s
|
% of sales
|
$'s
|
% of sales
|
$'s
|
% of sales
|
$'s
|
% of sales
|
||||||||||||||||||||||||
|
Net sales
|
$
|
72.4
|
100.0
|
%
|
$
|
113.9
|
100.0
|
%
|
$
|
224.0
|
100.0
|
%
|
$
|
285.9
|
100.0
|
%
|
||||||||||||||||
|
Cost of sales
|
64.9
|
89.6
|
%
|
95.5
|
83.9
|
%
|
196.1
|
87.6
|
%
|
246.1
|
86.1
|
%
|
||||||||||||||||||||
|
Gross profit
|
7.5
|
10.4
|
%
|
18.4
|
16.1
|
%
|
27.9
|
12.4
|
%
|
39.8
|
13.9
|
%
|
||||||||||||||||||||
|
Selling, general and administrative expenses
|
9.7
|
13.4
|
%
|
8.5
|
7.4
|
%
|
30.1
|
13.4
|
%
|
25.5
|
8.9
|
%
|
||||||||||||||||||||
|
Restructuring expenses
|
-
|
-
|
0.4
|
0.4
|
%
|
0.2
|
0.1
|
%
|
0.6
|
0.2
|
%
|
|||||||||||||||||||||
|
Impairment charges (reversals) – net
|
(57.2
|
)
|
-79.0
|
%
|
134.4
|
118.0
|
%
|
(56.0
|
)
|
-25.0
|
%
|
134.4
|
47.0
|
%
|
||||||||||||||||||
|
Operating income (loss)
|
$
|
55.0
|
76.0
|
%
|
$
|
(124.9
|
)
|
-109.7
|
%
|
$
|
53.6
|
24.0
|
%
|
$
|
(120.7
|
)
|
-42.2
|
%
|
||||||||||||||
Comparison of Three Months ended December 31, 2021 and 2020
Automotive net sales decreased $41.5 million, or 36 percent, from the third quarter of fiscal 2021 to the third 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 semiconductor shortages on the global automotive market. The air-cooled automotive sales were $18.0 million during
the third quarter of fiscal 2021. Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.
Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume. This
decrease was partially offset by higher raw material prices, which increased approximately $4.0 million. As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.
As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.
SG&A expenses increased $1.2 million compared with the third quarter of the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.
During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of
previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value. The $134.4 million of impairment charges in the same period last year also primarily
related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.
Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million. The operating income
and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business. In addition, as compared with the
third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.
Comparison of Nine Months ended December 31, 2021 and 2020
Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 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 $6.4 million favorable impact of foreign currency exchange rate changes. The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19
pandemic, primarily in the first half of the fiscal year. Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market. Sales in Europe, North America, and Asia
decreased $37.8 million, $14.2 million, and $9.9 million, respectively.
Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which
decreased $9.9 million. We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021. Upon reverting
back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business. These decreases were partially offset by higher raw material
prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes. As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.
As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.
Automotive year-to-date SG&A expenses increased $4.6 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 $0.7 million unfavorable impact of foreign currency exchange rate changes.
The year-to-date net impairment reversal of $56.0 million primarily related to assets in our liquid-cooled automotive business. The $57.2 million impairment reversal during the third
quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded during the first six months of fiscal 2022. 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 related to certain manufacturing operations that no longer met the requirements to be
classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.
Operating income of $53.6 million during the first nine months of fiscal 2022 represents a $174.3 million improvement from the operating loss of $120.7 million in the same period last
year. The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business. In
addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.
Liquidity and Capital Resources
Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021 and an available borrowing capacity of
$163.1 million under our revolving credit facility. Given our extensive international operations, approximately $59.0 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 Provided by Operating Activities
Net cash provided by operating activities for the nine months ended December 31, 2021 was $7.4 million, which represents a $139.1 million decrease compared with 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. Inventory, including amounts held for sale, increased $57.8 million from March 31, 2021 to December 31, 2021. 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 $30.7 million during the first nine months of fiscal 2022 increased $7.0 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.
Debt
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 December 31, 2021, our leverage ratio and interest coverage ratio were 2.5 and 10.0, respectively. We expect to remain in
compliance with our debt covenants during the remainder of fiscal 2022 and beyond.
Forward-Looking Statements
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 (and the supply chain), 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; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); 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 implications
of “Brexit”;
|
| • |
The impact of 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 semiconductor shortages;
|
| • |
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;
|
| • |
Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, in light of tight global labor markets;
|
| • |
Our ability to protect our proprietary information and intellectual property from theft or attack by internal or external sources;
|
| • |
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;
|
| • |
The constant and increasing pressures associated with healthcare and associated insurance costs; and
|
| • |
Costs and other effects of litigation, claims, or other obligations.
|
Strategic Risks:
| • |
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;
|
| • |
Our ability to identify and execute strategies in our automotive businesses to reduce costs and improve operating margins;
|
| • |
Our ability to identify and execute growth and diversification opportunities in order to position us for long-term success; and
|
| • |
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;
|
| • |
The impact of changes in federal, state or local tax regulations that could have the effect of increasing our income tax expense;
|
| • |
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
|
| • |
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.
|
Evaluation Regarding Disclosure 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 December 31, 2021.
Changes in Internal Control Over Financial Reporting
There have been no changes in internal control over financial reporting during the third quarter of fiscal 2022 that have materially affected, or are reasonably likely to materially affect,
the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
| Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds.
|
ISSUER PURCHASES OF EQUITY SECURITIES
The following describes the Company’s purchases of common stock during the third quarter of fiscal 2022:
|
Period
|
Total Number of
Shares Purchased
|
Average
Price Paid
Per Share
|
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
|
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
|
|
October 1 – October 31, 2021
|
36,644 (b)
|
$11.94
|
_______
|
$50,000,000
|
|
November 1 – November 30, 2021
|
_______
|
_______
|
_______
|
50,000,000
|
|
December 1 – December 31, 2021
|
4,189 (b)
|
$10.20
|
_______
|
50,000,000
|
|
Total
|
40,833 (b)
|
$11.76
|
_______
|
| (a) |
Effective November 5, 2020, the Board of Directors approved a two-year, $50.0 million share repurchase program, which allows the Company to repurchase Modine common stock through
solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.
|
| (b) |
Consists of shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards. The Company,
pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of
restrictions. These shares are held as treasury shares.
|
| Item 5. |
Other Information.
|
The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this
restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company
is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in
fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.
| Item 6. |
Exhibits.
|
|
(a)
|
Exhibits:
|
|
Exhibit No.
|
Description
|
Incorporated Herein By
Reference To
|
Filed
Herewith
|
|
|
Termination Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.
|
Exhibit 2.1 to Registrant’s Current Report on Form 8-K dated October 25, 2021
|
|||
|
Separation Letter Agreement between the Company and Joel T. Casterton, dated as of October 25, 2021.
|
X
|
|||
|
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.
|
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: February 3, 2022
* Executing as both the principal financial officer and a duly authorized officer of the Company
44