MOD 10-Q
Modine Manufacturing Co (MOD)
10-Q
2021-02-05
For: 2020-12-31
View Original
Added on
April 11, 2026
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2020
or
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ____________ to ____________
Commission file number 1-1373
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices) |
(Zip Code) |
Registrant’s telephone number, including area code (262 ) 636-1200
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Accelerated Filer ☐ |
|
Non-accelerated Filer ☐ |
Smaller reporting company |
Emerging growth company |
If an emerging growth company, indicate by checkmark if the registrant has not elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☑
The number of shares outstanding of the registrant’s common stock, $0.625 par value, was 51,421,276 at January 29, 2021.
MODINE MANUFACTURING COMPANY
PART I. FINANCIAL INFORMATION |
|
1 |
|
26 |
|
40 |
|
40 |
|
PART II. OTHER INFORMATION |
|
41 |
|
42 |
PART I. FINANCIAL INFORMATION
MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and nine months ended December 31, 2020 and 2019
(In millions, except per share amounts)
(Unaudited)
Three months ended December 31, |
Nine months ended December 31, |
|||||||||||||||
2020 |
2019 |
2020 |
2019 |
|||||||||||||
Net sales |
$ |
$ |
$ |
$ |
||||||||||||
Cost of sales |
||||||||||||||||
Gross profit |
||||||||||||||||
Selling, general and administrative expenses |
||||||||||||||||
Restructuring expenses |
||||||||||||||||
Impairment charges |
||||||||||||||||
Gain on sale of assets |
( |
) |
( |
) |
||||||||||||
Operating (loss) income |
( |
) |
( |
) |
||||||||||||
Interest expense |
( |
) |
( |
) |
( |
) |
( |
) |
||||||||
Other (expense) income – net |
( |
) |
( |
) |
( |
) |
||||||||||
(Loss) earnings before income taxes |
( |
) |
( |
) |
||||||||||||
Provision for income taxes |
( |
) |
( |
) |
( |
) |
( |
) |
||||||||
Net (loss) earnings |
( |
) |
( |
) |
||||||||||||
Net (earnings) loss attributable to noncontrolling interest |
( |
) |
( |
) |
||||||||||||
Net (loss) earnings attributable to Modine |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
||||||||
Net (loss) earnings per share attributable to Modine |
||||||||||||||||
Basic |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
||||||||
Diluted |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
||||||||
Weighted-average shares outstanding: |
||||||||||||||||
Basic |
||||||||||||||||
Diluted |
||||||||||||||||
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, 2020 and 2019
(In millions)
(Unaudited)
Three months ended December 31, |
Nine months ended December 31, |
|||||||||||||||
2020 |
2019 |
2020 |
2019 |
|||||||||||||
Net (loss) earnings |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
||||||||
Other comprehensive income (loss): |
||||||||||||||||
Foreign currency translation |
( |
) |
||||||||||||||
Defined benefit plans, net of income taxes of $ |
||||||||||||||||
Cash flow hedges, net of income taxes of $ |
( |
) |
||||||||||||||
Total other comprehensive income (loss) |
( |
) |
||||||||||||||
Comprehensive income (loss) |
( |
) |
( |
) |
||||||||||||
Comprehensive (income) loss attributable to noncontrolling interest |
( |
) |
( |
) |
||||||||||||
Comprehensive income (loss) attributable to Modine |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
||||||||
The notes to condensed consolidated financial statements are an integral part of these statements.
MODINE MANUFACTURING COMPANY
CONSOLIDATED BALANCE SHEETS
December 31, 2020 and March 31, 2020
(In millions, except per share amounts)
(Unaudited)
December 31, 2020 |
March 31, 2020 |
|||||||
ASSETS |
||||||||
Cash and cash equivalents |
$ |
$ |
||||||
Trade accounts receivable – net |
||||||||
Inventories |
||||||||
Assets held for sale |
||||||||
Other current assets |
||||||||
Total current assets |
||||||||
Property, plant and equipment – net |
||||||||
Intangible assets – net |
||||||||
Goodwill |
||||||||
Deferred income taxes |
||||||||
Other noncurrent assets |
||||||||
Total assets |
$ |
$ |
||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||
Short-term debt |
$ |
$ |
||||||
Long-term debt – current portion |
||||||||
Accounts payable |
||||||||
Accrued compensation and employee benefits |
||||||||
Liabilities held for sale |
||||||||
Other current liabilities |
||||||||
Total current liabilities |
||||||||
Long-term debt |
||||||||
Deferred income taxes |
||||||||
Pensions |
||||||||
Other noncurrent liabilities |
||||||||
Total liabilities |
||||||||
Commitments and contingencies (see Note 18) |
||||||||
Shareholders’ equity: |
||||||||
Preferred stock, $ |
||||||||
Common stock, $ |
||||||||
Additional paid-in capital |
||||||||
Retained earnings |
||||||||
Accumulated other comprehensive loss |
( |
) |
( |
) |
||||
Treasury stock, at cost, |
( |
) |
( |
) |
||||
Total Modine shareholders’ equity |
||||||||
Noncontrolling interest |
||||||||
Total equity |
||||||||
Total liabilities and equity |
$ |
$ |
||||||
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, 2020 and 2019
(In millions)
(Unaudited)
Nine months ended December 31, |
||||||||
2020 |
2019 |
|||||||
Cash flows from operating activities: |
||||||||
Net (loss) earnings |
$ |
( |
) |
$ |
||||
Adjustments to reconcile net (loss) earnings to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
||||||||
Impairment charges |
||||||||
Gain on sale of assets |
( |
) |
||||||
Stock-based compensation expense |
||||||||
Deferred income taxes |
||||||||
Other – net |
||||||||
Changes in operating assets and liabilities: |
||||||||
Trade accounts receivable |
||||||||
Inventories |
( |
) |
||||||
Accounts payable |
( |
) |
||||||
Other assets and liabilities |
( |
) |
||||||
Net cash provided by operating activities |
||||||||
Cash flows from investing activities: |
||||||||
Expenditures for property, plant and equipment |
( |
) |
( |
) |
||||
Proceeds from disposition of assets |
||||||||
Proceeds from sale of investment in affiliate |
||||||||
Other – net |
||||||||
Net cash used for investing activities |
( |
) |
( |
) |
||||
Cash flows from financing activities: |
||||||||
Borrowings of debt |
||||||||
Repayments of debt |
( |
) |
( |
) |
||||
Borrowings on bank overdraft facilities – net |
||||||||
Financing fees paid |
( |
) |
( |
) |
||||
Purchases of treasury stock under share repurchase program |
( |
) |
||||||
Dividend paid to noncontrolling interest |
( |
) |
||||||
Other – net |
( |
) |
( |
) |
||||
Net cash used for financing activities |
( |
) |
( |
) |
||||
Effect of exchange rate changes on cash |
( |
) |
||||||
Net increase (decrease) in cash, cash equivalents, restricted cash and cash held for sale |
( |
) |
||||||
Cash, cash equivalents, restricted cash and cash held for sale – beginning of period |
||||||||
Cash, cash equivalents, restricted cash and cash held for sale – end of period |
$ |
$ |
||||||
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, 2020 and 2019
(In millions)
(Unaudited)
_________________ |
||||||||||||||||||||||||||||||||
Common stock |
Additional |
Retained |
Accumulated other |
Treasury stock, |
Non- controlling |
|||||||||||||||||||||||||||
Shares |
Amount |
paid-in capital |
earnings |
comprehensive loss |
at cost |
interest |
Total |
|||||||||||||||||||||||||
Balance, March 31, 2020 |
$ |
$ |
$ |
$ |
( |
) |
$ |
( |
) |
$ |
$ |
|||||||||||||||||||||
Net loss attributable to Modine |
- |
( |
) |
( |
) |
|||||||||||||||||||||||||||
Other comprehensive income |
- |
|||||||||||||||||||||||||||||||
Stock options and awards |
( |
) |
||||||||||||||||||||||||||||||
Purchase of treasury stock |
- |
( |
) |
( |
) |
|||||||||||||||||||||||||||
Stock-based compensation expense |
- |
|||||||||||||||||||||||||||||||
Net earnings attributable to noncontrolling interest |
- |
|||||||||||||||||||||||||||||||
Balance, June 30, 2020 |
$ |
$ |
$ |
$ |
( |
) |
$ |
( |
) |
$ |
$ |
|||||||||||||||||||||
Net earnings attributable to Modine |
- |
|||||||||||||||||||||||||||||||
Other comprehensive income |
- |
|||||||||||||||||||||||||||||||
Stock options and awards |
||||||||||||||||||||||||||||||||
Stock-based compensation expense |
- |
|||||||||||||||||||||||||||||||
Net earnings attributable to noncontrolling interest |
- |
|||||||||||||||||||||||||||||||
Balance, September 30, 2020 |
$ |
$ |
$ |
$ |
( |
) |
$ |
( |
) |
$ |
$ |
|||||||||||||||||||||
Net loss attributable to Modine |
- |
( |
) |
( |
) |
|||||||||||||||||||||||||||
Other comprehensive income |
- |
|||||||||||||||||||||||||||||||
Stock-based compensation expense |
- |
|||||||||||||||||||||||||||||||
Net earnings attributable to noncontrolling interest |
- |
|||||||||||||||||||||||||||||||
Balance, December 31, 2020 |
$ |
$ |
$ |
$ |
( |
) |
$ |
( |
) |
$ |
$ |
|||||||||||||||||||||
Common stock |
Additional |
Retained |
Accumulated other |
Treasury stock, |
Non-controlling |
|||||||||||||||||||||||||||
Shares |
Amount |
paid-in capital |
earnings |
comprehensive loss |
at cost |
interest |
Total |
|||||||||||||||||||||||||
Balance, March 31, 2019 |
$ |
$ |
$ |
$ |
( |
) |
$ |
( |
) |
$ |
$ |
|||||||||||||||||||||
Net earnings attributable to Modine |
- |
|||||||||||||||||||||||||||||||
Other comprehensive income (loss) |
- |
( |
) |
|||||||||||||||||||||||||||||
Stock options and awards |
( |
) |
||||||||||||||||||||||||||||||
Purchase of treasury stock |
- |
( |
) |
( |
) |
|||||||||||||||||||||||||||
Stock-based compensation expense |
- |
|||||||||||||||||||||||||||||||
Dividend paid to noncontrolling interest |
- |
( |
) |
( |
) |
|||||||||||||||||||||||||||
Net earnings attributable to noncontrolling interest |
- |
|||||||||||||||||||||||||||||||
Balance, June 30, 2019 |
$ |
$ |
$ |
$ |
( |
) |
$ |
( |
) |
$ |
$ |
|||||||||||||||||||||
Net loss attributable to Modine |
- |
( |
) |
( |
) |
|||||||||||||||||||||||||||
Other comprehensive loss |
- |
( |
) |
( |
) |
( |
) |
|||||||||||||||||||||||||
Stock-based compensation expense |
- |
|||||||||||||||||||||||||||||||
Net loss attributable to noncontrolling interest |
- |
( |
) |
( |
) |
|||||||||||||||||||||||||||
Balance, September 30, 2019 |
$ |
$ |
$ |
$ |
( |
) |
$ |
( |
) |
$ |
$ |
|||||||||||||||||||||
Net earnings attributable to Modine |
- |
|||||||||||||||||||||||||||||||
Other comprehensive income |
- |
|||||||||||||||||||||||||||||||
Stock-based compensation expense |
- |
|||||||||||||||||||||||||||||||
Net loss attributable to noncontrolling interest |
- |
( |
) |
( |
) |
|||||||||||||||||||||||||||
Balance, December 31, 2019 |
$ |
$ |
$ |
$ |
( |
) |
$ |
( |
) |
$ |
$ |
|||||||||||||||||||||
The notes to condensed consolidated financial statements are an integral part of these statements.
Note 1: General
The accompanying 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 2021 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, 2020.
COVID-19
In March 2020, the World Health Organization declared the outbreak of the novel coronavirus, COVID-19, a pandemic. See Note 18 for additional information regarding the risks and uncertainties to the Company resulting from this pandemic.
Pending Disposition of Liquid-cooled Automotive Business
On November 2, 2020, the Company signed a definitive agreement to sell its liquid-cooled automotive business to Dana Incorporated. In connection with the pending sale, the Company classified the liquid-cooled automotive business as held for sale and, accordingly, is reporting the assets and liabilities of this business as held for sale on the December 31, 2020 consolidated balance sheet. See Note 2 for additional information.
Chief Executive Officer (“CEO”) Transition
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 nine months ended December 31, 2020. 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.
Sale of facility in Germany
During the third quarter of fiscal 2020, the Company completed the sale of a previously-closed manufacturing facility in Germany for a selling price of $6.0 million. As a result of this transaction, the Company recorded a gain of $0.8 million within the Automotive segment. The Company reported this gain within the gain on sale of assets line on the consolidated statements of operations.
Sale of Nikkei Heat Exchanger Company, Ltd. (“NEX”)
During the second quarter of fiscal 2020, the Company completed the sale of its 50 percent ownership interest in NEX for a selling price of $3.8 million. Prior to the sale, the Company accounted for its investment in this non-consolidated affiliate using the equity method. As a result of this sale, the Company recorded a gain of $0.1 million, which included the write-off of accumulated foreign currency translation gains of $0.6 million, within other income and expense on the consolidated statements of operations.
New Accounting Guidance
In June 2016, the Financial Accounting Standards Board issued new guidance related to the accounting for credit losses for certain financial assets, including trade accounts receivable and contract assets. The new guidance modifies the credit loss model to measure and recognize credit losses based upon expected losses rather than incurred losses. The Company adopted this guidance as of April 1, 2020. The adoption did not have a material impact on the Company’s consolidated balance sheets, statements of operations or statements of cash flows.
Note 2: Assets Held for Sale
On November 2, 2020, the Company signed a definitive agreement to sell its liquid-cooled automotive business to Dana Incorporated. The Company expects this transaction will close during the first quarter of fiscal 2022, subject to regulatory approvals and other customary closing conditions. The Company does not expect significant net cash proceeds from this transaction based upon the one dollar selling price and adjustments for cash, debt, and working capital, as defined within the definitive agreement. The Company reports financial results of the liquid-cooled automotive business within its Automotive segment.
In connection with the pending sale, the Company classified the liquid-cooled automotive business (the “disposal group”) as held for sale beginning on November 2, 2020 and ceased depreciating long-lived assets in the disposal group. The Company evaluated the disposal group and determined that it did not qualify as a discontinued operation for reporting purposes under U.S. GAAP. As part of its evaluation, the Company considered anticipated future sales to automotive and light vehicle customers as well as sales to other vehicular customers with similar product offerings and using similar heat-transfer technology within the Automotive and Heavy Duty Equipment segments. In addition, the Company will continue to operate in the same major geographical areas as it does today.
Upon classification as held for sale, the Company compared the disposal group’s carrying value with its fair value, less costs to sell. Through this review and based upon the selling price, the Company identified an implied loss in excess of the carrying value of the disposal group’s long-lived assets, which consist entirely of property, plant and equipment and right of use lease assets. As a result, the Company recorded a non-cash impairment charge of $132.7 million during the third quarter of fiscal 2021 to reduce the net carrying value of the disposal group’s long-lived assets to zero . Also during the third quarter of fiscal 2021, the Company recorded an impairment charge of $1.7 million within the Automotive segment related to equipment that will not convey to the buyer as part of the sale transaction and is not expected to be used within the Company’s other businesses. These charges are reported within the impairment charges line on the consolidated statements of operations.
The Company separately classified the assets and liabilities of the liquid-cooled automotive business as held for sale on the December 31, 2020 consolidated balance sheet. The assets and liabilities held for sale are classified as current as the transaction is expected to close during the first quarter of fiscal 2022. The major classes of assets and liabilities held for sale were as follows:
December 31, 2020 |
||||
ASSETS |
||||
Cash and cash equivalents |
$ |
|||
Trade accounts receivables - 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 |
$ |
|||
The Company will reassess the disposal group’s fair value less costs to sell at each reporting period until the transaction is completed. The Company expects to record an additional loss on sale of approximately $15.0 million to $25.0 million upon transaction completion. The loss on sale recorded will be impacted by changes in working capital, costs to sell, and net actuarial losses in accumulated other comprehensive loss related to the disposal group’s pension plans. It is possible that the loss on sale recorded could differ materially from the Company’s estimate.
Note 3: Revenue Recognition
Disaggregation of Revenue
The table below presents revenue for each of the Company’s business segments, Commercial and Industrial Solutions (“CIS”), Building HVAC Systems (“BHVAC”), 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 April 1, 2020, the Company realigned its segment structure. The segment revenue information presented in the table below for fiscal 2020 has been recast to conform to the fiscal 2021 presentation. See Note 20 for additional information regarding the Company’s operating segments.
Three months ended December 31, 2020 |
Three months ended December 31, 2019 |
|||||||||||||||||||||||||||||||||||||||
CIS |
BHVAC |
HDE |
Automotive |
Segment Total |
CIS |
BHVAC |
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, 2020 |
Nine months ended December 31, 2019 |
|||||||||||||||||||||||||||||||||||||||
CIS |
BHVAC |
HDE |
Automotive |
Segment Total |
CIS |
BHVAC |
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 |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
||||||||||||||||||||||||||||||
Contract Balances
Contract assets and contract liabilities from contracts with customers were as follows:
December 31, 2020 |
March 31, 2020 |
|||||||
Contract assets |
$ |
$ |
||||||
Contract liabilities |
||||||||
Contract assets, included within other current assets in the consolidated balance sheets, primarily consist of capitalized costs related to customer-owned tooling contracts, wherein the customer has guaranteed reimbursement, and assets recorded for revenue recognized over time, which represent the Company’s rights to consideration for work completed but not yet billed. The $16.6 million decrease in contract assets during the first nine months of fiscal 2021 primarily resulted from a decrease in contract assets for revenue recognized over time. In addition, the March 31, 2020 balance included $7.2 million of contract assets of the liquid-cooled automotive business, which have since been classified as held for sale. See Note 2 for additional information regarding assets and liabilities held for sale as of December 31, 2020.
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 $0.4 million increase in contract liabilities during the first nine months of fiscal 2021 was primarily related to customer contracts for which payment was received in advance of the Company’s satisfaction of performance obligations. The March 31, 2020 balance included $1.3 million of contract liabilities of the liquid-cooled automotive business, which have since been classified as held for sale.
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 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 both December 31, 2020 and March 31, 2020, the fair values of the investments and obligations for the Company’s deferred compensation plans each totaled $3.8
Note 5: Pensions
Pension cost included the following components:
Three months ended December 31, |
Nine months ended December 31, |
|||||||||||||||
2020 |
2019 |
2020 |
2019 |
|||||||||||||
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, 2020 and 2019, the Company contributed $8.8 million and $2.6 million, respectively, to its U.S. pension plans. The Company has deferred certain contributions to its U.S. pension plans during fiscal 2021, as permitted by the Coronavirus Aid, Relief and Economic Security Act. The Company expects to contribute approximately $10.0 million to its U.S. pension plans during the fourth quarter of fiscal 2021.
Note 6: Stock-Based Compensation
The Company’s stock-based incentive programs consist of the following: (1) a long-term incentive plan (“LTIP”) for officers and other executives that consists of stock awards, stock options, and performance-based stock awards granted for retention and performance, (2) a discretionary equity program for other management and key employees, and (3) stock awards for non-employee directors.
The Company calculates compensation expense based upon the fair value of the instruments at the time of grant and subsequently recognizes expense ratably over the respective vesting periods of the stock-based awards. The Company recognized stock-based compensation expense of $2.1 million and $0.8 million for the three months ended December 31,2020 and 2019, respectively. The Company recognized stock-based compensation expense of $4.2 million and $5.2 million for the nine months ended December 31, 2020 and 2019, respectively.
The fair value of stock-based compensation awards granted during the nine months ended December 31, 2020 and 2019 were as follows:
Nine months ended December 31, |
||||||||||||||||
2020 |
2019 |
|||||||||||||||
Shares |
Fair Value Per Award |
Shares |
Fair Value Per Award |
|||||||||||||
Stock options |
$ |
$ |
||||||||||||||
Restricted stock awards |
$ |
$ |
||||||||||||||
Performance stock awards (a) |
$ |
|||||||||||||||
Unrestricted stock awards |
$ |
$ |
||||||||||||||
| (a) |
The Company used the following assumptions in determining fair value for stock options:
Nine months ended December 31, |
||||||||
2020 |
2019 |
|||||||
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, 2020, 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 fiscal 2021, the Company transferred production from its manufacturing facility in Zhongshan, China to another CIS segment manufacturing facility in China. As a result of this plant consolidation, the Company recorded $3.1 million of severance expenses during the nine months ended December 31, 2020. In addition, the Company is in the process of transferring product lines to its CIS manufacturing facility in Mexico.
The Company also implemented targeted headcount reductions in fiscal 2021, the most significant of which were in North America in the HDE and CIS segments. The headcount reductions were in response to lower market demand and supported the Company’s objective of reducing operational and SG&A cost structures.
The Company’s restructuring actions during the first nine months of fiscal 2020 consisted primarily of targeted headcount reductions and plant consolidation activities. The fiscal 2020 headcount reductions were primarily in Europe within the Automotive segment and in the Americas within the HDE segment.
Restructuring and repositioning expenses were as follows:
Three months ended December 31, |
Nine months ended December 31, |
|||||||||||||||
2020 |
2019 |
2020 |
2019 |
|||||||||||||
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.
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, |
||||||||
2020 |
2019 |
|||||||
Beginning balance |
$ |
$ |
||||||
Additions |
||||||||
Payments |
( |
) |
( |
) |
||||
Reclassified as held for sale |
( |
) |
||||||
Effect of exchange rate changes |
||||||||
Ending balance |
$ |
$ |
||||||
Nine months ended December 31, |
||||||||
2020 |
2019 |
|||||||
Beginning balance |
$ |
$ |
||||||
Additions |
||||||||
Payments |
( |
) |
( |
) |
||||
Reclassified as held for sale |
( |
) |
||||||
Effect of exchange rate changes |
( |
) |
||||||
Ending balance |
$ |
$ |
||||||
In January 2021, the Company eliminated the Vice President, CIS and Chief Operating Officer senior executive position. As a result, the Company expects to record approximately $1.0 million of severance-related expenses during the fourth quarter of fiscal 2021.
Note 8: Other Income and Expense
Other income and expense consisted of the following:
Three months ended December 31, |
Nine months ended December 31, |
|||||||||||||||
2020 |
2019 |
2020 |
2019 |
|||||||||||||
Interest income |
$ |
$ |
$ |
$ |
||||||||||||
Foreign currency transactions (a) |
( |
) |
||||||||||||||
Net periodic benefit cost (b) |
( |
) |
( |
) |
( |
) |
( |
) |
||||||||
Equity in earnings of non-consolidated affiliate (c) |
||||||||||||||||
Total other (expense) income - net |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
( |
) |
||||||
| (a) |
| (b) |
| (c) |
Note 9: Income Taxes
The Company’s effective tax rate for the three months ended December 31, 2020 and 2019 was (71.7 ) percent and 63.0 percent, respectively. The Company’s effective tax rate for the nine months ended December 31, 2020 and 2019 was (95.7 ) percent and 65.4 percent, respectively. The effective tax rates for the fiscal 2021 periods were largely driven by both significant impairment charges and income tax charges related to valuation allowances. See Note 2 for information regarding the $134.4 million of impairment charges recorded during the third quarter of fiscal 2021. The income tax benefits associated with these impairment charges totaled $24.4 million and $13.3 million in the U.S. and in certain foreign jurisdictions, respectively, and increased the deferred tax assets in the applicable jurisdictions. The deferred tax assets, in turn, were evaluated for realizability as of December 31, 2020, as further described below.
In the fiscal 2020 periods, the effective tax rates were negatively impacted by income tax charges recorded during the third quarter of fiscal 2020. A $3.0 million income tax charge was recorded related to a valuation allowance on deferred tax assets in the U.S. and a net income tax charge totaling $2.7 million was recorded in connection with legal entity restructuring completed in preparation of the potential sale of the liquid-cooled automotive business. Partially offsetting the negative impacts of the income tax charges, the effective tax rates for the fiscal 2020 periods were favorably impacted by the recognition of a tax incentive in Italy during the third quarter and by the release of an unrecognized tax benefit during the second quarter.
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 analysis as of December 31, 2020, the Company determined it was more likely than not that its deferred tax assets in the U.S. and in certain foreign jurisdictions will not be realized in the future. As a result, the Company recorded income tax charges totaling $116.5 million in the third quarter of fiscal 2021 to increase the valuation allowance on deferred tax assets in the U.S. ($103.3 million) and in certain foreign jurisdictions ($13.2 million). Combined with the $6.6 million income tax charge recorded during the second quarter of fiscal 2021, the Company has now established a full valuation allowance on its U.S. deferred tax assets. Based upon the Company’s projections of future taxable income at the time, the Company previously believed it was more likely than not that these deferred tax assets would be realized in the future. The Company’s analysis for the third quarter of fiscal 2021 included consideration of the impairment charges recorded during the quarter in connection with the pending sale of the liquid-cooled automotive business; see Note 2 for additional information. These impairment charges contributed to the Company entering into a three-year
As of December 31, 2020, valuation allowances against deferred tax assets in the U.S. and in certain foreign jurisdictions totaled $121.7 million and $55.5 million, respectively. 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.
As further discussed in Note 18, the COVID-19 pandemic has resulted in risks and uncertainties to our business. 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 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 2021.
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, |
|||||||||||||||
2020 |
2019 |
2020 |
2019 |
|||||||||||||
Net (loss) earnings attributable to Modine |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
||||||||
Weighted-average shares outstanding - basic |
||||||||||||||||
Effect of dilutive securities |
||||||||||||||||
Weighted-average shares outstanding - diluted |
||||||||||||||||
(Loss) earnings per share: |
||||||||||||||||
Net (loss) earnings per share - basic |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
||||||||
Net (loss) earnings per share - diluted |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
||||||||
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.
For the three and nine months ended December 31, 2019, the calculation of diluted earnings per share excluded 1.2 million and 0.8 million stock options, respectively, because they were anti-dilutive. In addition, the calculation for both the three and nine months ended December 31, 2019 excluded 0.5
Note 11: Cash, Cash Equivalents and Restricted Cash
Cash, cash equivalents and restricted cash consisted of the following:
December 31, 2020 |
March 31, 2020 |
|||||||
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 and other noncurrent 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.
Note 12: Inventories
Inventories consisted of the following:
December 31, 2020 |
March 31, 2020 |
|||||||
Raw materials |
$ |
$ |
||||||
Work in process |
||||||||
Finished goods |
||||||||
Total inventories |
$ |
$ |
||||||
Note 13: Property, Plant and Equipment
Property, plant and equipment, including depreciable lives, consisted of the following:
December 31, 2020 |
March 31, 2020 |
|||||||
Land |
$ |
$ |
||||||
Buildings and improvements ( |
||||||||
Machinery and equipment ( |
||||||||
Office equipment ( |
||||||||
Construction in progress |
||||||||
Less: accumulated depreciation |
( |
) |
( |
) |
||||
Net property, plant and equipment |
$ |
$ |
||||||
Note 14: Goodwill and Intangible Assets
Changes in the carrying amount of goodwill were as follows:
CIS |
BHVAC |
Total |
||||||||||
Goodwill, March 31, 2020 |
$ |
$ |
$ |
|||||||||
Effect of exchange rate changes |
||||||||||||
Goodwill, December 31, 2020 |
$ |
$ |
$ |
|||||||||
Intangible assets consisted of the following:
December 31, 2020 |
March 31, 2020 |
|||||||||||||||||||||||
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 $2.2 million and $2.3 million for the three months ended December 31, 2020 and 2019, respectively. The Company recorded amortization expense of $6.4 million and $6.7 million for the nine months ended December 31, 2020 and 2019, respectively. The Company estimates that it will record $2.1 million of amortization expense during the remainder of fiscal 2021 and approximately $8.0
Note 15: Product Warranties
Changes in accrued warranty costs were as follows:
Three months ended December 31, |
||||||||
2020 |
2019 |
|||||||
Beginning balance |
$ |
$ |
||||||
Warranties recorded at time of sale |
||||||||
Adjustments to pre-existing warranties |
( |
) |
( |
) |
||||
Settlements |
( |
) |
( |
) |
||||
Reclassified as held for sale |
( |
) |
||||||
Effect of exchange rate changes |
||||||||
Ending balance |
$ |
$ |
||||||
Nine months ended December 31, |
||||||||
2020 |
2019 |
|||||||
Beginning balance |
$ |
$ |
||||||
Warranties recorded at time of sale |
||||||||
Adjustments to pre-existing warranties |
( |
) |
( |
) |
||||
Settlements |
( |
) |
( |
) |
||||
Reclassified as held for sale |
( |
) |
||||||
Effect of exchange rate changes |
||||||||
Ending balance |
$ |
$ |
||||||
Note 16: Leases
Lease Assets and Liabilities
The following table provides a summary of leases recorded on the consolidated balance sheets.
- |
Balance Sheet Location |
December 31, 2020 |
March 31, 2020 |
|||||
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, |
|||||||||||||||
2020 |
2019 |
2020 |
2019 |
|||||||||||||
Operating lease expense (a) |
$ |
$ |
$ |
$ |
||||||||||||
Finance lease expense: |
||||||||||||||||
Depreciation of ROU assets |
||||||||||||||||
Interest on lease liabilities |
||||||||||||||||
Total lease expense |
$ |
$ |
$ |
$ |
||||||||||||
(a) |
Note 17: Indebtedness
Long-term debt consisted of the following:
_ |
Fiscal year of maturity |
December 31, 2020 |
March 31, 2020 |
||||||
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 2021 |
$ |
|||
2022 |
||||
2023 |
||||
2024 |
||||
2025 |
||||
2026 & beyond |
||||
Total |
$ |
|||
Borrowings under both the revolving credit 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, 2020, the weighted-average interest rates for revolving credit facility borrowings and the term loans were both 2.5 30.7 million and domestic letters of credit totaled $5.7 million, resulting in available borrowings under the revolving credit facility of $213.6 million.
The Company also maintains credit agreements for its foreign subsidiaries, with outstanding short-term borrowings of $0.6 million and $14.8 million at December 31, 2020 and March 31, 2020, respectively. See Note 2 for information regarding short-term borrowings classified as held for sale at December 31, 2020.
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.
In May 2020, the Company executed amendments to its primary credit agreements in the U.S. Under the amended agreements, the leverage ratio covenant limit has been temporarily raised. The leverage ratio covenant requires the Company to limit the ratio of its consolidated indebtedness, less a portion of its cash balance, both as defined by the credit agreements, to its consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”). The leverage ratio covenant limit for the third quarter of fiscal 2021 was 5.25 to 1. The leverage ratio covenant limit is 5.75 to 1 for the fourth quarter of fiscal 2021. In fiscal 2022, the leverage ratio covenant limit is 4.75 to 1, 3.75 to 1, and 3.50 to 1 for the first, second and third quarters, respectively, and subsequently returns to 3.25 to 1 for the fourth quarter of fiscal 2022. 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. The Company was in compliance with its debt covenants as of December 31, 2020.
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, 2020 and March 31, 2020, 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 $140.4 million and $131.3 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
In March 2020, the World Health Organization declared the outbreak of the novel coronavirus, COVID-19, a pandemic. The spread of COVID-19 and the resulting work and travel restrictions, including international border closings, have disrupted, and may continue to disrupt, global supply chains and have negatively impacted the global economy. As a result of this pandemic, the Company experienced significant impacts on its operations. Local government requirements or customer shutdowns caused the Company to suspend production at many of its manufacturing facilities in March and April 2020. All of the temporarily-closed facilities reopened in the first or second quarter and have generally returned to more normal production levels. However, since reopening, production at certain of our plants has been negatively affected at times by employee absences due to COVID-19. The Company is continuing to focus on protecting the health and wellbeing of its employees and the communities in which it operates, while also ensuring the continuity of its business operations and timely delivery of quality products and services to its customers. Beginning largely in April 2020 and to mitigate the negative impacts of COVID-19, the Company took actions including, but not limited to, production staffing adjustments, furloughs, shortened work weeks, and temporary salary reductions at all levels of the organization. As production has generally returned to more normal levels, the Company reduced the extent of furloughs, shortened work weeks and salary reductions during the third quarter of fiscal 2021, yet remains focused on controlling operating and administrative expenses. Based upon its current expectations, the Company believes that its sources of liquidity will generate sufficient cash flow to meet its obligations during the next twelve months.
The Company’s consolidated financial statements reflect estimates and assumptions made by management, including assumptions regarding the future impacts of the COVID-19 pandemic, that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting periods presented. For example, assets particularly sensitive to assumptions that could be adversely impacted by the COVID-19 pandemic include goodwill and deferred tax assets. While the Company believes it used appropriate estimates and assumptions to prepare the consolidated financial statements, actual amounts could differ materially and future events or circumstances could have a potential negative effect on the assumptions used. If the Company, its suppliers, or its customers experience further shutdowns or other significant business disruptions associated with the COVID-19 pandemic, its ability to conduct business in the manner and on the timelines presently planned could be materially and negatively impacted, which could have a material adverse effect on the Company’s business, financial position, results of operations and cash flows.
Environmental
The Company has recorded environmental investigation and remediation accruals related to soil and groundwater contamination at manufacturing facilities in the U.S., one of which the Company currently owns and operates, and at its former manufacturing facility in the Netherlands, along with accruals for lesser environmental matters at certain other facilities in the U.S. These accruals generally relate to 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. The accruals for these environmental matters totaled $18.4 million and $18.2 million as of December 31, 2020 and March 31, 2020, respectively. As additional information becomes available, the Company will re-assess the liabilities related to these matters and revise the estimated accruals, if necessary. Based upon currently available information, the Company believes 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.
Note 19: Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss were as follows:
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 (b) |
( |
) |
( |
) |
||||||||||||||||||||||||||||
Income taxes |
( |
) |
( |
) |
( |
) |
( |
) |
( |
) |
||||||||||||||||||||||
Total other comprehensive income |
||||||||||||||||||||||||||||||||
Ending balance |
$ |
( |
) |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
$ |
( |
) |
||||||||||||
Three months ended December 31, 2019 |
Nine months ended December 31, 2019 |
|||||||||||||||||||||||||||||||
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) |
||||||||||||||||||||||||||||||||
Realized losses - net (b) |
||||||||||||||||||||||||||||||||
Foreign currency translation gains (c) |
( |
) |
( |
) |
||||||||||||||||||||||||||||
Income taxes |
( |
) |
( |
) |
( |
) |
( |
) |
( |
) |
||||||||||||||||||||||
Total other comprehensive income (loss) |
( |
) |
( |
) |
( |
) |
||||||||||||||||||||||||||
Ending balance |
$ |
( |
) |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
$ |
( |
) |
||||||||||||
| (a) |
| (b) |
| (c) |
Note 20: Segment Information
Effective April 1, 2020, the Company began managing its global automotive business separate from the other businesses within the previously-reported Vehicular Thermal Solutions (“VTS”) segment. The Company is managing the automotive business as the Automotive segment as it targets the sale or eventual exit of its underlying automotive business operations. The other businesses of the VTS segment, including the commercial vehicle and off-highway businesses, are being managed as the Heavy Duty Equipment segment. The segment realignment had no impact on the CIS and BHVAC segments or on the Company’s consolidated financial position, results of operations, and cash flows. Segment financial information for fiscal 2020 has been recast to conform to the fiscal 2021 presentation.
Each operating segment is managed by a vice president and has separate financial results reviewed by the Company’s chief operating decision maker. These results are used by management in evaluating the performance of each segment and in making decisions on the allocation of resources among the Company’s various businesses.
The following is a summary of net sales, gross profit, operating income, and total assets by segment:
Three months ended December 31, |
||||||||||||||||||||||||
2020 |
2019 |
|||||||||||||||||||||||
External Sales |
Inter-segment Sales |
Total |
External Sales |
Inter-segment Sales |
Total |
|||||||||||||||||||
Net sales: |
||||||||||||||||||||||||
CIS |
$ |
$ |
$ |
$ |
$ |
$ |
||||||||||||||||||
BHVAC |
||||||||||||||||||||||||
HDE |
||||||||||||||||||||||||
Automotive |
||||||||||||||||||||||||
Segment total |
||||||||||||||||||||||||
Corporate and eliminations |
- |
( |
) |
( |
) |
- |
( |
) |
( |
) |
||||||||||||||
Net sales |
$ |
484.3 |
$ |
- |
$ |
$ |
473.4 |
$ |
- |
$ |
||||||||||||||
Nine months ended December 31, |
||||||||||||||||||||||||
2020 |
2019 |
|||||||||||||||||||||||
External Sales |
Inter-segment Sales |
Total |
External Sales |
Inter-segment Sales |
Total |
|||||||||||||||||||
Net sales: |
||||||||||||||||||||||||
CIS |
$ |
$ |
$ |
$ |
$ |
$ |
||||||||||||||||||
BHVAC |
||||||||||||||||||||||||
HDE |
||||||||||||||||||||||||
Automotive |
||||||||||||||||||||||||
Segment total |
||||||||||||||||||||||||
Corporate and eliminations |
- |
( |
) |
( |
) |
- |
( |
) |
( |
) |
||||||||||||||
Net sales |
$ |
1,293.5 |
$ |
- |
$ |
$ |
1,502.6 |
$ |
- |
$ |
||||||||||||||
Three months ended December 31, |
Nine months ended December 31, |
|||||||||||||||||||||||||||||||
2020 |
2019 |
2020 |
2019 |
|||||||||||||||||||||||||||||
$'s |
% of sales |
$'s |
% of sales |
$'s |
% of sales |
$'s |
% of sales |
|||||||||||||||||||||||||
Gross profit: |
||||||||||||||||||||||||||||||||
CIS |
$ |
% |
$ |
% |
$ |
% |
$ |
% |
||||||||||||||||||||||||
BHVAC |
% |
% |
% |
% |
||||||||||||||||||||||||||||
HDE |
% |
% |
% |
% |
||||||||||||||||||||||||||||
Automotive |
% |
% |
% |
% |
||||||||||||||||||||||||||||
Segment total |
% |
% |
% |
% |
||||||||||||||||||||||||||||
Corporate and eliminations |
( |
) |
( |
) |
( |
) |
||||||||||||||||||||||||||
Gross profit |
$ |
% |
$ |
% |
$ |
% |
$ |
% |
||||||||||||||||||||||||
Three months ended December 31, |
Nine months ended December 31, |
|||||||||||||||
2020 |
2019 |
2020 |
2019 |
|||||||||||||
Operating income: |
||||||||||||||||
CIS |
$ |
( |
) |
$ |
$ |
$ |
||||||||||
BHVAC |
||||||||||||||||
HDE |
||||||||||||||||
Automotive |
( |
) |
( |
) |
||||||||||||
Segment total |
( |
) |
( |
) |
||||||||||||
Corporate and eliminations |
( |
) |
( |
) |
( |
) |
( |
) |
||||||||
Operating (loss) income |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
||||||||
December 31, 2020 |
March 31, 2020 |
|||||||
Total assets: |
||||||||
CIS |
$ |
$ |
||||||
BHVAC |
||||||||
HDE |
||||||||
Automotive (a) |
||||||||
Corporate and eliminations (b) |
||||||||
Total assets |
$ |
$ |
||||||
(a) |
| (b) |
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations. |
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, 2020 was the third quarter of fiscal 2021.
Pending Disposition of Liquid-cooled Automotive Business
On November 2, 2020, we entered into a definitive agreement to sell our liquid-cooled automotive business to Dana Incorporated. We expect this transaction will close during the first quarter of fiscal 2022, subject to regulatory approvals and other customary closing conditions. We do not expect significant net cash proceeds from this transaction based upon the selling price of one dollar and adjustments for cash, debt, and working capital, as defined within the definitive agreement. We report financial results of the liquid-cooled automotive business within the Automotive segment.
We recorded a non-cash impairment charge of $132.7 million during the third quarter of fiscal 2021 related to the liquid-cooled automotive business’s long-lived assets. We expect to record an additional loss on sale of approximately $15.0 million to $25.0 million when the sale is completed. It is possible that the loss on sale could differ materially from this estimate. See Note 2 of the Notes to Condensed Consolidated Financial Statements for information regarding the accounting impacts of this pending sale.
We are also evaluating strategic alternatives for the other businesses in the Automotive segment and are committed to exiting these businesses in a manner that is in the best interest of our shareholders.
COVID-19
As the COVID-19 pandemic continues, both the health and overall well-being of our employees and delivering quality products and services to our customers remain our top priorities.
The COVID-19 pandemic has broadly impacted the global economy and our key end markets, which were most severely impacted during the first quarter of fiscal 2021. Beginning largely in April 2020 and in an effort to mitigate the negative impacts of COVID-19 on our financial results, we implemented actions, including, but not limited to, production staffing adjustments, furloughs, shortened work weeks, and temporary salary reductions at all levels of our organization. In addition, we reduced operating and administrative expenses, including travel and entertainment expenditures. We have also focused on limiting capital expenditures and, where possible, have delayed certain projects and the purchase of some program-related equipment and tooling. Our swift cost-saving actions, coupled with a slow but steady recovery in most of our key end markets, have favorably impacted our financial results. As production has generally returned to more normal levels, we reduced the extent of furloughs, shortened work weeks and salary reductions. As a result, the benefit of the cost-saving actions, primarily on selling, general and administrative (“SG&A”) expenses, was less significant during the third quarter of fiscal 2021 compared with the first and second quarters of fiscal 2021.
The full extent of the impacts of COVID-19, which will largely depend on the length and severity of the pandemic, could have a material adverse effect on our business, results of operations, and cash flows.
Third Quarter Highlights
Net sales in the third quarter of fiscal 2021 increased $10.9 million, or 2 percent, from the third quarter of fiscal 2020, primarily due to higher sales volume in the Heavy Duty Equipment (“HDE”) segment and a favorable impact of foreign currency exchange rate changes, partially offset by lower sales volume in our Commercial and Industrial Solutions (“CIS”) segment. Cost of sales increased $1.7 million compared with the third quarter of fiscal 2020. Gross profit increased $9.2 million and gross margin improved 160 basis points to 17.1 percent. SG&A expenses decreased $7.4 million, primarily due to lower project costs associated with our review of strategic alternatives for the automotive segment businesses and preparing the liquid-cooled automotive business for sale. We recorded $134.4 million of impairment charges during the third quarter in our Automotive segment, primarily related to the pending sale of the liquid-cooled automotive business. The operating loss of $108.7 million during the third quarter of fiscal 2021 represents a decline of $116.9 million from the prior-year operating income of $8.2 million, primarily due to the impairment charges in our Automotive segment and lower earnings in our CIS segment, partially offset by higher earnings in our HDE and Building HVAC Systems (“BHVAC”) segments.
Year-to-date Highlights
Net sales in the first nine months of fiscal 2021 decreased $209.1 million, or 14 percent, from the same period last year, primarily due to lower sales in our HDE, CIS and Automotive segments. Cost of sales decreased $186.1 million, or 15 percent, from the same period last year, primarily due to lower sales volume. Gross profit decreased $23.0 million and gross margin improved 70 basis points to 16.2 percent. SG&A expenses decreased $42.8 million, primarily due to lower project costs associated with our review of strategic alternatives for the automotive segment businesses and preparing the liquid-cooled automotive business for sale. In addition, SG&A expenses benefitted from cost-reduction initiatives implemented earlier in the fiscal year in response to the negative impacts of COVID-19. The operating loss of $83.4 million during the first nine months of fiscal 2021 represents a decline of $115.7 million from the prior-year operating income of $32.3 million, primarily due to the $134.4 million of impairment charges recorded during the third quarter of fiscal 2021, partially offset by lower SG&A expenses.
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, 2020 and 2019:
Three months ended December 31, |
Nine months ended December 31, |
|||||||||||||||||||||||||||||||
2020 |
2019 |
2020 |
2019 |
|||||||||||||||||||||||||||||
(in millions) |
$'s |
% of sales |
$'s |
% of sales |
$'s |
% of sales |
$'s |
% of sales |
||||||||||||||||||||||||
Net sales |
$ |
484.3 |
100.0 |
% |
$ |
473.4 |
100.0 |
% |
$ |
1,293.5 |
100.0 |
% |
$ |
1,502.6 |
100.0 |
% |
||||||||||||||||
Cost of sales |
401.6 |
82.9 |
% |
399.9 |
84.5 |
% |
1,083.9 |
83.8 |
% |
1,270.0 |
84.5 |
% |
||||||||||||||||||||
Gross profit |
82.7 |
17.1 |
% |
73.5 |
15.5 |
% |
209.6 |
16.2 |
% |
232.6 |
15.5 |
% |
||||||||||||||||||||
Selling, general and administrative expenses |
56.1 |
11.6 |
% |
63.5 |
13.4 |
% |
151.6 |
11.7 |
% |
194.4 |
12.9 |
% |
||||||||||||||||||||
Restructuring expenses |
0.9 |
0.2 |
% |
2.6 |
0.6 |
% |
7.0 |
0.5 |
% |
6.7 |
0.4 |
% |
||||||||||||||||||||
Impairment charges |
134.4 |
27.8 |
% |
- |
- |
134.4 |
10.4 |
% |
- |
- |
||||||||||||||||||||||
Gain on sale of assets |
- |
- |
(0.8 |
) |
-0.2 |
% |
- |
- |
(0.8 |
) |
- |
|||||||||||||||||||||
Operating (loss) income |
(108.7 |
) |
-22.5 |
% |
8.2 |
1.7 |
% |
(83.4 |
) |
-6.5 |
% |
32.3 |
2.1 |
% |
||||||||||||||||||
Interest expense |
(4.6 |
) |
-0.9 |
% |
(5.6 |
) |
-1.2 |
% |
(15.2 |
) |
-1.2 |
% |
(17.3 |
) |
-1.2 |
% |
||||||||||||||||
Other (expense) income – net |
(0.5 |
) |
-0.1 |
% |
0.1 |
- |
(1.0 |
) |
-0.1 |
% |
(2.3 |
) |
-0.2 |
% |
||||||||||||||||||
(Loss) earnings before income taxes |
(113.8 |
) |
-23.5 |
% |
2.7 |
0.6 |
% |
(99.6 |
) |
-7.7 |
% |
12.7 |
0.8 |
% |
||||||||||||||||||
Provision for income taxes |
(81.6 |
) |
-16.8 |
% |
(1.7 |
) |
-0.4 |
% |
(95.3 |
) |
-7.4 |
% |
(8.3 |
) |
-0.5 |
% |
||||||||||||||||
Net (loss) earnings |
$ |
(195.4 |
) |
-40.3 |
% |
$ |
1.0 |
0.2 |
% |
$ |
(194.9 |
) |
-15.1 |
% |
$ |
4.4 |
0.3 |
% |
||||||||||||||
Comparison of Three Months ended December 31, 2020 and 2019
Third quarter net sales of $484.3 million were $10.9 million, or 2 percent, higher than the third quarter of the prior year, primarily due to higher sales volume in the HDE and BHVAC segments and an $11.2 million favorable impact of foreign currency exchange rate changes, partially offset by lower sales volume in the CIS and Automotive segments. Sales in the HDE, BHVAC, and Automotive segments increased $20.7 million, $3.8 million, and $3.4 million, respectively. CIS segment sales decreased $18.5 million.
Third quarter cost of sales increased $1.7 million. As a percentage of sales, cost of sales decreased 160 basis points to 82.9 percent. The increase in cost of sales was primarily due to a $9.7 million unfavorable impact of foreign currency exchange rate changes, partially offset by the favorable impacts of procurement and other cost-reduction initiatives and a $3.0 million decrease in depreciation expense in the Automotive segment. In addition, program and equipment transfer costs to prepare the liquid-cooled automotive business for sale decreased approximately $1.0 million compared with the prior year.
As a result of higher sales and lower cost of sales as a percentage of sales, third quarter gross profit increased $9.2 million and gross margin improved 160 basis points to 17.1 percent.
Third quarter SG&A expenses decreased $7.4 million. The decrease in SG&A expenses was primarily due to lower costs recorded at Corporate associated with our review of strategic alternatives for the Automotive segment’s business operations, which decreased approximately $10.0 million. This favorable driver was partially offset by a $1.0 million unfavorable impact of foreign currency exchange rate changes and higher environmental charges in the HDE segment.
Restructuring expenses of $0.9 million during the third quarter of fiscal 2021 decreased $1.7 million, primarily due to lower restructuring expenses in the HDE segment.
Impairment charges of $134.4 million in the third quarter of fiscal 2021 primarily related to the write-down of the long-lived assets in the Automotive segment’s liquid-cooled automotive business in connection with the pending sale of that business.
The operating loss of $108.7 million represents a $116.9 million decline from the prior-year operating income of $8.2 million. The decline was primarily due to the $134.4 million of impairment charges recorded in the Automotive segment and lower earnings in the CIS segment. These negative drivers were partially offset by higher earnings in our HDE and BHVAC segments.
Interest expense decreased $1.0 million, or 18 percent, during the third quarter of fiscal 2021, primarily due to lower outstanding long-term debt and, to a lesser extent, favorable changes in interest rates.
The provision for income taxes was $81.6 million and $1.7 million in the third quarter of fiscal 2021 and 2020, respectively. The $79.9 million increase was primarily due to income tax charges totaling $116.5 million recorded in the third quarter of fiscal 2021 to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions, partially offset by income tax benefits totaling $37.7 million related to the impairment charges recorded earlier in the third quarter of fiscal 2021.
Comparison of Nine Months ended December 31, 2020 and 2019
Fiscal 2021 year-to-date net sales of $1,293.5 million were $209.1 million, or 14 percent, lower than the same period last year, primarily due to lower sales in our HDE, CIS and Automotive segments. Sales in these segments decreased $93.8 million, $87.4 million, and $53.9 million, respectively, and were significantly impacted by market-driven volume declines and temporary plant closures earlier in the fiscal year due to the COVID-19 pandemic. BHVAC segment sales increased $8.3 million.
Fiscal 2021 year-to-date cost of sales of $1,083.9 million decreased $186.1 million, or 15 percent, primarily due to lower sales volume. As a percentage of sales, cost of sales improved 70 basis points to 83.8 percent. The unfavorable impact of lower sales volume was more than offset by the benefits of cost-reduction initiatives implemented earlier in the fiscal year in response to lower end market demand and procurement initiatives.
As a result of lower sales and lower cost of sales as a percentage of sales, fiscal 2021 year-to-date gross profit decreased $23.0 million and gross margin improved 70 basis points to 16.2 percent.
Fiscal 2021 year-to-date SG&A expenses decreased $42.8 million. The decrease in SG&A expenses was primarily due to lower costs recorded at Corporate associated with our review of strategic alternatives for the Automotive segment’s business operations, which decreased approximately $29.0 million, and lower compensation-related expenses, which decreased approximately $18.0 million. These favorable drivers were partially offset by $5.9 million of costs recorded at Corporate in connection with Mr. Burke stepping down from his position as President and CEO and the search for his successor.
Restructuring expenses of $7.0 million during the first nine months of fiscal 2021 increased $0.3 million compared with the same period last year, primarily due to higher restructuring expenses in the CIS segment, partially offset by lower restructuring expenses in the Automotive segment.
The fiscal 2021 year-to-date operating loss of $83.4 million represents a $115.7 million decline from the prior-year operating income of $32.3 million. The decline was primarily due to the $134.4 million of impairment charges recorded in the Automotive segment and lower earnings in our CIS and HDE segments. These negative drivers were partially offset by lower SG&A expenses at Corporate and higher earnings in our BHVAC segment.
Interest expense decreased $2.1 million, or 12 percent, during the first nine months of fiscal 2021, primarily due to lower outstanding long-term debt and favorable changes in interest rates.
The provision for income taxes was $95.3 million and $8.3 million during the first nine months of fiscal 2021 and 2020, respectively. The $87.0 million increase was primarily due to income tax charges totaling $123.1 million recorded during the first nine months of fiscal 2021 to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions, partially offset by income tax benefits totaling $37.7 million related to the impairment charges recorded during fiscal 2021.
SEGMENT RESULTS OF OPERATIONS
Effective April 1, 2020, we began managing our global automotive business separate from the other businesses within the previously-reported Vehicular Thermal Solutions (“VTS”) segment. We have been managing the automotive business as the Automotive segment as we target the sale or eventual exit of its underlying automotive business operations. We are managing the other businesses of the VTS segment, including the commercial vehicle and off-highway businesses, as the Heavy Duty Equipment segment. We began reporting financial results for our new segment structure beginning for fiscal 2021. Segment financial information for fiscal 2020 has been recast to conform to the fiscal 2021 presentation. The segment realignment had no impact on the CIS and BHVAC segments.
The following is a discussion of our segment results of operations for the three and nine months ended December 31, 2020 and 2019:
Commercial and Industrial Solutions
Three months ended December 31, |
Nine months ended December 31, |
|||||||||||||||||||||||||||||||
2020 |
2019 |
2020 |
2019 |
|||||||||||||||||||||||||||||
(in millions) |
$'s |
% of sales |
$'s |
% of sales |
$'s |
% of sales |
$'s |
% of sales |
||||||||||||||||||||||||
Net sales |
$ |
129.0 |
100.0 |
% |
$ |
147.5 |
100.0 |
% |
$ |
385.6 |
100.0 |
% |
$ |
473.0 |
100.0 |
% |
||||||||||||||||
Cost of sales |
116.4 |
90.2 |
% |
124.8 |
84.6 |
% |
338.2 |
87.7 |
% |
403.1 |
85.2 |
% |
||||||||||||||||||||
Gross profit |
12.6 |
9.8 |
% |
22.7 |
15.4 |
% |
47.4 |
12.3 |
% |
69.9 |
14.8 |
% |
||||||||||||||||||||
Selling, general and administrative expenses |
13.8 |
10.7 |
% |
13.7 |
9.3 |
% |
39.1 |
10.2 |
% |
42.8 |
9.1 |
% |
||||||||||||||||||||
Restructuring expenses |
0.5 |
0.4 |
% |
0.7 |
0.5 |
% |
4.4 |
1.1 |
% |
1.3 |
0.3 |
% |
||||||||||||||||||||
Operating (loss) income |
$ |
(1.7 |
) |
-1.3 |
% |
$ |
8.3 |
5.6 |
% |
$ |
3.9 |
1.0 |
% |
$ |
25.8 |
5.4 |
% |
|||||||||||||||
Comparison of Three Months ended December 31, 2020 and 2019
CIS net sales decreased $18.5 million, or 13 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021, primarily due to lower sales volume of data center cooling products, partially offset by a $4.5 million favorable impact of foreign currency exchange rate changes. Sales to data center cooling customers decreased $18.4 million, primarily due to lower sales to one individual customer.
CIS cost of sales decreased $8.4 million, or 7 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021, primarily due to lower sales volume, partially offset by a $4.2 million unfavorable impact of foreign currency exchange rate changes. As a percentage of sales, cost of sales increased 560 basis points to 90.2 percent, primarily due to the impact of lower sales volume, unfavorable sales mix, and to a lesser extent, temporary operating inefficiencies associated with plant consolidation activities in China. These negative impacts were partially offset by benefits from procurement and other cost-reduction initiatives.
As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.1 million and gross margin declined 560 basis points to 9.8 percent.
SG&A expenses increased $0.1 million, or 140 basis points as a percentage of sales, compared with the third quarter of the prior year. The increase in SG&A expenses was primarily due to a $0.5 million unfavorable impact of foreign currency exchange rate changes, partially offset by lower compensation-related expenses.
Restructuring expenses during the third quarter of fiscal 2021 totaled $0.5 million, a decrease of $0.2 million compared with the third quarter of fiscal 2020, and primarily consisted of equipment transfer and plant consolidation costs in China.
The CIS operating loss of $1.7 million represents a $10.0 million decline from the prior-year operating income of $8.3 million and was primarily due to lower gross profit.
Comparison of Nine Months ended December 31, 2020 and 2019
CIS year-to-date net sales decreased $87.4 million, or 18 percent, from the same period last year, primarily due to lower sales volume associated with the impacts of the COVID-19 pandemic. In addition, sales in fiscal 2021 have been negatively impacted by lower sales to a significant data center customer. Sales to commercial HVAC&R and data center cooling customers decreased $48.1 million and $41.1 million, respectively.
CIS year-to-date cost of sales decreased $64.9 million, or 16 percent, from the same period last year, primarily due to lower sales volume. As a percentage of sales, cost of sales increased 250 basis points to 87.7 percent, primarily due to the impact of lower sales volume and unfavorable sales mix, partially offset by cost-reduction and procurement initiatives.
As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $22.5 million and gross margin declined 250 basis points to 12.3 percent.
CIS year-to-date SG&A expenses decreased $3.7 million compared with the prior year. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $5.0 million, partially offset by a $0.6 million unfavorable impact of foreign currency exchange rate changes.
Restructuring expenses during the first nine months of fiscal 2021 increased $3.1 million compared with the prior year and primarily consisted of severance expenses and equipment transfer costs related to plant consolidation activities in China and targeted headcount reductions in North America.
Operating income decreased $21.9 million to $3.9 million, primarily due to lower gross profit and higher restructuring expenses, partially offset by lower SG&A expenses.
Building HVAC Systems
Three months ended December 31, |
Nine months ended December 31, |
|||||||||||||||||||||||||||||||
2020 |
2019 |
2020 |
2019 |
|||||||||||||||||||||||||||||
(in millions) |
$'s |
% of sales |
$'s |
% of sales |
$'s |
% of sales |
$'s |
% of sales |
||||||||||||||||||||||||
Net sales |
$ |
68.7 |
100.0 |
% |
$ |
64.9 |
100.0 |
% |
$ |
178.2 |
100.0 |
% |
$ |
169.9 |
100.0 |
% |
||||||||||||||||
Cost of sales |
43.0 |
62.7 |
% |
41.8 |
64.5 |
% |
116.3 |
65.3 |
% |
115.4 |
67.9 |
% |
||||||||||||||||||||
Gross profit |
25.7 |
37.3 |
% |
23.1 |
35.5 |
% |
61.9 |
34.7 |
% |
54.5 |
32.1 |
% |
||||||||||||||||||||
Selling, general and administrative expenses |
9.9 |
14.3 |
% |
9.6 |
14.7 |
% |
25.9 |
14.5 |
% |
26.9 |
15.8 |
% |
||||||||||||||||||||
Operating income |
$ |
15.8 |
23.1 |
% |
$ |
13.5 |
20.8 |
% |
$ |
36.0 |
20.2 |
% |
$ |
27.6 |
16.2 |
% |
||||||||||||||||
Comparison of Three Months ended December 31, 2020 and 2019
BHVAC net sales increased $3.8 million, or 6 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021, primarily due to higher sales in the U.S. and the U.K., which both increased approximately $2.0 million. The higher sales in the U.S. were primarily due to higher sales of heating products, partially offset by lower sales of ventilation products. The higher sales in the U.K. were primarily due to higher sales of air conditioning and data center cooling products.
BHVAC cost of sales increased $1.2 million, or 3 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021, primarily due to higher sales volume. As a percentage of sales, cost of sales decreased 180 basis points to 62.7 percent and was positively impacted by favorable customer pricing and sales mix.
As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $2.6 million and gross margin improved 180 basis points to 37.3 percent.
SG&A expenses increased $0.3 million from the prior year, yet decreased 40 basis points as a percentage of sales. The increase in SG&A expenses was primarily due to higher compensation-related expenses, including commission expenses.
Operating income of $15.8 million increased $2.3 million during the quarter, primarily due to higher gross profit.
Comparison of Nine Months ended December 31, 2020 and 2019
BHVAC year-to-date net sales increased $8.3 million, or 5 percent, from the same period last year, primarily due to higher sales volume. Compared with the first nine months of the prior year, sales increased $9.2 million in the U.K. and decreased $0.9 million in the U.S. The higher sales in the U.K. were primarily due to higher sales of data center products. The lower sales in the U.S. resulted primarily from the negative impacts of the COVID-19 pandemic and decreased sales of ventilation products, partially offset by higher sales of heating products.
BHVAC year-to-date cost of sales increased $0.9 million from the same period last year. As a percentage of sales, cost of sales decreased 260 basis points to 65.3 percent and was positively impacted by favorable customer pricing, sales mix and cost-reduction initiatives.
As a result of higher sales and lower cost of sales as a percentage of sales, gross profit increased $7.4 million and gross margin improved 260 basis points to 34.7 percent.
BHVAC year-to-date SG&A expenses decreased $1.0 million, or 130 basis points as a percentage of sales, from the prior year. The decrease in SG&A expenses was primary due to lower travel expenses.
Operating income of $36.0 million increased $8.4 million compared with the same period last year, primarily due to higher gross profit and lower SG&A expenses.
Heavy Duty Equipment
Three months ended December 31, |
Nine months ended December 31, |
|||||||||||||||||||||||||||||||
2020 |
2019 |
2020 |
2019 |
|||||||||||||||||||||||||||||
(in millions) |
$'s |
% of sales |
$'s |
% of sales |
$'s |
% of sales |
$'s |
% of sales |
||||||||||||||||||||||||
Net sales |
$ |
185.6 |
100.0 |
% |
$ |
164.9 |
100.0 |
% |
$ |
474.7 |
100.0 |
% |
$ |
568.5 |
100.0 |
% |
||||||||||||||||
Cost of sales |
159.6 |
86.0 |
% |
148.1 |
89.8 |
% |
413.8 |
87.2 |
% |
496.8 |
87.4 |
% |
||||||||||||||||||||
Gross profit |
26.0 |
14.0 |
% |
16.8 |
10.2 |
% |
60.9 |
12.8 |
% |
71.7 |
12.6 |
% |
||||||||||||||||||||
Selling, general and administrative expenses |
13.2 |
7.1 |
% |
12.6 |
7.7 |
% |
35.4 |
7.4 |
% |
42.3 |
7.4 |
% |
||||||||||||||||||||
Restructuring expenses |
- |
- |
1.4 |
0.8 |
% |
1.9 |
0.4 |
% |
2.2 |
0.4 |
% |
|||||||||||||||||||||
Operating income |
$ |
12.8 |
6.8 |
% |
$ |
2.8 |
1.7 |
% |
$ |
23.6 |
5.0 |
% |
$ |
27.2 |
4.8 |
% |
||||||||||||||||
Comparison of Three Months ended December 31, 2020 and 2019
HDE net sales increased $20.7 million, or 13 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021, primarily due to higher sales volume to global off-highway customers. Sales to off-highway and commercial vehicle customers increased $16.7 million and $3.8 million, respectively. Geographically, sales increased most significantly in Asia.
HDE cost of sales increased $11.5 million, or 8 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021, primarily due to higher sales volume. As a percentage of sales, cost of sales decreased 380 basis points to 86.0 percent and was favorably impacted by the higher sales volume, cost savings from procurement and other cost-reduction initiatives, and, to a lesser extent, improved operating efficiencies.
As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $9.2 million and gross margin improved 380 basis points to 14.0 percent.
SG&A expenses increased $0.6 million, yet decreased 60 basis points as a percentage of sales, compared with the third quarter of the prior year. The increase in SG&A expenses was primarily due to environmental charges related to a previously-owned U.S. manufacturing facility, which increased $0.4 million.
Restructuring expenses decreased $1.4 million compared with the third quarter of fiscal 2020, primarily due to lower severance expenses related to targeted headcount reductions.
Operating income of $12.8 million increased $10.0 million during the quarter, primarily due to higher gross profit and lower restructuring expenses.
Comparison of Nine Months ended September 30, 2020 and 2019
HDE year-to-date net sales decreased $93.8 million, or 16 percent, from the same period last year, primarily due to lower sales volume resulting from the impacts of the COVID-19 pandemic, which were most severe in the Americas and Europe during the first half of the fiscal year. Sales to commercial vehicle and automotive and light vehicle customers decreased $57.2 million and $15.2 million, respectively.
HDE year-to-date cost of sales decreased $83.0 million, or 17 percent, primarily due to lower sales volume. As a percentage of sales, cost of sales decreased 20 basis points to 87.2 percent. The significant unfavorable impact of the lower sales volume was more than offset by favorable impacts from improved operating efficiencies and cost savings from procurement and other cost-reduction initiatives.
As a result of the lower sales and lower cost of sales as a percentage of sales, gross profit decreased $10.8 million and gross margin improved 20 basis points to 12.8 percent.
HDE year-to-date SG&A expenses decreased $6.9 million from the prior year. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $6.0 million, and cost-reduction initiatives, including lower travel expenses.
Restructuring expenses during the first nine months of fiscal 2021 totaled $1.9 million, a decrease of $0.3 million compared with the same period last year, and primarily consisted of severance expenses resulting from targeted headcount reductions in North America.
Operating income of $23.6 million decreased $3.6 million compared with the same period last year, primarily due to lower gross profit, partially offset by lower SG&A expenses.
Automotive
Three months ended December 31, |
Nine months ended December 31, |
|||||||||||||||||||||||||||||||
2020 |
2019 |
2020 |
2019 |
|||||||||||||||||||||||||||||
(in millions) |
$'s |
% of sales |
$'s |
% of sales |
$'s |
% of sales |
$'s |
% of sales |
||||||||||||||||||||||||
Net sales |
$ |
113.9 |
100.0 |
% |
$ |
110.5 |
100.0 |
% |
$ |
285.9 |
100.0 |
% |
$ |
339.8 |
100.0 |
% |
||||||||||||||||
Cost of sales |
95.5 |
83.9 |
% |
98.3 |
89.0 |
% |
246.1 |
86.1 |
% |
302.1 |
88.9 |
% |
||||||||||||||||||||
Gross profit |
18.4 |
16.1 |
% |
12.2 |
11.0 |
% |
39.8 |
13.9 |
% |
37.7 |
11.1 |
% |
||||||||||||||||||||
Selling, general and administrative expenses |
8.5 |
7.4 |
% |
11.2 |
10.2 |
% |
25.5 |
8.9 |
% |
33.6 |
9.9 |
% |
||||||||||||||||||||
Restructuring expenses |
0.4 |
0.4 |
% |
0.2 |
0.2 |
% |
0.6 |
0.2 |
% |
2.9 |
0.8 |
% |
||||||||||||||||||||
Impairment charges |
134.4 |
118.0 |
% |
- |
- |
134.4 |
47.0 |
% |
- |
- |
||||||||||||||||||||||
Gain on sale of assets |
- |
- |
(0.8 |
) |
-0.8 |
% |
- |
- |
(0.8 |
) |
-0.2 |
% |
||||||||||||||||||||
Operating (loss) income |
$ |
(124.9 |
) |
-109.7 |
% |
$ |
1.6 |
1.4 |
% |
$ |
(120.7 |
) |
-42.2 |
% |
$ |
2.0 |
0.6 |
% |
||||||||||||||
Comparison of Three Months ended December 31, 2020 and 2019
Automotive net sales increased $3.4 million, or 3 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021, primarily due to a $6.7 million favorable impact of foreign currency exchange rate changes, partially offset by lower sales volume. Compared with the prior year, sales increased $3.8 million and $2.0 million in Europe and Asia, respectively, and decreased $2.4 million in the Americas.
Automotive cost of sales decreased $2.8 million, or 3 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021. As a percentage of sales, cost of sales decreased 510 basis points to 83.9 percent. Compared with the prior year, cost of sales was favorably impacted by lower depreciation expenses, which decreased approximately $3.0 million, cost savings from procurement and other cost-reduction initiatives, and improved operating efficiencies. The lower depreciation expenses resulted from the Company ceasing depreciation of the long-lived assets within the liquid-cooled automotive business when it was classified as held for sale in November 2020. Foreign currency exchange rate changes negatively impacted cost of sales by $5.7 million.
As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $6.2 million and gross margin improved 510 basis points to 16.1 percent.
SG&A expenses decreased $2.7 million compared with the third quarter of the prior year. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $2.0 million.
Restructuring expenses during the third quarter of fiscal 2021 totaled $0.4 million and primarily consisted of severance expenses resulting from targeted headcount reductions in Europe.
Impairment charges during the third quarter of fiscal 2021 totaled $134.4 million and primarily related to assets in the liquid-cooled automotive business. Upon classifying this business as held for sale during the third quarter, we identified an implied loss in excess of the carrying value of its long-lived assets. Accordingly, we reduced the liquid-cooled automotive business’s long-lived assets, primarily property, plant and equipment, to zero.
During the third quarter of fiscal 2020, we completed the sale of a previously-closed manufacturing facility in Germany and, as a result, recorded a gain of $0.8 million.
The Automotive operating loss of $124.9 million in the third quarter of fiscal 2021, as compared with operating income of $1.6 million in the third quarter of the prior year, was significantly impacted by the large impairment charges associated with the liquid-cooled automotive business and, to a much lesser extent, higher gross profit and lower SG&A expenses.
Comparison of Nine Months ended December 31, 2020 and 2019
Automotive year-to-date net sales decreased $53.9 million, or 16 percent, from the same period last year, primarily due to lower sales volume largely resulting from the impacts of the COVID-19 pandemic, partially offset by a $9.7 million favorable impact of foreign currency exchange rate changes. Sales in Europe and North America decreased $46.8 million and $13.0 million, respectively. Sales in Asia increased $5.9 million.
Automotive year-to-date cost of sales decreased $56.0 million, or 19 percent, from the prior year, primarily due to lower sales volume, partially offset by an $8.2 million unfavorable impact of foreign currency exchange rate changes. As a percentage of sales, cost of sales decreased 280 basis points to 86.1 percent and was favorably impacted by improved operating efficiencies, cost savings from procurement initiatives, and lower depreciation expenses of approximately $4.0 million, partially offset by the unfavorable impact of lower sales volume.
As a result of the lower sales and lower cost of sales as a percentage of sales, gross profit increased $2.1 million and gross margin improved 280 basis points to 13.9 percent.
Automotive year-to-date SG&A expenses decreased $8.1 million compared with the prior year. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $8.0 million.
Restructuring expenses during the first nine months of fiscal 2021 totaled $0.6 million, a decrease of $2.3 million compared with the same period in the prior year. The decrease was primarily driven by lower severance expenses in Europe resulting from fewer targeted headcount reductions.
The Automotive operating loss of $120.7 million during the first nine months of fiscal 2021, as compared with operating income of $2.0 million during the same period last year, was significantly impacted by the large impairment charges associated with the liquid-cooled automotive business during the third quarter of fiscal 2021 and, to a much lesser extent, higher gross profit and lower SG&A expenses and restructuring charges.
Liquidity and Capital Resources
Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $72.9 million as of December 31, 2020, and an available borrowing capacity of $213.6 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.
In response to the COVID-19 pandemic, we have taken actions to reduce operating and administrative expenses, conserve cash and maximize liquidity. In addition, as described below, we have focused on reducing our capital expenditures and executed amendments to our primary credit agreements to provide financial covenant flexibility during fiscal 2021 and 2022. We believe our sources of liquidity, including cash flow from operations, our cash and cash equivalents, and access to both committed and uncommitted credit facilities, will provide sufficient cash flow to meet our obligations during the next twelve months and beyond. However, we are continuing to monitor the impacts of COVID-19 on our business and the credit and financial markets.
Net Cash Provided by Operating Activities
Net cash provided by operating activities for the nine months ended December 31, 2020 was $146.5 million, which represents a $100.6 million increase compared with the same period in the prior year. This increase in operating cash flow was primarily due to favorable net changes in working capital and lower payments for separation and project costs associated with our review of strategic alternatives for the automotive businesses. The favorable changes in working capital during the first nine months of fiscal 2021, compared with the same period in the prior year, included lower inventory levels and lower payments for incentive compensation, employee benefits, income taxes and payroll taxes. In addition, we have deferred payments of U.S. payroll taxes, as permitted by the Coronavirus Aid, Relief and Economic Security Act. We plan to resume payment of these payroll taxes during the fourth quarter of fiscal 2021.
Capital Expenditures
In response to the economic impacts of the COVID-19 pandemic, we have been focused on reducing our capital expenditures and, where possible, have delayed certain projects and the purchase of certain program-related equipment and tooling in our vehicular businesses. Capital expenditures of $23.7 million during the first nine months of fiscal 2021 decreased $34.5 million compared with the same period in the prior year.
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.
In May 2020, we executed amendments to our primary credit agreements in the U.S. to provide additional covenant flexibility in light of the risks and uncertainties associated with the COVID-19 pandemic. Under the amended agreements, the leverage ratio covenant limit has been temporarily raised. 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, in relation to our consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”). The leverage ratio covenant limit is 5.75 to 1 for the fourth quarter of fiscal 2021. In fiscal 2022, the leverage ratio covenant limit is 4.75 to 1, 3.75 to 1, and 3.50 to 1 for the first, second and third quarters, respectively, and subsequently returns to 3.25 to 1 for the fourth quarter of fiscal 2022. 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, 2020, we were in compliance with our debt covenants; our leverage ratio and interest coverage ratio were 1.9 and 8.7, respectively. We expect to remain in compliance with our debt covenants during fiscal 2021, fiscal 2022 and beyond.
Share Repurchase Program
On November 5, 2020, we announced our Board of Directors approved a two-year, $50.0 million share repurchase program, which allows us to repurchase shares of our 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 we deem appropriate. To date, we have not repurchased shares under this program. Our decision whether and to what extent to repurchase shares under this program will depend on a number of factors, including business conditions, other cash priorities, and stock price.
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, 2020. Other risks and uncertainties include, but are not limited to, the following:
Market Risks:
| • | The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers, customers, and employees; |
| • | Economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including, in particular, foreign currency exchange rate fluctuations; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); inflation; changes in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade, public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade, the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the short- and long-term implications of “Brexit”; |
| • | The impact of potential price increases associated with raw materials, including aluminum, copper, steel and stainless steel (nickel), and other purchased components including, but not limited to, increases in the underlying material cost based upon the London Metal Exchange and related premiums or fabrication 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, the concentration of sales within our CIS segment attributable to one customer, 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 with suppliers meeting our time, quantity, quality and price 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 programs 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 program launches, product applications or requirements; |
| • | 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 reduce our cost structure in response to sales volume declines 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 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 complete the pending sale of our liquid-cooled automotive business, including the receipt of governmental and third-party approvals and satisfaction of other closing conditions, and our ability to successfully exit our other automotive businesses in a manner that is in the best interest of our shareholders; |
| • | Our ability to successfully realize anticipated benefits from our increased “industrial” market presence, with our CIS and BHVAC businesses, while maintaining appropriate focus on the market opportunities presented by our HDE and Automotive businesses; |
| • | 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, and of the continued uncertainty around the utilization of LIBOR or alternative reference rates; |
| • | Our ability to comply with the financial covenants, as amended, 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, 2020. The Company’s market risks have not materially changed since the fiscal 2020 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 Vice President, Finance and 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 Vice President, Finance and 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, 2020.
Changes in Internal Control Over Financial Reporting
There have been no changes in internal control over financial reporting during the third quarter of fiscal 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
| Item 6. | Exhibits. |
(a) Exhibits:
Exhibit No. |
Description |
Incorporated Herein By Reference To |
Filed Herewith |
|
Securities and Asset Purchase Agreement, dated as of November 2, 2020, by and between the Company and Dana Incorporated |
Exhibit 2.1 to Registrant’s Current Report on Form 8-K dated November 2, 2020 |
|||
[Corrected] Offer Letter dated as of November 10, 2020, by and between the Company and Mr. Brinker |
X |
|||
Form of Make-Whole RSU Award Agreement with Neil Brinker |
X |
|||
Form of Make-Whole Performance Cash Award Agreement with Neil Brinker |
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, Vice President, Finance and Chief Financial Officer. |
X |
|||
Section 1350 Certification of Neil D. Brinker, President and Chief Executive Officer. |
X |
|||
Section 1350 Certification of Michael B. Lucareli, Vice President, Finance and 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 |
||
101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase Document |
X |
||
101.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 |
* Schedules and similar attachments have been omitted pursuant to Item 601(b)(2) of Regulation S-K because they are not material and would likely cause competitive harm to the Company if publicly disclosed.
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, Vice President, Finance and
Chief Financial Officer*
Date: February 5, 2021
* Executing as both the principal financial officer and a duly authorized officer of the Company
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