We could be adversely affected if we experience shortages of components or materials from our suppliers.
In an effort to manage and reduce our cost of purchased goods and services, we, like many suppliers and customers, have been consolidating our supply base. As a result, we are dependent upon limited sources of supply for certain components used in the manufacture of our products. We select our suppliers based onupon total value (including price, delivery and quality), taking into consideration their production capacities, financial condition and willingness and ability to meet our demand. In some cases, it can take several months or longer to find a supplier due to qualification requirements. However, strong demand, the potential effects of trade laws and tariffs, capacity limitations,constraints, financial instability, public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic, or other problemscircumstances experienced by our suppliers could result in shortages or delays in their supply of product to us.us, or a significant price increase resulting in our need to resource. For example, the COVID-19 pandemic and other factors have contributed to a global shortage of semiconductor chips, which has negatively impacted automotive and other markets, and in turn, order levels for certain products we provide to our automotive customers. In addition, recent storms in Texas intensified already-constrained resin supply and, as a result, we experienced delays due to our suppliers’ inability to procure critical materials used in the production of certain of our products. If such shortages continue or worsen, or if we were to experience a significant or prolonged shortageshortages of any critical components or materials from any of our suppliers and could not procure the components or materials from other sources, we would be unable to meet our production schedules and we would miss product delivery dates, which would adversely affect our sales, results of operations and customer relationships.
We face strong competition.
As a global company, we are subject to foreign currency rate fluctuations, which may affect our financial results.
Although our financial results are reported in U.S. dollars, a significant portion of our sales and operating costs are realized in foreign currencies, including the euro, British pound, Brazilian real and others.currencies. Our sales and profitability are affected by movements of the U.S. dollar against foreign currencies in which we generate sales and incur expenses. To the extent that we are unable to match sales in foreign currencies with costs paid in the same currency, exchange rate fluctuations in any such currency could have an adverse effect on our financial results. During times of a strengthening U.S. dollar, our reported sales and earnings from our international operations will be lower because the applicable local currency will be translated into fewer U.S. dollars. In certain instances, currency rate fluctuations may create pricing pressure relative to competitors quoting in different currencies, which could result in our products becoming less competitive. Significant long-term fluctuations in relative currency values in particular a significant change in the relative values of the U.S. dollar, euro, British pound or Brazilian real, could have an adverse effect on our results of operations and financial condition.
If we cannot differentiate ourselves from our competitors with our technology, our existing and potential customers may seek lower prices and our sales and earnings may be adversely affected.
Price, quality, delivery, technological innovation, and application engineering development are the primary elements of competition in our markets. If we fail to keep pace with technological changes and cannot differentiate ourselves from our competitors with our technology or fail to provide high quality, innovative products and services that both meet or exceed customer expectations and address their ever-evolving needs, we may experience price erosion, lower sales, and lower profit margins. Significant technological developments by our competitors or others also could adversely affect our business and results of operations.
Developments or assertions by or against us relating to intellectual property rights could adversely affect our business.
ITEM 4. | MINE SAFETY DISCLOSURES. |
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
INFORMATION ABOUT OUR EXECUTIVE
OFFICERS OF THE REGISTRANT.OFFICERS.
The following sets forth the name, age (as of March 31, 2016)2021), recent business experience and certain other information relative to each executive officer of the Company.
Name | | Age | | Position |
Scott L. BowserBrian J. Agen | | 52 | | Vice President, Human Resources (October 2012 – Present). |
Neil D. Brinker | | 45 | | President and Chief Executive Officer (December 2020 – Present). Prior to joining Modine, Mr. Brinker served as President and Chief Operating Officer of Advanced Energy Industries, Inc. after serving as its Executive Vice President and Chief Operating Officer. Prior to joining Advanced Energy Industries, Inc, Mr. Brinker served as a Group President at IDEX Corporation. |
Joel T. Casterton | | 49 | | Vice President, Heavy Duty Equipment (April 2020 – Present); previously Vice President, Vehicular Thermal Solutions and Director – Global Program Management and Quality for the Company. |
Michael B. Lucareli | | 52 | | Executive Vice President, Chief Financial Officer (May 2021 – Present); previously Vice President, Finance and Chief Financial Officer for the Company. |
Matthew J. McBurney | | 51 | | Vice President, of Asia and Global Procurement (May 2015Building HVAC (February 2021 – Present); Regionalpreviously Vice President, – Asia (July 2012 – May 2015); RegionalBuilding HVAC and Corporate Strategy, Vice President, – Americas (March 2009 – July 2012); Managing Director – Modine Brazil (April 2006 – March 2009); General Sales Manager – Truck Division (January 2002 – March 2006); Plant Manager atStrategic Planning and Development; and Vice President, Commercial and Industrial Solutions Integration for the Company’s Pemberville, OH plant (1998 – 2001).Company. |
Scott A. Miller | | | | |
Thomas A. Burke | | 58 | | President and Chief Executive Officer (April 2008 – Present); Executive Vice President and Chief Operating Officer (July 2006 – March 2008); and Executive Vice President (May 2005 – July 2006). |
| | | | |
Margaret C. Kelsey | | 5156 | | Vice President, LegalCommercial and Corporate Communications,Industrial Solutions (January 2021 – Present); previously Vice President, Global Coils and Coolers; Vice President, Building HVAC; and Managing Director – Global Operations for the Company. |
Sylvia A. Stein | | 54 | | Vice President, General Counsel, Secretary and Secretary (April 2014Chief Compliance Officer (February 2020 – Present); previously Vice President, General Counsel and Corporate Secretary (November 2008 – March 2014); Vice President Corporate Strategy and Business Development (May 2008 – October 2008); Vice President - Finance, Corporate Treasury and Business Development (January 2007 – April 2008); Corporate Treasurer & Assistant Secretary (January 2006 – December 2006); Senior Counsel & Assistant Secretary (April 2002 – December 2005); Senior Counsel (April 2001 – March 2002). |
| | | | |
Michael B. Lucareli | | 47 | | Vice President, Finance and Chief Financial Officer (October 2011 – Present); Vice President, Finance, Chief Financial Officer and Treasurer (July 2010 – October 2011); Vice President, Finance and Corporate Treasurer (May 2008 – July 2010); Managing Director Financial Operations (November 2006 – May 2008); Director, Financial Operations and Analysis (May 2004 – October 2006); Director, Business Development and Strategic Planning (November 2002 – May 2004); and Business Development and Investor Relations Manager (1999 – October 2002). |
Thomas F. Marry | | 55 | | Executive Vice President and Chief Operating Officer (February 2012 – Present); Executive Vice President – Europe, Asia and Commercial Products Group (May 2011 – February 2012); Regional Vice President – Asia and Commercial Products Group (November 2007 – May 2011); Managing Director – Powertrain Cooling Products (October 2006 – October 2007); General Manager – Truck Division (2003 – 2006); Director – Engine Products Group (2001 – 2003); Manager – Sales, Marketing and Product Development (1999 – 2001); Marketing Manager (1998 – 1999). |
| | | | |
Matthew J. McBurney | | 46 | | Vice President, Building HVAC (May 2011 – Present); Director, Commercial Products Group (CPG) – North America (June 2007 – May 2011); Business and Product Development Manager – CPG (November 2006 – June 2007); Business Development Manager – CPG (May 2006 – October 2006); Plant Superintendent at the Company’s Richland, SC plant (November 2003 – May 2006); Program Manager - Automotive (March 2000 – November 2003). In addition, from 1992 through 2000, Mr. McBurney held various engineering positions atfor the Company.
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| | | | |
Holger Schwab | | 51 | | Regional Vice President – Europe (July 2012 – Present). Prior to joining Modine, Mr. Schwab held various leadership positions at Valeo in North America and Europe and at Thermal Werke. |
| | | | |
Scott D. Wollenberg | | 47 | | Vice President – Americas (February 2016 – Present); Regional Vice President – North America (July 2012 – January 2016); Chief Technology Officer (July 2011 – May 2013); Vice President – Global Research and Engineering (May 2010 – June 2011). In addition, from 1992 through 2010, Mr. Wollenberg held various engineering and product management positionsMs. Stein served as the Associate General Counsel, Marketing & Regulatory at the Kraft Heinz Foods Company.
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Executive Officer positions are designated in our Bylaws and the persons holding these positions are elected annually by the Board, generally at its first meeting after the annual meeting of shareholders in July of each year. In addition, the Officer NominationHuman Capital and Compensation Committee of the Board may recommend and the Board of Directors approvesmay approve promotions and other actions with regard to executive officers at any time during the fiscal year.
There are no family relationships among the executive officers and directors. All of the executive officers of Modine have been employed by us in various capacities during the last five years with the exception of Mr. Schwab,Brinker and Ms. Stein, who joined Modine in July 2012.December 2020 and January 2018, respectively, whose business experience during the last five years is described above.
There are no arrangements or understandings between any of the executive officers and any other person pursuant to which he or she was elected an officer of Modine.
PART II
ITEM 5ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. | MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. |
Our common stock is listed on the New York Stock Exchange. Our trading symbol is MOD. The table below shows the range of high and low closing sales prices for our common stock for fiscal 2016 and 2015. As of March 31, 2016,2021, shareholders of record numbered 2,828.2,220.
| | Fiscal 2016 | | | Fiscal 2015 | |
Quarter | | High | | | Low | | | High | | | Low | |
First | | $ | 13.50 | | | $ | 10.60 | | | $ | 17.51 | | | $ | 13.46 | |
Second | | | 10.79 | | | | 7.85 | | | | 16.15 | | | | 11.87 | |
Third | | | 9.62 | | | | 7.91 | | | | 13.96 | | | | 11.25 | |
Fourth | | | 11.23 | | | | 6.01 | | | | 13.82 | | | | 12.11 | |
We did not pay dividends during fiscal 20162021 or 2015.2020. Under our debtcredit agreements, we are permitted to pay dividends on our common stock, subject to certain restrictions based onupon the calculation of debt covenants, as further described under “Liquidity and Capital Resources” under Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. We currently do not intend to pay dividends in fiscal 2017.2022.
PERFORMANCE GRAPH
The following graph compares the cumulative five-year total return on our common stock with similar returns on the Russell 2000 Index and the Standard & Poor’s (S&P) MidCap 400 Industrials Index. The graph assumes a $100 investment and reinvestment of dividends.
| | | | | Indexed Returns | |
| | Initial Investment | | | Years ended March 31, | |
Company / Index | | March 31, 2011 | | | 2012 | | | 2013 | | | 2014 | | | 2015 | | | 2016 | |
Modine Manufacturing Company | | $ | 100 | | | $ | 54.71 | | | $ | 56.38 | | | $ | 90.77 | | | $ | 83.46 | | | $ | 68.22 | |
Russell 2000 Index | | | 100 | | | | 99.82 | | | | 116.09 | | | | 145.00 | | | | 156.90 | | | | 141.59 | |
S&P MidCap 400 Industrials Index | | | 100 | | | | 102.77 | | | | 127.93 | | | | 158.01 | | | | 168.47 | | | | 164.16 | |
ISSUER PURCHASES OF EQUITY SECURITIES
During fiscal 2016, our Board of Directors approved a $50.0 million share repurchase program, which expires in November 2016. During fiscal 2016, we repurchased $6.9 million of shares under this program. Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.
The following describes ourthe Company’s purchases of common stock during the fourth quarter of fiscal 2016:2021:
| | | | |
Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (a) |
January 1 – January 31, 2021 | _______ | _______ | _______ | $50,000,000 |
| | | | |
February 1 – February 28, 2021 | 8,816 (b) | $14.52 | _______ | $50,000,000 |
| | | | |
March 1 – March 31, 2021 | 7,088 (b) | $15.25 | _______ | $50,000,000 |
| | | | |
Total | 15,904 (b) | $14.85 | _______ | |
Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs |
January 1 – January 31, 2016 | 9,318 (a) | $6.28 | ——— | $47,921,782 |
| | | | |
February 1 – February 29, 2016 | 413,831 | $8.69 | 413,831 | $44,326,469 |
| | | | |
March 1 – March 31, 2016 | 120,000 | $9.86 | 120,000 | $43,143,608 |
| | | | |
Total | 543,149 | $8.90 | 533,831 | |
(a) | (a)Effective November 5, 2020, the Board of Directors approved a two-year, $50.0 million share repurchase program, which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate. |
(b) | Consists of shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards. The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy the person’s tax withholding obligations that arise upon the termination of restrictions. These shares are held as treasury shares. |
ITEM 6. | SELECTED FINANCIAL DATA. |
PERFORMANCE GRAPH
The following data should be read in conjunctiongraph compares the cumulative five-year total return on our common stock with similar returns on the consolidated financial statementsRussell 2000 Index and accompanying notes included elsewhere in this report.the Standard & Poor’s (S&P) MidCap 400 Industrials Index. The graph assumes a $100 investment and reinvestment of dividends.
| | Years ended March 31, |
(in millions, except per share amounts) | | 2016 | | 2015 | | 2014 | | 2013 | | 2012 |
| | | | | | | | | | | | | | | |
Net sales | | $ | 1,352.5 | | | $ | 1,496.4 | | | $ | 1,477.6 | | | $ | 1,376.0 | | | $ | 1,577.2 | |
(Loss) earnings from continuing operations | | | (1.0 | ) | | | 22.2 | | | | 131.9 | | | | (22.8 | ) | | | 38.0 | |
Total assets (a) | | | 920.9 | | | | 930.9 | | | | 1,030.2 | | | | 816.1 | | | | 886.2 | |
Long-term debt - excluding current portion | | | 125.5 | | | | 129.6 | | | | 131.2 | | | | 132.5 | | | | 141.9 | |
Net cash provided by operating activities | | | 72.4 | | | | 63.5 | | | | 104.5 | | | | 48.8 | | | | 45.8 | |
Expenditures for property, plant and equipment | | | 62.8 | | | | 58.3 | | | | 53.1 | | | | 49.8 | | | | 64.4 | |
(Loss) earnings per share from continuing operations - basic: | | | (0.03 | ) | | | 0.45 | | | | 2.75 | | | | (0.52 | ) | | | 0.81 | |
(Loss) earnings per share from continuing operations - diluted: | | | (0.03 | ) | | | 0.44 | | | | 2.72 | | | | (0.52 | ) | | | 0.80 | |
| (a) | We adopted new deferred income tax accounting guidance for our fiscal year ended March 31, 2016. The prior periods presented include the effects of our retrospective application of the guidance to conform to the current-period presentation. As a result, total assets for the years ended March 31, 2012 through 2015 decreased $7.3 million, $2.7 million, $2.1 million, and $0.7 million, respectively. See Note 1 of the Notes to Consolidated Financial Statements for additional information on this new accounting guidance. |
| | | | | Indexed Returns | |
| | Initial Investment | | | Years ended March 31, | |
Company / Index | | March 31, 2016 | | | 2017 | | | 2018 | | | 2019 | | | 2020 | | | 2021 | |
Modine Manufacturing Company | | $ | 100 | | | $ | 110.81 | | | $ | 192.10 | | | $ | 125.98 | | | $ | 29.52 | | | $ | 134.15 | |
Russell 2000 Index | | | 100 | | | | 126.22 | | | | 141.10 | | | | 143.99 | | | | 109.45 | | | | 213.26 | |
S&P MidCap 400 Industrials Index | | | 100 | | | | 124.60 | | | | 145.10 | | | | 146.90 | | | | 119.46 | | | | 224.07 | |
The following factors impact the comparability of the selected financial data presented above:
| · | During fiscal 2016, we recorded $42.1 million of non-cash pension settlement losses. See Note 17 of the Notes to Consolidated Financial Statements for additional information. |
| · | During fiscal 2016, 2015, 2014, and 2013, we incurred $16.6 million, $4.7 million, $16.1 million and $17.0 million, respectively, of restructuring expenses. See Note 6 of the Notes to Consolidated Financial Statements for additional information. |
| · | During fiscal 2016, 2015, 2014, 2013, and 2012, we recorded impairment charges of $9.9 million, $7.8 million, $3.2 million, $25.9 million, and $2.5 million, respectively. See Note 6 and Note 14 of the Notes to Consolidated Financial Statements for additional information. |
| · | During fiscal 2016, we recorded a $9.5 million gain related to an insurance settlement for equipment losses. See Note 2 of the Notes to Consolidated Financial Statements for additional information. |
| · | During fiscal 2016 and 2014, we reversed $3.0 million and $119.2 million, respectively, of deferred tax asset valuation allowances. See Note 8 of the Notes to Consolidated Financial Statements for additional information. |
ITEM 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Overview
Founded in 1916, Modine Manufacturing Company is a worldwideglobal leader in thermal management systems and components, bringing heating and cooling technology and solutions to diversified global markets. We operate on five continents, in 16 countries, and employ approximately 7,10010,900 persons worldwide.
Our primary product groups include i) heating, ventilation and air conditioning; ii) coils, coolers, and coatings; and iii) powertrain cooling and engine cooling. We provide our thermal management technology and solutions to a wide array of commercial, industrial, and building heating, ventilating, air conditioning, and refrigeration markets. In addition, our products are used in light-, medium- and heavy-duty vehicles, commercial heating, ventilation and air conditioning (“HVAC”) equipment, refrigeration systemson- and off-highway and industrial equipment. Our broad product offerings include radiators and radiator cores, condensers, oil coolers, charge air coolers, heat-transfer modules and assemblies, exhaust gas recirculation (“EGR”) coolers, building HVAC equipment, and coils.original-equipment vehicular applications.
Company Strategy
DuringFiscal 2021 presented challenges, including business disruptions and market weakness spurred by the COVID-19 pandemic. Since the onset of the pandemic, our top priorities have been, and continue to be, the health and overall well-being of our employees and delivering quality products and services to our customers. COVID-19 has broadly impacted the global economy and our key end markets. Our businesses were most severely impacted during the first quarter of fiscal 2016,2021. In response, we launchedswiftly implemented cost-saving actions, including, but not limited to, production staffing adjustments, furloughs, shortened work weeks, and temporary salary reductions at all levels of our Strengthen, Diversifyorganization. We withdrew most of these cost-saving actions in the third quarter of fiscal 2021 as production returned to more normal levels as markets recovered.
We met the challenges presented by the COVID-19 pandemic head on and Grow strategic transformationended the year in a position of strength. By the end of fiscal 2021, we had reached separate agreements to sell the liquid- and air-cooled automotive businesses. These sale agreements represent significant progress toward our strategy of exiting the Automotive segment businesses. The sale of the air-cooled automotive business closed in April 2021 and the sale of the liquid-cooled automotive business is subject to the receipt of governmental and third-party approvals. We also completed the transition to our new President and Chief Executive Officer (“CEO”), Neil D. Brinker.
Under new leadership, our teams are energized in implementing an “80/20 strategy” in order to position focus our resources on products and markets with the highest growth and best returns. We are in the early stages of implementing this new strategy and are in process of examining our customer base and product portfolio by end market to identify areas of our business that we should focus more of our resources, and also areas that we should emphasize less in the future. We see opportunities to grow our businesses and are particularly focused on expanding our presence in and increasing sales to the data center and ventilation markets. We expect continued growth in the data center market related to cloud storage, digitalization and the internet of things. We also see opportunities in the ventilation market, as the COVID-19 pandemic has highlighted the need for long-term success. Our main objectives under this platform include:improved indoor air quality. In addition, we are engaged with truck and bus manufacturers on solutions for alternative powertrains, including battery electric.
| · | Strengthen: We will strengthen our business by right-sizing our cost structure by, among other things, implementing a more global, product-based organization. We believe this new organization will allow us to capture synergies among our vehicular, Building HVAC, and coils businesses and improve our speed to market. We aim to optimize our manufacturing footprint and drive cost reductions throughout our business, including reducing costs for materials and services through adjustments and negotiations with our supply base. |
| · | Diversify: We will invest significant financial and human resources in our industrial businesses, which includes our Building HVAC segment and our coils business. Our objective is to create a more balanced exposure to our end markets and decrease our customer concentration, while achieving better market recognition for these businesses. |
| · | Grow: We are focused on aggressively pursuing acquisitions in industrial markets and expanding our market share in high-growth engine and powertrain cooling areas. |
Our Strengthen, Diversify and Grow objectives are harmonized with, and designed to lead us toward, the following established Enduring Goals, which continue to guide our day-to-day actions:
| · | Growth: To grow our business and achieve a 10 percent average annual revenue growth rate; |
| · | Return on Capital: To attain a 15 percent consolidated return on average capital employed (“ROACE”), which helps ensure selectiveness of growth opportunities and avoidance of low-margin or value-destroying business; |
| · | Diversification: To build a more diversified business model in order to be less vulnerable to market cyclicality and commercial pressures; and |
| · | Fastest improving: To become the fastest improving company in our industry by building on our culture of trust and continuous improvement. |
Development of New Products and Technology
Our ability to develop new products and technologies based upon our building block strategymethodology for new and emerging markets is one of our competitive strengths. Under this strategy,methodology, we focus on creating core technologies that can form the basis for multiple products and product lines.lines across multiple business segments. Each of our business segments have a strong heritage of new product development, and our entire global technology organization benefits from mutual strengths. We own twofour global, state-of-the-art technology centers, dedicated to the development and testing of products and technologies. The centers are located in Racine, Wisconsin, Grenada, Mississippi, Pocenia, Italy and Bonlanden, Germany. Our reputation for providing high quality products and technologies has been a Company strength valued by our customers.
We continue to benefit from relationships with customers that recognize the value of having us participate directly in product design, development and validation processes. This has resulted, and we expect it to continue to result, in strong, long-term customer relationships with companies that value partnerships with their suppliers.
Strategic Planning and Corporate Development
We employ both short-term (one(one-to-three year) and longer-term (five-to-seven year) strategic planning processes, which enable us to continually assess our opportunities, competitive threats, and economic market challenges.
We devote significant resources to global strategic planning and development activities to strengthen our competitive position. Our objectives include leveragingWe will continue to pursue organic- and external-growth opportunities, particularly to grow our strong balance sheet position to build a more balanced portfolio of thermal management products and services, reduce exposure toglobal, market cycles withinleading positions in our vehicular business, and decrease customer concentration. To accomplish these objectives,industrial businesses. In particular, we are actively pursuing higher-margin organic- and inorganic-growth opportunities, primarilyfocused on expanding our presence in the building HVACdata center market. We are bringing together the full systems capability and coils markets. We will also continue to focus significant attention on growing strategically important aspectsestablished roots of our vehicular business. During fiscal 2016,BHVAC segment in the data center space with the global manufacturing expertise and customer relationships within CIS. We are also redesigning our organizational structure to reduce complexity and to be better aligned with the markets we formedserve, with general managers who will be both empowered to make decisions and assumed the controlling share of a joint venture, Modine Puxin Thermal Systems (Jiangsu) Co., Ltd., in China. We expect this joint venture will, among other benefits, expedite our introduction of stainless steel heat exchangersheld accountable for commercial vehicle markets in China.results.
Operational and FinancialFinancial Discipline
We operate in a dynamic, global marketplace; therefore, we manage our business with a disciplined focus on increasing productivity and reducing waste. The competitivenessnature of the global marketplace requires us to move toward a greater manufacturing scale in order to create a more competitive cost base. In order to optimize our cost structure and improve efficiency of our operations, we have engaged inexecuted restructuring activities in our Americas, Europe,CIS, HDE, and Building HVACAutomotive segments during recent years. We have also refined our approach to the data center market by aligning the resources and at Corporate.capabilities of our data center businesses to increase our speed to market. In addition, as costs for materials and purchased parts may rise from time to time due to increases in commodity markets,prices, we seek low-cost country sourcing, when appropriate, and enter into contracts with some of our customers that provide for rising costs to be passed through to themcommodity price adjustments, on a lag basis.
We follow a rigorous financial process for investment and returns,are implementing an 80/20 methodology, intended to enable increased profitabilitybetter focus our resources on products and cash flows overmarkets that offer the long term.highest growth and best returns. We place particular emphasis on working capital improvement and prioritizationare using data analytics to examine our businesses by end-market to determine areas of our capital investments.business that we should focus more of our resources, and also areas that we should emphasize less in the future.
Our executive management incentive compensation (annual cash incentive) plan for fiscal 20162021 was based upon two performance goals: growth in consolidated ROACEnet earnings before interest, taxes, depreciation, amortization, and operating income growth.certain other adjustments (“Adjusted EBITDA”); and a cash flow margin metric. These performance goals drive alignment of management and shareholders’ interests in both our asset management decisionsearnings growth and earnings growthcash flow targets. In addition, we provide a long-term incentive compensation plan for officers and certain key employees to attract, retain, and motivate employees who directly impact the long-term performance of our company. The plan is comprised of stock awards, stock options, restricted stock, and performance-based stock or cash awards. The performance-based stock awards for the fiscal 20162021 through 20182023 performance period are based upon three-year average consolidated ROACE anda target three-year average annual revenue growth.growth and a target three-year average consolidated cash flow return on invested capital.
To aid in management’s focus on guiding our long-term strategies, we pursue our Enduring Goals set forth earlier. These long-term goals serve as a constant reminder to the management team when making strategic decisions as stewards of our company.
Segment Information – Strategy, Market Conditions and Trends
Each of our operating segments is managed by a vice president and has separate strategic and financial plans, and financial results, all of which are reviewed by our chief operating decision maker. These plans and results are used by management to evaluate the performance of each segment and to make decisions on the allocation of resources.
Americas (43 percentEffective April 1, 2020, we began managing our automotive business separate from the previously-reported Vehicular Thermal Solutions (“VTS”) segment. The other businesses of fiscal 2016 net sales)
Our Americasthe VTS segment, provides thermal management products toincluding the commercial vehicle, off-highway, and automotive markets in North and South America. Commercial vehicle markets served include Class 3-8 trucks, school and transit buses and other specialty vehicles. Automotive markets served include automobiles, light trucks, and power sports (e.g. motorcycles and all-terrain vehicles). Off-highway markets served include agricultural, construction, mining, and power generation equipment. In addition, the Americas segment provides coils products to the commercial refrigeration, residential heating, commercial heating, and air conditioning markets and also serves Brazil’s automotive and commercial vehicle aftermarkets.
Sales volume in the Americas segment declined during fiscal 2016 compared with the prior year due to softening in certain end markets. Market declines in the North America commercial vehicle and off-highway markets were partially offset by modest improvement inbusinesses, are being managed as the automotive market, which remained relatively strong throughout fiscal 2016. Market declines across Brazil’s OEM markets were accompanied by relatively flat aftermarket sales. Our fiscal 2017 market outlook is mixed. We expect the North America commercial vehicle market to continue to decline, especially for Class 8 trucks. We anticipate all other OEM markets in North America and Brazil to remain relatively flat in fiscal 2017. We anticipate modest growth in Brazil aftermarket sales in fiscal 2017. In general, we expect our markets will be constrained by slow global economic growth in the coming years. We will, however, target higher-growth markets that we expect to benefit from rising efficiency standards, including the U.S. automotive and coils markets, which are influenced by fuel economy and building HDE segment.
Building HVAC efficiency and air quality standards, respectively.
Our Americas segment will continue to focus on growth in the markets where its products and manufacturing footprint create a competitive advantage. Our product strategy includes the use of standard “building blocks” to shorten development times and improve competitiveness. We are focusing on improving our operating leverage through manufacturing improvements and a lower fixed-cost structure. This includes launching new programs efficiently, as well as improving the utilization of our manufacturing footprint. During fiscal 2016, we completed the transfer of production from our McHenry, Illinois manufacturing facility to other facilities within North America. In addition, we announced a plan to close our Washington, Iowa manufacturing facility and are in the process of transferring the facility’s production to other manufacturing facilities within this segment, which we expect to complete in late fiscal 2017. Our cost-reduction efforts, including the McHenry closure and various cost-saving initiatives in Brazil, have allowed us to improve our profitability despite the challenging market environment.
Europe (38Systems (13 percent of fiscal 20162021 net sales)
Our Europe segment provides powertrain and engine cooling systems, as well as vehicular climate control components, to OEM end markets, including the automotive, commercial vehicle, and off-highway markets. These systems include cooling modules, radiators, charge air coolers, oil cooling products, EGR products, retarder and transmission cooling components, and HVAC condensers.
Overall, economic conditions in Europe showed moderate growth during fiscal 2016, as compared with the prior year. Sales to the commercial vehicle market experienced moderate growth, primarily driven by a further Euro 6 ramp-up, as compared with the prior year. The premium automotive market experienced relatively strong growth during fiscal 2016, while the off-highway market remained relatively flat. Sales volume growth, primarily within the automotive and commercial vehicle markets, was more than offset by an unfavorable impact of foreign currency exchange rate changes, primarily due to the strengthening of the U.S. dollar versus the euro. During fiscal 2016, we recorded a $10 million asset impairment charge related to a manufacturing facility in Germany, which was generating pre-tax losses, resulting in management deciding to exit a certain product line in the future.
Our Europe segment is focused on continuous improvements, low-cost country sourcing and manufacturing footprint, and cost containment. We expect continued price-reduction pressure from our customers, along with increased global customer service expectations and competition from competitors operating in low-cost countries. Our objective with our restructuring activities in Europe continues to be improving segment ROACE and strengthening overall competitiveness. As a result of our restructuring activities, we believe our Europe segment is well-positioned for improved long-term financial results, driven by our strong customer reputation for technology, service, and program management.
Asia (6 percent of fiscal 2016 net sales)
Our Asia segment provides powertrain cooling systems and engine products to customers in the commercial vehicle, off-highway, and automotive markets.
During fiscal 2016, Asia segment sales volume decreased slightly, primarily due to lower sales to off-highway customers in China and Korea, partially offset by an increase in automotive sales and new program launches. Our manufacturing facility in Shanghai, China is continuing to ramp up production of aluminum oil coolers, and the production level at our manufacturing facility in Chennai, India has increased. We expect this trend to continue in fiscal 2017. Our technology, performance, quality, and reputation have enabled us to win new engine products business in Asia. Emissions standards in China and India have generally lagged behind those in North America and Europe. As a result, some local on- and off-highway powertrain cooling customers focus on price more than technology. Due to the evolution of emission standards, we expect to benefit from additional powertrain and engine cooling opportunities; however, we expect the Asia markets to remain price-focused in the near term. In January 2016, we assumed the controlling share of a newly-formed joint venture, Modine Puxin Thermal Systems (Jiangsu) Co., Ltd., in China. We expect this joint venture will expedite our introduction of stainless steel heat exchangers for the commercial vehicle market in China and expand opportunities for our EGR coolers in China as well.
Our strategy in this segment is to accelerate sales growth and achieve sustained profitability. Our focus is on securing new business and further diversifying our product offering and customer base, while controlling costs and increasing our asset utilization and manufacturing capabilities. We believe we are well positioned for growth and new programs in the future.
Building HVAC (13 percent of fiscal 2016 net sales)
Our Building HVACBHVAC segment manufactures and distributes a variety of original equipment and aftersales HVAC products, primarily for commercial buildings and related applicationsdata centers in North America, the U.K., mainland Europe, the Middle East, Asia, and Africa. We sell and distribute our heating, ventilation and cooling products through various channels towholesalers, distributors, consulting engineers, contractors and building ownersdata center operators for applications such as warehouses, repair garages, greenhouses, residential garages, schools, data centers, manufacturing facilities,schools, greenhouses, hotels, hospitals, restaurants, stadiums, warehouses, repair garages, residential garages, and retail stores.manufacturing facilities. Our heating products include gas (natural and propane), electric, oil and hydronic unit heaters, low-intensitylow- and high-intensity infrared and duct furnace units. Our ventilation products include large roof-mounted direct- and indirect-fired makeup air units. Our ventilation products includeunits, single-packaged vertical units and unit ventilators used in school room applications, air-handling equipment, and rooftop packaged ventilation units used in a variety of commercial building applications. Our cooling products include precision air conditioning units used primarily for data center cooling applications, air- and water-cooled chillers, and ceiling cassettes, and geothermal heat pump products which are also used in a variety of commercial building applications.
Economic conditions, such as demand for new commercial construction, building renovations, including HVAC replacement, growth in data centers and school renovations, and higher efficiency requirements, are growth drivers for our building HVAC products. InDuring fiscal 2016,2021, sales volume for ourincreased in both the U.K. and North America, ventilationprimarily driven by increased sales of data center products improved with demand. Our North America heating sales volume remained relatively flat, as compared with the prior year. During fiscal 2016, our Airedale business in the U.K. relocated into its new facility, which was rebuilt after a fire destroyed itand heating products in fiscal 2014. During fiscal 2016, unfavorable currency conditions negatively impactedNorth America. These sales at our Airedale U.K. business and resulted in increased competition from other mainland European suppliers.were partially offset by lower sales of ventilation products, largely associated with the negative impacts of COVID-19 during the year, particularly within the hospitality sectors.
We expect growth in each of the HVAC markets we serve during fiscal 2017, although at varied rates.2022. The markets that we serve are heavily impacted by construction activity, building regulations, and owner/occupant comfort requirements.requirements, and demand for digital infrastructure. Growth rates in these markets have strengthened recently,shown increasing strength as the need for digital infrastructure expands and manufacturing, housing, and business investment have increased. We also anticipate modestinvestments increase. In fiscal 2022, we expect sales growth in our BHVAC segment through focused market share gains and the expansion of data center sales in the North America heating market duringAmerican market.
Commercial and Industrial Solutions (29 percent of fiscal 2017. 2021 net sales)
Our BuildingCIS segment provides a broad offering of thermal management products to the HVAC segment has grown through strategic acquisitions in recent years,&R and data center markets, including solutions tailored to indoor, outdoor, and mobile climates, food storage and transport-refrigeration, and industrial processes. CIS’s primary product groups include coils, coolers, and coatings. Our coils products include custom-designed condensers, evaporators, round-tube solutions, as well as steam and water/fluid coils. Our coolers include commercial refrigeration units, which are used across the food supply chain, products for precision climate control for applications such as Barkell,data center cooling, carbon dioxide and ammonia unit coolers, remote condensers, transformer oil coolers, and brine coolers. In addition, we offer proprietary coating solutions for corrosion protection, prolonging the life of heat-transfer equipment.
During fiscal 2021, CIS segment sales volume decreased, primarily due to the impacts of the COVID-19 pandemic on the HVAC&R and industrial cooling markets. Sales were most severely impacted early in our fiscal year and sales volumes have been recovering since. In addition, sales in fiscal 2021 were negatively impacted by lower sales to a manufacturer of custom air handling units locatedsignificant data center customer. During fiscal 2021, we transferred production from our Zhongshan, China manufacturing facility to our Wuxi, China manufacturing facility, consolidating two manufacturing locations into one. While costs incurred for our plant consolidation activities negatively impacted on our fiscal 2021 operating results, we expect to realize operating efficiencies going forward. Despite the challenging market conditions in fiscal 2021, we are proud to have supported numerous customers that produced products used in battling the COVID-pandemic and improving safety, from disinfectant application to vaccine storage.
Looking ahead, we anticipate continued market recovery, with stronger recovery expected in the U.K., which we acquiredsecond half of fiscal 2022. We are poised to generate new sales in late fiscal 2014.Europe, as heat pump technology is improved to address regulatory guidelines. Our CIS team is focused on improving financial results through manufacturing efficiencies, pricing strategies, and vertical integration projects. We will continue to pursue acquisitionssupport our customers with innovative products, such as computer room air handlers, antimicrobial coating lines, and low-VOC topcoats, which have reduced amounts of volatile organic compounds and are less harmful to the environment. In addition, we see growth opportunities with our product offerings that use alternative refrigerants, including carbon dioxide, which are more environmentally friendly. We aim to capitalize on opportunities arising from energy and environmental regulations and post-pandemic shifting consumer buying patterns. We believe we are well-positioned to be the partner of choice for our customers.
Heavy Duty Equipment (37 percent of fiscal 2021 net sales)
Our HDE segment provides powertrain and engine cooling products, including, but not limited to, radiators, charge air coolers, condensers, oil coolers, EGR coolers, fuel coolers, electronics cooling packages, and battery thermal management systems to OEMs in linethe commercial vehicle, off-highway, and automotive and light vehicle markets in North America, South America, Europe, and Asia. In addition, our HDE segment serves Brazil’s commercial vehicle and automotive aftermarkets.
Sales volume in the HDE segment decreased during fiscal 2021, as compared with the prior year, primarily due to the negative impacts of the COVID-19 pandemic. The COVID-19 impacts were most severe in the Americas and Europe during the first half of fiscal 2021 and most negatively impacted sales to commercial vehicle and automotive and light vehicle customers.
Looking ahead to fiscal 2022, we expect that the combination of market recovery, particularly in the Americas and Europe, and new business wins in all regions will result in increased sales in our HDE segment. In addition, we are working with numerous customers on products for alternative powertrains, including battery electric, and expect to launch exciting new products and systems related to electric trucks and buses. We are focused on controlling SG&A and operational expenses to improve the HDE segment’s profitability, while also expanding our capability and capacity in critical areas.
Automotive (21 percent of fiscal 2021 net sales)
Our Automotive segment provides powertrain and engine cooling products, including, but not limited to, radiators, charge air coolers, condensers, oil coolers, and EGR coolers, to OEMs primarily in the automotive and light vehicle markets in North America, Europe, and Asia.
Sales volume in the Automotive segment decreased during fiscal 2021, as compared with the prior year, primarily due to the negative impacts of the COVID-19 pandemic. In particular, sales in Europe and North America decreased significantly compared with the prior year. The decline in those regions were partially offset by increased sales in Asia.
The automotive and light vehicle markets were most severely impacted by the COVID-19 pandemic early in fiscal 2021 and have been recovering since. We expect these markets will continue to recover and exhibit growth objectiveduring fiscal 2022.
During fiscal 2021, we signed definitive agreements to sell our liquid- and air-cooled automotive businesses. The sale of the air-cooled automotive business to Schmid Metall GmbH closed on April 30, 2021 and the sale of the liquid-cooled automotive business to Dana Incorporated is subject to the receipt of governmental and third-party approvals. We are 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 Strengthen, Diversify and Grow strategic transformation.shareholders.
Consolidated Results of Operations
DuringLiquid- and Air-cooled Automotive Businesses
On November 2, 2020, we signed a definitive agreement to sell our liquid-cooled automotive business to Dana Incorporated, subject to the receipt of governmental and third-party approvals and satisfaction of other closing conditions. We are currently working with the buyer through the regulatory approval process. At this time, we are not able to estimate the ultimate impact of the regulatory approval process or the closing date for this transaction.
On February 19, 2021, we signed a definitive agreement to sell our air-cooled automotive business to Schmid Metall GmbH; this transaction closed on April 30, 2021.
We report the financial results of both the liquid- and air-cooled automotive businesses within the Automotive segment. We recorded non-cash impairment charges totaling $165 million during fiscal 2016,2021 related to the long-lived assets within these held for sale businesses. We are in the process of accounting for the sale of the air-cooled automotive business and currently expect to record a loss on sale of approximately $6 million in the first quarter of fiscal 2022. In addition, we announcedcurrently estimate that we will record a loss on sale of approximately $20 million to $30 million when the sale of the liquid-cooled automotive business is completed. It is possible that the losses recorded could differ materially from our new Strengthen, Diversifyestimates. See Note 2 of the Notes to Consolidated Financial Statements for information regarding the accounting impacts of these sales.
We are also evaluating strategic alternatives for the other businesses in the Automotive segment and Grow strategic transformational framework. Guided by this framework,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 commenced initiativesalso 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, favorably impacted our fiscal 2021 financial results.
We withdrew most of the cost-saving actions, including the temporary salary reductions, in the third quarter of fiscal 2021 as production returned to among other things, achieve global procurement savingsmore normal levels as markets recovered. As a result, while we remain focused on controlling expenses, we expect compensation-related expenses, particularly SG&A expenses, will increase in fiscal 2022.
The impacts of the COVID-19 pandemic, which will largely depend on the length and efficiencies, optimizeseverity of the pandemic, could have a material adverse effect on our manufacturing footprint, implement a new global organizational structure,business, results of operations, and reduce personnel costs. We also formed and assumed the controlling sharecash flows.
Fiscal 20162021 Highlights
Fiscal 2021 net sales decreased $143$167 million, or 8 percent, from the prior year, primarily due to lower sales in our CIS, HDE, and Automotive segments, partially offset by higher sales in our BHVAC segment. Foreign currency exchange rate changes favorably impacted sales in fiscal 2021 by $28 million. Cost of sales decreased $153 million, or 9 percent, from last year, primarily due to lower sales volume. Gross profit decreased $14 million and gross margin improved 60 basis points to 16.2 percent. SG&A expenses decreased $39 million, primarily due to lower costs associated with our review of strategic alternatives for our Automotive segment businesses and preparing the liquid- and air-cooled automotive businesses for sale. In addition, SG&A expenses decreased due to cost-reduction initiatives implemented early in the fiscal year in response to the negative impacts of COVID-19. The operating loss of $98 million during fiscal 2021 represents a $136 million decline from the prior-year operating income of $38 million and was primarily due to $167 million of impairment charges recorded primarily for assets of the liquid- and air-cooled automotive businesses, partially offset by lower SG&A expenses.
Fiscal 2020 Highlights
Fiscal 2020 net sales decreased $237 million, or 11 percent, from the prior year, primarily due to lower sales in our HDE, CIS, and Automotive segments, partially offset by higher sales in our BHVAC segment. Foreign currency exchange rate changes negatively impacted sales in fiscal 2020 by $46 million. Cost of sales decreased $179 million, or 10 percent, from the prior year, primarily due to a $110 million unfavorable impact of foreign currency exchange rate changes associated with the strengthening of the U.S. dollar, and lower sales volumevolume. Gross profit decreased $58 million and gross margin declined 90 basis points to off-highway customers, partially offset by higher sales volume to automotive customers. During fiscal 2016, we completed a voluntary lump-sum payout program offered to certain eligible former employees participating in our U.S. pension plans. See Note 17 of the Notes to Consolidated Financial Statements for additional information. As a result of lump-sum payouts during the fiscal year, we recorded $42 million of non-cash pension settlement losses to costs of sales ($9 million) and15.6 percent. SG&A expenses ($33 million). During fiscal 2016, we recorded $17increased $6 million, of restructuring expenses for activities, including Strengthen, Diversify and Grow initiatives, intended to optimize our cost structure and improve the efficiency of our operations. We also recorded a $10 million asset impairment charge related to a manufacturing facility in Germany. During fiscal 2016, our operating loss was $8 million, compared with operating income of $53 million in the prior year. In addition, we recorded a $10 million gain within other income related to an insurance settlement for equipment losses resulting from the Airedale fire in fiscal 2014.
Fiscal 2015 net sales increased $18 million, or 1 percent, from the prior year, primarily due to higher sales volume to building HVAC, commercial vehicle, and automotive customers,costs associated with the review of strategic alternatives for our Automotive segment businesses, partially offset by lower sales volume to off-highway customers and a $43 million unfavorable impact of foreign currency exchange rate changes associated with the strengthening of the U.S. dollar. During fiscal 2015, we recorded $5 million of restructuring expenses and an $8 million goodwill impairment charge in Brazil. Also in fiscal 2015, we sold a wind tunnel, which resulted in a gain of $3 million.lower-compensation related expenses. Operating income of $53during fiscal 2020 decreased $72 million in fiscal 2015 increased $16to $38 million, compared with the prior year.primarily due to lower gross profit and higher SG&A expenses.
The following table presents our consolidated financial results on a comparative basis for the fiscal years ended March 31, 2016, 2015,2021, 2020 and 2014.2019.
| | Years ended March 31, | |
| | 2021 | | | 2020 | | | 2019 | |
(in millions) | | _$’s | | | % of sales | | | _$’s | | | % of sales | | | _$’s | | | % of sales | |
Net sales | | $ | 1,808 | | | | 100.0 | % | | $ | 1,976 | | | | 100.0 | % | | $ | 2,213 | | | | 100.0 | % |
Cost of sales | | | 1,515 | | | | 83.8 | % | | | 1,668 | | | | 84.4 | % | | | 1,847 | | | | 83.5 | % |
Gross profit | | | 293 | | | | 16.2 | % | | | 308 | | | | 15.6 | % | | | 366 | | | | 16.5 | % |
Selling, general and administrative expenses | | | 211 | | | | 11.7 | % | | | 250 | | | | 12.6 | % | | | 244 | | | | 11.0 | % |
Restructuring expenses | | | 13 | | | | 0.7 | % | | | 12 | | | | 0.6 | % | | | 10 | | | | 0.4 | % |
Impairment charges | | | 167 | | | | 9.2 | % | | | 9 | | | | 0.4 | % | | | - | | | | - | |
(Gain) loss on sale of assets | | | - | | | | - | | | | (1 | ) | | | - | | | | 2 | | | | 0.1 | % |
Operating (loss) income | | | (98 | ) | | | -5.4 | % | | | 38 | | | | 1.9 | % | | | 110 | | | | 5.0 | % |
Interest expense | | | (19 | ) | | | -1.1 | % | | | (23 | ) | | | -1.1 | % | | | (25 | ) | | | -1.1 | % |
Other expense - net | | | (2 | ) | | | -0.1 | % | | | (5 | ) | | | -0.2 | % | | | (4 | ) | | | -0.2 | % |
(Loss) earnings before income taxes | | | (119 | ) | | | -6.6 | % | | | 10 | | | | 0.5 | % | | | 81 | | | | 3.7 | % |
(Provision) benefit for income taxes | | | (90 | ) | | | -5.0 | % | | | (12 | ) | | | -0.6 | % | | | 5 | | | | 0.2 | % |
Net (loss) earnings | | $ | (209 | ) | | | -11.6 | % | | $ | (2 | ) | | | -0.1 | % | | $ | 86 | | | | 3.9 | % |
| | Years ended March 31, |
| | 2016 | | 2015 | | 2014 |
(in millions) | | $'s | | | % of sales | | $'s | | | % of sales | | $'s | | | % of sales |
Net sales | | $ | 1,353 | | | | 100.0 | % | | $ | 1,496 | | | | 100.0 | % | | $ | 1,478 | | | | 100.0 | % |
Cost of sales | | | 1,129 | | | | 83.5 | % | | | 1,249 | | | | 83.5 | % | | | 1,240 | | | | 83.9 | % |
Gross profit | | | 224 | | | | 16.5 | % | | | 247 | | | | 16.5 | % | | | 238 | | | | 16.1 | % |
Selling, general and administrative expenses | | | 205 | | | | 15.2 | % | | | 184 | | | | 12.3 | % | | | 182 | | | | 12.3 | % |
Restructuring expenses | | | 17 | | | | 1.2 | % | | | 5 | | | | 0.3 | % | | | 16 | | | | 1.1 | % |
Impairment charges | | | 10 | | | | 0.7 | % | | | 8 | | | | 0.5 | % | | | 3 | | | | 0.2 | % |
Gain on sale of wind tunnel | | | - | | | | - | | | | (3 | ) | | | -0.2 | % | | | - | | | | - | |
Operating (loss) income | | | (8 | ) | | | -0.6 | % | | | 53 | | | | 3.6 | % | | | 37 | | | | 2.5 | % |
Interest expense | | | (11 | ) | | | -0.8 | % | | | (12 | ) | | | -0.8 | % | | | (12 | ) | | | -0.8 | % |
Other income (expense) – net | | | 9 | | | | 0.6 | % | | | - | | | | - | | | | (1 | ) | | | -0.1 | % |
(Loss) earnings from continuing operations before income taxes | | | (10 | ) | | | -0.7 | % | | | 41 | | | | 2.8 | % | | | 24 | | | | 1.6 | % |
Benefit (provision) for income taxes | | | 9 | | | | 0.6 | % | | | (19 | ) | | | -1.3 | % | | | 108 | | | | 7.3 | % |
(Loss) earnings from continuing operations | | $ | (1 | ) | | | -0.1 | % | | $ | 22 | | | | 1.5 | % | | $ | 132 | | | | 8.9 | % |
Year Ended March 31, 20162021 Compared with Year Ended March 31, 2015:2020
Fiscal 20162021 net sales decreased $143of $1,808 million were $167 million, or 108 percent, lower than the prior year, primarily due to lower sales volume in the CIS, HDE, and Automotive segments, partially offset by a $28 million favorable impact of foreign currency exchange rate changes and higher sales volume in the BHVAC segment. Sales in the CIS, HDE and Automotive segments decreased $92 million, $64 million and $47 million, respectively, and were significantly impacted by market-driven volume declines and temporary plant closures early in the fiscal year due to the COVID-19 pandemic. Sales increased $20 million in our BHVAC segment.
Fiscal 2021 cost of sales of $1,515 million decreased $153 million, or 9 percent, primarily due to lower sales volume. Fiscal 2021 cost of sales was negatively impacted by $24 million from foreign currency exchange rate changes. As a percentage of sales, cost of sales decreased 60 basis points to 83.8 percent. The unfavorable impacts of lower sales volume and, to a lesser extent, higher material costs, which negatively impacted cost of sales as a percentage of sales by approximately 50 basis points, were more than offset by benefits from procurement and other cost-reduction initiatives and an $8 million decrease in depreciation expense in the Automotive segment. We ceased depreciating the long-lived assets within the liquid- and air-cooled automotive businesses once they were classified as held for sale during fiscal 2021. In addition, program and equipment transfer costs to prepare the liquid-cooled automotive business for sale decreased approximately $3 million compared with the prior year.
As a result of lower sales and lower cost of sales as a percentage of sales, fiscal 2021 gross profit decreased $14 million and gross margin improved 60 basis points to 16.2 percent.
Fiscal 2021 SG&A expenses decreased $39 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 businesses, which decreased approximately $30 million, and lower compensation-related expenses, which decreased approximately $13 million, largely resulting from cost-saving actions taken in response to COVID-19. These favorable drivers were partially offset by approximately $7 million of CEO transition costs recorded at Corporate and a $3 million unfavorable impact of foreign currency exchange rate changes.
Restructuring expenses totaled $13 million during fiscal 2021 and increased $1 million compared with the prior year, primarily due to higher severance expenses. The fiscal 2021 restructuring expenses primarily consisted of severance expenses related to headcount reductions within the CIS, Automotive and HDE segments.
During fiscal 2021, we recorded impairment charges totaling $167 million within the Automotive segment, an increase of $158 million compared with the prior year. The impairment charges during fiscal 2021 primarily related to writing-down the long-lived assets in the liquid- and air-cooled automotive businesses in connection with their pending sales. The $9 million of impairment charges recorded in fiscal 2020 primarily related to two manufacturing facilities in the Automotive segment.
The operating loss of $98 million during fiscal 2021 represents a $136 million decline from the prior-year operating income of $38 million. The decline was primarily due to higher impairment charges, which increased $158 million, and lower earnings in the CIS segment, which decreased $25 million. These negative drivers were partially offset by lower costs associated with our review of strategic alternatives for the Automotive segment businesses, which decreased $33 million, and higher earnings in our BHVAC segment, which increased $11 million.
The provision for income taxes was $90 million and $12 million in fiscal 2021 and 2020, respectively. The $78 million increase was primarily due to an increase in income tax charges related to valuation allowances, partially offset by income tax benefits totaling $38 million related to the impairment charges recorded during fiscal 2021. In fiscal 2021, we recorded income tax charges totaling $117 million to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions, compared with $7 million of income tax charges for valuation allowances in fiscal 2020. See Note 8 of the Notes to Consolidated Financial Statements for additional information.
Year Ended March 31, 2020 Compared with Year Ended March 31, 2019
Fiscal 2020 net sales of $1,976 million were $237 million, or 11 percent, lower than the prior year, primarily due to lower sales in our AmericasHDE, CIS, and Europe segments. Sales volume increases in our Europe segment were more than offset by a $76 million unfavorable impact of foreign currency exchange rate changes. In total, our fiscal 2016 sales were negatively affected by a $110 million unfavorable impact of foreign currency exchange rate changes, primarily associated with the strengthening of the U.S. dollar.
Gross profit decreased $23 million to $224 million in fiscal 2016, yet gross margin of 16.5 percent was consistent with the prior year. The decrease in gross profit was primarily due to a $14 million unfavorable impact of foreign currency exchange rate changes, $9 million of pension settlement losses, and lower sales volume in the Americas segment, partially offset by lower material costs, improved production efficiencies, and cost-savings initiatives.
Fiscal 2016 SG&A expenses increased $21 million from the prior year. The increase was primarily due to $33 million of pension settlement losses and the absence of $5 million of recoveries from business interruption insurance for the Airedale fire received in the prior year, partially offset by ongoing cost-control initiativesAutomotive segments and a $10 million favorable impact of foreign currency exchange rate changes.
Restructuring expenses increased $12 million in fiscal 2016 compared with the prior year, primarily due to severance expenses in the Europe and Americas segments and equipment transfer costs related to plant consolidation activities in the Americas segment.
In fiscal 2016, we recorded a $10 million impairment charge to write down the carrying value of a manufacturing facility in Germany to fair value. In fiscal 2015, we recorded a goodwill impairment charge of $8 million in Brazil and recognized a gain of $3 million from the sale of a wind tunnel in Germany.
The operating loss of $8 million in fiscal 2016 represents a $61 million decline from $53 million of operating income in the prior year. This decline was primarily due to $42 million of pension settlement losses, lower gross profit, higher restructuring expenses, and a $4 million unfavorable impact of foreign currency exchange rate changes, partially offset by ongoing cost-control initiatives.
Other income during fiscal 2016 includes a $10 million gain related to an insurance settlement for equipment losses resulting from the Airedale fire in fiscal 2014.
Our benefit for income taxes was $9 million in fiscal 2016, compared with a provision for income taxes of $19 million in fiscal 2015. This $28 million change was primarily due to $16 million of income tax benefits related to pension settlement losses in the current year, a decrease in pre-tax operating earnings, and a $3 million income tax benefit related to the reversal of a deferred tax asset valuation allowance in the current year.
Year Ended March 31, 2015 Compared with Year Ended March 31, 2014:
Fiscal 2015 net sales increased $18 million, or 1 percent, from the prior year, primarily due to sales increases in our Building HVAC and Asia segments, partially offset by lower sales in our Americas segment, as economic conditions in Brazil were weak, and in our Europe segment, where sales increases were more than offset by a $35 million unfavorable impact of foreign currency exchange rate changes. In total, our fiscal 2015 sales were negatively affected by a $43 million unfavorable impact of foreign currency exchange rate changes, primarily associated with the strengthening of the U.S. dollar.
Gross profit increased $9 million to $247 million in fiscal 2015 and gross margin increased 40 basis points to 16.5 percent, primarily due to sales volume improvements and lower warranty costs.
Fiscal 2015 SG&A expenses increased $2 million from the prior year, primarily due to increased engineering and development costs and SG&A expenses at our Barkell business, which we acquired in the fourth quarter of fiscal 2014, partially offset by $5 million of recoveries from business interruption insurance during fiscal 2015 related to the Airedale fire.
Restructuring expenses decreased $11 million in fiscal 2015 compared with the prior year, primarily due to lower restructuring costs in our Europe segment, partially offset by higher severance expenses in our Americas segment.
In fiscal 2015, we sold a wind tunnel in Germany that we no longer considered to be a core asset, and recognized a gain of $3 million. In addition, we recorded a goodwill impairment charge of $8 million related to Brazil. In fiscal 2014, we recorded $3 million of impairment charges, primarily related to restructuring actions in our Europe segment.
Operating income of $53 million in fiscal 2015 increased $16 million compared with the prior year. This improvement was primarily due to higher gross profit on increased sales volume, lower restructuring expenses, and the gain on the sale of the wind tunnel, partially offset by higher impairment charges and slightly higher SG&A expenses.
Our provision for income taxes was $19 million in fiscal 2015, compared with a benefit from income taxes of $108 million in fiscal 2014. The provision for taxes in the U.S. totaled $9 million in fiscal 2015, compared with a significant benefit for taxes in fiscal 2014, which resulted primarily from the reversal of U.S. income tax valuation allowances totaling $119 million. The provision for taxes in foreign jurisdictions totaled $10 million and $11 million in fiscal 2015 and 2014, respectively.
Earnings from discontinued operations of $1 million in fiscal 2015 related to a gain associated with the final collection of proceeds from the fiscal 2009 sale of our Electronic Cooling business.
Segment Results of Operations
During fiscal 2016, we combined our North America and South America segments into the Americas segment to streamline operations, gain synergies and improve our cost structure. As a result, we recast the prior-period segment financial information to conform to the current-period presentation. There was no impact to our consolidated financial statements as a result.
Americas
| | Years ended March 31, |
| | 2016 | | 2015 | | 2014 |
(in millions) | | $'s | | | % of sales | | $'s | | | % of sales | | $'s | | | % of sales |
Net sales | | $ | 586 | | | | 100.0 | % | | $ | 667 | | | | 100.0 | % | | $ | 688 | | | | 100.0 | % |
Cost of sales | | | 486 | | | | 82.9 | % | | | 558 | | | | 83.7 | % | | | 574 | | | | 83.4 | % |
Gross profit | | | 100 | | | | 17.1 | % | | | 109 | | | | 16.3 | % | | | 114 | | | | 16.6 | % |
Selling, general and administrative expenses | | | 55 | | | | 9.4 | % | | | 65 | | | | 9.7 | % | | | 62 | | | | 9.0 | % |
Restructuring expenses | | | 9 | | | | 1.5 | % | | | 3 | | | | 0.4 | % | | | 1 | | | | 0.2 | % |
Impairment charges | | | - | | | | - | | | | 8 | | | | 1.2 | % | | | 1 | | | | 0.2 | % |
Operating income | | $ | 36 | | | | 6.2 | % | | $ | 33 | | | | 5.0 | % | | $ | 50 | | | | 7.2 | % |
Americas net sales decreased $81 million, or 12 percent, in fiscal 2016 compared with the prior year. Sales were lower in both North America and Brazil, including a $25 million unfavorable impact of foreign currency exchange rate changes. Sales in North America decreased $43 million, primarily due to lower sales volume to off-highway and commercial vehicle customers, partially offset by higher sales volume to automotive customers. Sales volume to all markets in Brazil also declined during fiscal 2016, as economic conditions in Brazil remained weak. Sales decreased $21 million, or 3 percent, in fiscal 2015 compared with fiscal 2014, primarily due to lower sales in Brazil and a $9$46 million unfavorable impact of foreign currency exchange rate changes, partially offset by higher sales in North America, where higher sales volume to commercial vehicle customers were partially offset by lower sales volume to off-highway customers.
Gross profitour BHVAC segment. Sales decreased $126 million, $84 million, and $44 million in our HDE, CIS, and Automotive segments, respectively. Sales increased $9 million yet gross margin increased 80 basis points to 17.1in our BHVAC segment.
Fiscal 2020 cost of sales of $1,668 million decreased $179 million, or 10 percent, in fiscal 2016. The decrease in gross profit was primarily due to lower sales volume a $3 million unfavorable impact of foreign currency exchange rate changes, and $2 million of environmental charges for investigative work related to a previously-owned manufacturing facility, partially offset by lower material costs, cost savings from the McHenry, Illinois manufacturing facility closure, and improved production efficiencies. Gross profit decreased $5 million and gross margin decreased 30 basis points to 16.3 percent in fiscal 2015 compared with fiscal 2014, primarily due to lower sales volume in Brazil, partially offset by lower warranty costs and sales volume improvements in North America.
Fiscal 2016 SG&A expenses decreased $10 million from the prior year, primarily due to ongoing cost-control initiatives, the absence of a $3 million charge for a legal matter in Brazil in the prior year, and a $3$39 million favorable impact of foreign currency exchange rate changes. Fiscal 2015 SG&A expensesAs a percentage of sales, cost of sales increased $3 million from the prior year, primarily90 basis points to 84.4 percent and was negatively impacted by approximately 80 basis points due to the $3 million charge for the legal matter in fiscal 2015.
higher labor and inflationary costs and, to a lesser extent, by sales mix. These negative impacts were partially offset by favorable material costs, which impacted costs of sales by approximately 30 basis points. The favorable material costs primarily resulted from lower commodity pricing, which more than offset a negative impact from tariffs. In fiscal 2016, we recorded $9 million of restructuring expenses, primarily related to severance expenses associated with a voluntary retirement program in the U.S., and the planned closure of our Washington, Iowa manufacturing facility, which we expect to complete during fiscal 2017, and equipment transfer costs related to plant consolidation activities in North America. In fiscal 2015,addition, we recorded $3 million of costs at Corporate for program and equipment transfers associated with the separation of the liquid-cooled automotive business in preparation for a potential sale.
As a result of lower sales and higher cost of sales as a percentage of sales, fiscal 2020 gross profit decreased $58 million and gross margin declined 90 basis points to 15.6 percent.
Fiscal 2020 SG&A expenses increased $6 million. The increase in SG&A was primarily due to separation and project costs recorded at Corporate associated with our review of strategic alternatives for the Automotive segment businesses, which increased approximately $29 million. This increase was partially offset by lower compensation-related expenses, which decreased approximately $13 million, lower environmental charges related to previously-owned manufacturing facilities in the U.S., which decreased approximately $3 million, and a $4 million favorable impact from foreign currency exchange rate changes.
Restructuring expenses totaled $12 million during fiscal 2020 and increased $2 million compared with the prior year. The fiscal 2020 restructuring expenses primarily consisted of severance expenses related to severance expensestargeted headcount reductions in Brazil, to better align our cost structure with the market conditions in Brazil,HDE and Automotive segments and equipment transfer and plant consolidation costs in the CIS segment.
During fiscal 2020, we recorded impairment charges totaling $9 million, primarily related to the closure of our McHenry, Illinoistwo manufacturing facility, which we completed during fiscal 2016. We also recorded an $8 million goodwill impairment charge during fiscal 2015, primarily due to a declinefacilities in the financial outlook for Brazil.Automotive segment.
Operating income of $36$38 million during fiscal 2020 decreased $72 million compared with the prior year. This decrease was primarily due to an increase of $32 million of separation and project costs associated with our review of strategic alternatives for our automotive businesses and lower earnings in our HDE, CIS, and Automotive segments, which decreased $27 million, $20 million, and $10 million respectively, partially offset by higher earnings in our BHVAC segment, which increased $9 million.
The provision for income taxes was $12 million in fiscal 20162020, compared with a benefit for income taxes of $5 million in fiscal 2019. The $17 million change was primarily due to the absence of income tax benefits totaling $25 million recorded in fiscal 2019 and income tax charges totaling $10 million in fiscal 2020, partially offset by lower operating earnings in fiscal 2020. The $25 million of income tax benefits recorded in fiscal 2019 related to the recognition of tax assets for foreign tax credits and a manufacturing deduction in the U.S. and our accounting for the Tax Act. The $10 million of income tax charges in fiscal 2020 were comprised of net charges totaling $7 million resulting from adjustments of valuation allowances on certain deferred tax assets in the U.S. and in a foreign jurisdiction and $3 million associated with legal entity restructuring in preparation for a potential sale of the liquid-cooled automotive business.
Segment Results of Operations
Effective April 1, 2020, we began managing our global automotive business separate from the other businesses within the previously-reported VTS segment. We have been managing the automotive business as the Automotive segment as we work towards the sale or eventual exit of its underlying automotive business operations. We are managing the other businesses of the VTS segment, including the commercial vehicle and off-highway businesses, as the HDE segment. We began reporting financial results for our new segment structure beginning for fiscal 2021. Segment financial information for fiscal 2020 and 2019 has been recast to conform to the fiscal 2021 presentation. The segment realignment had no impact on the CIS and BHVAC segments.
BHVAC | | | | | | | | | | | | | | | | | | |
| | Years ended March 31, | |
| | 2021 | | | 2020 | | | 2019 | |
(in millions) | | _$’s | | | % of sales | | | _$’s | | | % of sales | | | _$’s | | | % of sales | |
Net sales | | $ | 241 | | | | 100.0 | % | | $ | 221 | | | | 100.0 | % | | $ | 212 | | | | 100.0 | % |
Cost of sales | | | 158 | | | | 65.5 | % | | | 150 | | | | 67.7 | % | | | 149 | | | | 70.1 | % |
Gross profit | | | 83 | | | | 34.5 | % | | | 72 | | | | 32.3 | % | | | 63 | | | | 29.9 | % |
Selling, general and administrative expenses | | | 36 | | | | 14.9 | % | | | 35 | | | | 15.8 | % | | | 35 | | | | 16.4 | % |
Loss on sale of assets | | | - | | | | - | | | | - | | | | - | | | | 2 | | | | 0.8 | % |
Operating income | | $ | 47 | | | | 19.6 | % | | $ | 36 | | | | 16.5 | % | | $ | 27 | | | | 12.6 | % |
Year Ended March 31, 2021 Compared with Year Ended March 31, 2020
BHVAC net sales increased $3$20 million, or 9 percent, in fiscal 2021 compared with the prior year, primarily due to lower SG&A expenseshigher sales in the U.K. and the absence of the goodwill impairment chargeU.S., which increased $14 million and $5 million, respectively. The higher sales in the prior year,U.K. were primarily due to higher sales of data center cooling products. The higher sales in the U.S. were primarily due to higher sales of heating products, partially offset by lower sales of ventilation products.
BHVAC cost of sales increased $8 million, or 5 percent, in fiscal 2021, primarily due to higher sales volume. As a percentage of sales, cost of sales decreased 220 basis points to 65.5 percent and was positively impacted by favorable sales mix and customer pricing.
As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $11 million and gross margin improved 220 basis points to 34.5 percent.
BHVAC SG&A expenses increased $1 million from the prior year. The increase in SG&A expenses was primarily due to higher restructuringcompensation-related expenses, including commission expenses.
Operating income of $33 million in fiscal 2015 decreased $172021 of $47 million increased $11 million, primarily due to higher gross profit.
Year Ended March 31, 2020 Compared with Year Ended March 31, 2019
BHVAC net sales increased $9 million, or 4 percent, in fiscal 2020 compared with the prior year, primarily due to the goodwill impairment charge, lower gross profit, and higher SG&A and restructuring expenses.
Europe
| | Years ended March 31, |
| | 2016 | | 2015 | | 2014 |
(in millions) | | $'s | | | % of sales | | $'s | | | % of sales | | $'s | | | % of sales |
Net sales | | $ | 524 | | | | 100.0 | % | | $ | 578 | | | | 100.0 | % | | $ | 584 | | | | 100.0 | % |
Cost of sales | | | 456 | | | | 87.0 | % | | | 509 | | | | 88.1 | % | | | 513 | | | | 87.9 | % |
Gross profit | | | 68 | | | | 13.0 | % | | | 69 | | | | 11.9 | % | | | 71 | | | | 12.1 | % |
Selling, general and administrative expenses | | | 39 | | | | 7.4 | % | | | 44 | | | | 7.6 | % | | | 44 | | | | 7.6 | % |
Restructuring expenses | | | 6 | | | | 1.2 | % | | | 2 | | | | 0.4 | % | | | 15 | | | | 2.6 | % |
Impairment charges | | | 10 | | | | 1.9 | % | | | - | | | | - | | | | 2 | | | | 0.3 | % |
Gain on sale of wind tunnel | | | - | | | | - | | | | (3 | ) | | | -0.6 | % | | | - | | | | - | |
Operating income | | $ | 13 | | | | 2.5 | % | | $ | 26 | | | | 4.5 | % | | $ | 10 | | | | 1.6 | % |
Europe net sales decreased $54 million, or 9 percent, in fiscal 2016 compared with the prior year, primarily due to a $76 million unfavorable impact of foreign currency exchange rate changes and lower sales volume to off-highway customers, partially offset by increased sales volume to commercial vehicle and automotive customers. Sales decreased $6 million, or 1 percent, in fiscal 2015 compared with fiscal 2014, primarily due to a $35 million unfavorable impact of foreign currency exchange rate changes and lower tooling sales, partially offset by increased sales volume to commercial vehicle and automotive customers.
Gross profit decreased $1 million, yet gross margin increased 110 basis points to 13.0 percent in fiscal 2016. The gross margin increase was primarily due to higher sales volume and lower material costs. In addition, gross profit was negatively impacted by $9 million from foreign currency exchange rate changes. In fiscal 2015, gross margin decreased 20 basis points to 11.9 percent compared with fiscal 2014, primarily due to unfavorable sales mix, production inefficiencies caused by increased volume at certain manufacturing facilities and plant consolidation activities, and a $4 million unfavorable impact of foreign currency exchange rate changes, partially offset by the absence of $4 million of accelerated depreciation recorded in fiscal 2014 for production equipment that is no longer used and lower warranty costs.
Fiscal 2016 SG&A expenses decreased $5 million from the prior year, primarily due to a $6 million favorable impact of foreign currency exchange rate changes. Fiscal 2015 SG&A expenses of $44 million were consistent with the prior year, as higher engineering and development costs were offset by a favorable impact of foreign currency exchange rate changes.
In fiscal 2016, we recorded $6 million of restructuring expenses, primarily related to severance expenses. In addition, we recorded a $10 million asset impairment charge. These restructuring expenses and impairment charge primarily related to a manufacturing facility in Germany, which was generating pre-tax losses, resulting in management deciding to exit a certain product line in the future. In fiscal 2015, we recorded $2U.S., which increased $14 million, of restructuring expenses, primarily due to plant consolidation activities, and we sold a wind tunnel for cash proceeds of $6 million, which resulted in a gain of $3 million. In fiscal 2014, we recorded $15 million of restructuring expenses, primarily related to severance expenses, and $2 million of asset impairment charges.
Operating income of $13 million in fiscal 2016 decreased $13 million compared with the prior year, primarily due to an increase in restructuring expenses and impairment charges and the absence of a $3 million gain on the sale of a wind tunnel in the prior year, partially offset by lower SG&A expenses. Operating incomesales in the U.K., which decreased $5 million. The higher sales in the U.S. were primarily driven by the increased sales of $26 millionventilation and heating products. The lower sales in fiscal 2015 increased $16 million compared with the prior year, primarily due to a reduction in restructuring expenses and impairment charges and the gain from selling the wind tunnel.
| | Years ended March 31, |
| | 2016 | | 2015 | | 2014 |
(in millions) | | $'s | | | % of sales | | $'s | | | % of sales | | $'s | | | % of sales |
Net sales | | $ | 79 | | | | 100.0 | % | | $ | 81 | | | | 100.0 | % | | $ | 72 | | | | 100.0 | % |
Cost of sales | | | 67 | | | | 84.5 | % | | | 69 | | | | 85.8 | % | | | 63 | | | | 87.5 | % |
Gross profit | | | 12 | | | | 15.5 | % | | | 12 | | | | 14.2 | % | | | 9 | | | | 12.5 | % |
Selling, general and administrative expenses | | | 11 | | | | 14.5 | % | | | 12 | | | | 13.9 | % | | | 12 | | | | 17.2 | % |
Operating income (loss) | | $ | 1 | | | | 1.0 | % | | $ | - | | | | 0.3 | % | | $ | (3 | ) | | | -4.7 | % |
Asia net sales decreased $2 million, or 3 percent, in fiscal 2016 compared with the prior year,U.K. were primarily due to lower sales volume to off-highway customers in Chinaof air conditioning and Koreaventilation products and a $4$3 million unfavorable impact of foreign currency exchange rate changes, partially offset by higher data center sales.
BHVAC cost of sales volumeincreased $1 million, or less than 1 percent, in fiscal 2020. As a percentage of sales, cost of sales decreased 240 basis points to automotive customers in China67.7 percent, primarily due to favorable sales mix and increased overallfavorable customer pricing.
As a result of the higher sales in India. Salesand lower cost of sales as a percentage of sales, gross profit increased $9 million and gross margin improved 240 basis points to 32.3 percent.
BHVAC SG&A expenses remained consistent with the prior year yet decreased 60 basis points as a percentage of sales.
During fiscal 2019, we sold our business in South Africa and, as a result, recorded a loss of $2 million. Annual net sales attributable to this disposed business were less than $2 million.
Operating income in fiscal 2020 of $36 million increased $9 million, primarily due to higher gross profit.
CIS | | | | | | | | | | | | | | | | | | |
| | Years ended March 31, | |
| | 2021 | | | 2020 | | | 2019 | |
(in millions) | | _$’s | | | % of sales | | | _$’s | | | % of sales | | | _$’s | | | % of sales | |
Net sales | | $ | 532 | | | | 100.0 | % | | $ | 624 | | | | 100.0 | % | | $ | 708 | | | | 100.0 | % |
Cost of sales | | | 465 | | | | 87.5 | % | | | 531 | | | | 85.1 | % | | | 593 | | | | 83.8 | % |
Gross profit | | | 67 | | | | 12.5 | % | | | 93 | | | | 14.9 | % | | | 115 | | | | 16.2 | % |
Selling, general and administrative expenses | | | 53 | | | | 10.0 | % | | | 57 | | | | 9.2 | % | | | 61 | | | | 8.6 | % |
Restructuring expenses | | | 5 | | | | 1.0 | % | | | 2 | | | | 0.3 | % | | | - | | | | - | |
Impairment charges | | | - | | | | - | | | | 1 | | | | 0.1 | % | | | - | | | | 0.1 | % |
Operating income | | $ | 8 | | | | 1.5 | % | | $ | 33 | | | | 5.3 | % | | $ | 53 | | | | 7.5 | % |
Year Ended March 31, 2021 Compared with Year Ended March 31, 2020
CIS net sales decreased $92 million, or 1315 percent, in fiscal 2015 compared with fiscal 2014, primarily due to automotive program launches in China and increased overall sales in India, partially offset by lower sales volume to off-highway customers.
Gross margin increased 130 basis points to 15.5 percent in fiscal 20162021 compared with the prior year, primarily due to lower sales volume associated with the impacts of the COVID-19 pandemic and lower sales to a significant data center customer, partially offset by a $13 million favorable impact of foreign currency exchange rate changes. Sales to data center cooling and commercial HVAC&R customers decreased $60 million and $43 million, respectively.
CIS cost of sales mix. Grossdecreased $66 million, or 12 percent, primarily due to lower sales volume, partially offset by an $11 million unfavorable impact of foreign currency exchange rate changes. As a percentage of sales, cost of sales increased 240 basis points to 87.5 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 $26 million and gross margin declined 240 basis points to 12.5 percent.
CIS SG&A expenses decreased $4 million compared with the prior year. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $5 million, partially offset by a $1 million unfavorable impact of foreign currency exchange rate changes.
Restructuring expenses during fiscal 2021 increased $3 million, 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 in fiscal 2021 decreased $25 million to $8 million, primarily due to lower gross margin increased 170 basis points to 14.2profit and higher restructuring expenses, partially offset by lower SG&A expenses.
Year Ended March 31, 2020 Compared with Year Ended March 31, 2019
CIS net sales decreased $84 million, or 12 percent, in fiscal 20152020 compared with fiscal 2014, primarily due to higher sales volume.
Fiscal 2016 SG&A expenses decreased $1 million from the prior year, primarily due to cost-control initiatives, partially offset by acquisition-related costs associated withlower sales volume and a joint venture that we formed in fiscal 2016. See Note 3$12 million unfavorable impact of foreign currency exchange rate changes. Sales to commercial HVAC&R and data center cooling customers decreased $43 million and $38 million, respectively.
CIS cost of sales decreased $62 million, or 10 percent, primarily due to lower sales volume and an $11 million favorable foreign currency exchange rate impact. As a percentage of sales, cost of sales increased 130 basis points to 85.1 percent, primarily due to the Notes to Consolidated Financial Statements for additional information on this joint venture. Fiscal 2015 SG&A expenses were consistent withunfavorable impact of lower sales volume and unfavorable sales mix.
As a result of the prior year, yet decreasedlower sales and higher cost of sales as a percentage of sales.sales, gross profit decreased $22 million and gross margin declined 130 basis points to 14.9 percent.
Operating income of $1 million in fiscal 2016 increased $1CIS SG&A expenses decreased $4 million compared with the prior year, primarily due to lower SG&A expenses. Operating incomecompensation-related expenses, which decreased approximately $2 million, and the favorable impact of less than $1cost-control initiatives.
Restructuring expenses during fiscal 2020 increased $2 million, in fiscal 2015 represented a $3 million improvement compared with the operating loss in the prior year, and was primarily due to higher equipment transfer and plant consolidation costs.
During fiscal 2020, we recorded a $1 million asset impairment charge related to a previously-closed manufacturing facility in Austria.
Operating income in fiscal 2020 decreased $20 million to $33 million, primarily due to lower gross profit, on increased sales volume.
partially offset by lower SG&A expenses.
| | Years ended March 31, |
| | 2016 | | 2015 | | 2014 |
(in millions) | | $'s | | | % of sales | | $'s | | | % of sales | | $'s | | | % of sales |
Net sales | | $ | 181 | | | | 100.0 | % | | $ | 186 | | | | 100.0 | % | | $ | 146 | | | | 100.0 | % |
Cost of sales | | | 127 | | | | 70.1 | % | | | 130 | | | | 70.0 | % | | | 103 | | | | 70.4 | % |
Gross profit | | | 54 | | | | 29.9 | % | | | 56 | | | | 30.0 | % | | | 43 | | | | 29.6 | % |
Selling, general and administrative expenses | | | 39 | | | | 21.6 | % | | | 37 | | | | 19.8 | % | | | 34 | | | | 23.2 | % |
Restructuring expenses | | | 1 | | | | 0.6 | % | | | - | | | | - | | | | - | | | | - | |
Operating income | | $ | 14 | | | | 7.7 | % | | $ | 19 | | | | 10.2 | % | | $ | 9 | | | | 6.4 | % |
Building HVAC
HDE | | | | | | | | | | | | | | | | | | |
| | Years ended March 31, | |
| | 2021 | | | 2020 | | | 2019 | |
(in millions) | | _$’s | | | % of sales | | | _$’s | | | % of sales | | | _$’s | | | % of sales | |
Net sales | | $ | 682 | | | | 100.0 | % | | $ | 746 | | | | 100.0 | % | | $ | 872 | | | | 100.0 | % |
Cost of sales | | | 594 | | | | 87.0 | % | | | 649 | | | | 87.0 | % | | | 744 | | | | 85.3 | % |
Gross profit | | | 88 | | | | 13.0 | % | | | 97 | | | | 13.0 | % | | | 128 | | | | 14.7 | % |
Selling, general and administrative expenses | | | 49 | | | | 7.1 | % | | | 56 | | | | 7.4 | % | | | 62 | | | | 7.1 | % |
Restructuring expenses | | | 3 | | | | 0.4 | % | | | 3 | | | | 0.4 | % | | | 1 | | | | 0.1 | % |
Operating income | | $ | 37 | | | | 5.4 | % | | $ | 38 | | | | 5.1 | % | | $ | 65 | | | | 7.5 | % |
Year Ended March 31, 2021 Compared with Year Ended March 31, 2020
HDE net sales decreased $5$64 million, or 39 percent, in fiscal 20162021 compared with the prior 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 off-highway customers increased $20 million and were offset by lower sales to commercial vehicle and automotive and light vehicle customers, which decreased $52 million and $11 million, respectively.
HDE cost of sales decreased $55 million, or 8 percent, primarily due to lower sales volume. As a percentage of sales, cost of sales was consistent at 87.0 percent. Beyond the unfavorable impacts of the lower sales volume, higher material costs impacted cost of sales as a percentage of sales by approximately 100 basis points. The unfavorable materials costs primarily resulted from higher commodity pricing and tariffs on imported materials. These negative impacts were largely 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, gross profit decreased $9 million. Gross margin of 13.0 percent was consistent with the prior year.
HDE SG&A expenses decreased $7 million compared with the prior year. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $6 million, and cost-reduction initiatives, including lower travel expenses.
Restructuring expenses during fiscal 2021 totaled $3 million, consistent with the prior year. Fiscal 2021 restructuring expenses primarily consisted of severance expenses resulting from targeted headcount reductions in North America.
Operating income in fiscal 2021 decreased $1 million to $37 million, primarily due to lower gross profit, partially offset by lower SG&A expenses.
Year Ended March 31, 2020 Compared with Year Ended March 31, 2019
HDE net sales decreased $126 million, or 14 percent, in fiscal 2020 compared with the prior year, primarily due to lower sales volume, a $15 million unfavorable impact of foreign currency exchange rate changes, and, lowerto a lesser extent, unfavorable customer pricing largely resulting from contractually-scheduled price-downs. Sales to off-highway and commercial vehicle customers decreased $57 million and $51 million, respectively. These sales at our businessesdeclines largely resulted from weakness in global vehicular markets and the U.K., as unfavorable currency conditions resulted in increased competition from other mainland European suppliers, partially offset by increased ventilation productplanned wind-down of certain commercial vehicle programs.
HDE cost of sales in North America. Sales increased $40decreased $95 million, or 2713 percent, in fiscal 2015 compared with fiscal 2014, primarily due to a $23 million increase inlower sales at our businesses in the U.K.volume and increased heating product sales in North America, as we experienced a strong heating season in fiscal 2015. The sales increase in the U.K. was primarily due to a $13 million increase in sales at Barkell, which we acquired in the fourth quarter of fiscal 2014, and the continuing recovery from the Airedale fire, which caused a temporary halt in production during the prior fiscal year.
Gross profit decreased $2 million in fiscal 2016 compared with the prior year, primarily due to a $1 million unfavorable impact of foreign currency exchange rate changes. Gross margin decreased 10 basis points to 29.9 percent in fiscal 2016 compared with the prior year. Gross profit increased $13 million and gross margin improved 40 basis points to 30.0 percent in fiscal 2015 compared with fiscal 2014, primarily due to higher sales volume.
Fiscal 2016 SG&A expenses increased $2 million from the prior year, primarily due to the absence of $5 million of recoveries from business interruption insurance for the Airedale fire received in the prior year, partially offset by lower engineering and development costs and a $1 million favorable impact of foreign currency exchange rate changes. Fiscal 2015As a percentage of sales, cost of sales increased 170 basis points to 87.0 percent. Beyond the unfavorable impact of the lower sales volume, higher labor and inflationary costs and unfavorable customer pricing negatively impacted cost of sales as a percentage of sales by approximately 110 basis points and 80 basis points, respectively. These negative impacts were partially offset by improved operating efficiencies and cost savings from procurement initiatives.
As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $31 million and gross margin declined 170 basis points to 13.0 percent.
HDE SG&A expenses increased $3 million from the prior year, primarily due to additional costs from Barkell and increased expenses associated with higher sales levels, partially offset by the recoveries from business interruption insurance for the Airedale fire.
In fiscal 2016, we recorded $1 million of restructuring expenses, primarily related to severance expenses.
Operating income of $14 million in fiscal 2016 decreased $5$6 million compared with the prior year, primarily due to lower compensation-related expenses and environmental charges related to previously-owned manufacturing facilities in the U.S, which each decreased approximately $3 million.
Restructuring expenses during fiscal 2020 increased $2 million, primarily due to higher severance expenses resulting from targeted headcount reductions in the Americas.
Operating income in fiscal 2020 decreased $27 million to $38 million, primarily due to lower gross profit, partially offset by lower SG&A expenses.
AUTOMOTIVE | | | | | | | | | | | | | | | | | | |
| | Years ended March 31, | |
| | 2021 | | | 2020 | | | 2019 | |
(in millions) | | _$’s | | | % of sales | | | _$’s | | | % of sales | | | _$’s | | | % of sales | |
Net sales | | $ | 398 | | | | 100.0 | % | | $ | 445 | | | | 100.0 | % | | $ | 489 | | | | 100.0 | % |
Cost of sales | | | 342 | | | | 85.9 | % | | | 396 | | | | 89.1 | % | | | 430 | | | | 87.9 | % |
Gross profit | | | 56 | | | | 14.1 | % | | | 48 | | | | 10.9 | % | | | 59 | | | | 12.1 | % |
Selling, general and administrative expenses | | | 36 | | | | 9.1 | % | | | 45 | | | | 10.1 | % | | | 51 | | | | 10.5 | % |
Restructuring expenses | | | 4 | | | | 1.0 | % | | | 6 | | | | 1.5 | % | | | 8 | | | | 1.7 | % |
Impairment charges | | | 167 | | | | 41.9 | % | | | 8 | | | | 1.8 | % | | | - | | | | - | |
Gain on sale of assets | | | - | | | | - | | | | (1 | ) | | | -0.2 | % | | | - | | | | - | |
Operating loss | | $ | (151 | ) | | | -37.9 | % | | $ | (10 | ) | | | -2.3 | % | | $ | - | | | | -0.1 | % |
Year Ended March 31, 2021 Compared with Year Ended March 31, 2020
Automotive net sales decreased $47 million, or 11 percent, in fiscal 2021 compared with the prior year, primarily due to lower sales volume largely resulting from the impacts of the COVID-19 pandemic, partially offset by an $18 million favorable impact of foreign currency exchange rate changes. Sales in Europe and North America decreased $39 million and $19 million, respectively. Sales in Asia increased $12 million.
Automotive cost of sales decreased $54 million, or 14 percent, compared with the prior year, primarily due to lower sales volume, partially offset by a $15 million unfavorable impact of foreign currency exchange rate changes. As a percentage of sales, cost of sales decreased 320 basis points to 85.9 percent and was favorably impacted by lower depreciation expenses of approximately $8 million, cost savings from procurement initiatives and improved operating efficiencies, partially offset by the unfavorable impact of lower sales volume. We ceased depreciating the long-lived assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale in November 2020 and February 2021, respectively.
As a result of the lower sales and lower cost of sales as a percentage of sales, gross profit increased $8 million and gross margin improved 320 basis points to 14.1 percent.
Automotive SG&A expenses decreased $9 million compared with the prior year. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $8 million.
Restructuring expenses during fiscal 2021 totaled $4 million, a decrease of $2 million compared with the prior year. The decrease was primarily driven by lower severance expenses in Europe resulting from fewer targeted headcount reductions.
Impairment charges during fiscal 2021 totaled $167 million and primarily related to assets in the liquid- and air-cooled automotive businesses. Upon classifying these businesses as held for sale, we recorded impairment charges to write-down the long-lived assets of these businesses based upon the selling prices in the agreements.
The Automotive operating loss in fiscal 2021 of $151 million, as compared with an operating loss of $10 million in the prior year, was significantly impacted by the large impairment charges, which were partially offset by higher gross profit and higherlower SG&A and restructuring expenses. Operating income
Year Ended March 31, 2020 Compared with Year Ended March 31, 2019
Automotive net sales decreased $44 million, or 9 percent, in fiscal 2020 compared with the prior year, primarily due to lower sales volume, a $16 million unfavorable impact of $19foreign currency exchange rate changes, and, to a lesser extent, unfavorable customer pricing largely resulting from contractually-scheduled price-downs. Sales decreased $48 million in fiscal 2015Europe and increased $10$5 million in Asia. The sales declines in Europe largely resulted from general weakness in vehicular markets.
Automotive cost of sales decreased $34 million, or 8 percent, primarily due to lower sales volume and a $14 million favorable impact of foreign currency exchange rate changes. As a percentage of sales, cost of sales increased 120 basis points to 89.1 percent. Beyond the unfavorable impact of the lower sales volume, unfavorable customer pricing and higher labor and inflationary costs negatively impacted cost of sales as a percentage of sales by approximately 40 basis points and 30 basis points, respectively. Higher depreciation costs, primarily resulting from recent manufacturing capacity expansion in China and Hungary, also negatively impacted cost of sales to a lesser extent. These negative impacts were partially offset by favorable material costs, which impacted cost of sales by approximately 30 basis points, improved operating efficiencies and cost savings from procurement initiatives. The favorable material costs primarily resulted from lower commodity pricing, which more than offset the negative impacts of tariffs.
As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11 million and gross margin declined 120 basis points to 10.9 percent.
Automotive SG&A expenses decreased $6 million compared with the prior year, primarily due to higherlower compensation-related expenses, which decreased approximately $5 million, and a $2 million favorable impact of foreign currency exchange rate changes.
Restructuring expenses during fiscal 2020 decreased $2 million, primarily due to lower severance expenses resulting from fewer targeted headcount reductions in Europe.
During fiscal 2020, we recorded asset impairment charges totaling $8 million, primarily related to manufacturing facilities in Austria and Germany.
During fiscal 2020, we completed the sale of a previously-closed manufacturing facility in Germany and, as a result, recorded a gain of $1 million.
The operating loss in fiscal 2020 of $10 million represents a $10 million decline from the prior year and was primarily due to lower gross profit and higher impairment charges, partially offset by higherlower SG&A and restructuring expenses.
Liquidity and Capital Resources
Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents atas of March 31, 20162021 of $69$38 million, and an available borrowing capacity of $207$238 million under lines ofour revolving credit provided by banks in the United States and abroad.facility. Given our extensive international operations, $49approximately $35 million of our cash and cash equivalents are held by our non-U.S. subsidiaries. Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds wouldmay be subject to U.S. taxforeign withholding taxes if repatriated. We have not encountered,believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and do notlong-term basis.
Our primary contractual obligations include pension obligations, debt and related interest payments, lease obligations, and obligations for capital expenditures. Our pension liabilities totaled $77 million as of March 31, 2021. We expect to encounter, any difficulty meetingcontribute approximately $13 million to our U.S. pension plans during fiscal 2022. We are currently evaluating the liquidity requirementsprovisions within the American Rescue Plan Act of 2021, which include funding relief for single-employer pension plans. We believe this recent legislation could allow for lower contributions to our global operations.pension plans during fiscal 2022.
During fiscal 2016, our Board of Directors approved a $50 million share repurchase program, which expires in November 2016. We repurchased $7 million of shares under this program in fiscal 2016. Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.
Net Cash Provided by Operating Activities
Net cash provided by operating activities in fiscal 20162021 was $72$150 million, an increase of $8$92 million from $64$58 million in the prior year. This increase in operating cash flow was primarily due to favorable net changes in working capital, including lower incentive compensation payments during fiscal 2016 andimpacts from the timing of value-added tax payments.payments to vendors and receipts from customers, as compared with the prior year. The favorable changes in working capital also included lower payments for incentive compensation, employee benefits, and payroll taxes. During fiscal 2021, we deferred payments of U.S. payroll taxes totaling $7 million, as permitted by the Coronavirus Aid, Relief, and Economic Security Act. We resumed payment of these payroll taxes during the fourth quarter of fiscal 2021 and expect to pay the deferred amounts in two equal installments when required in December 2021 and 2022. Also during fiscal 2021, payments for separation and project costs associated with our review of strategic alternatives for the Automotive segment businesses and restructuring activities decreased $31 million and $5 million, respectively, compared with fiscal 2020.
Net cash provided by operating activities in fiscal 20152020 was $64$58 million, a decrease of $41$45 million from $105$103 million in the prior year. This decrease in operating cash flow was primarily due to unfavorablelower operating earnings in the current year and payments for separation and project costs associated with our strategic review of alternatives for the automotive businesses, partially offset by favorable net changes in working capital. The favorable changes in working capital, including higheras compared with the prior year, included lower employee benefit and incentive compensation payments during fiscal 2015 related to fiscal 2014 performance, and the timing of customer-owned tooling reimbursements.payments.
Capital Expenditures
Capital expenditures of $63$33 million during fiscal 2016 increased $52021 decreased $39 million compared with fiscal 2015. In fiscal 2016,2020. Similar to prior years, our capital spending in fiscal 2021 primarily occurred in the AmericasHDE and EuropeAutomotive segments, which totaled $27$14 million and $25$11 million, respectively. Capital projects in fiscal 2016respectively, and included tooling and equipment purchases in conjunction with new and renewal programs with customers.
At March 31, 2016,During fiscal 2021 and in response to the economic impacts of the COVID-19 pandemic, we reduced our capital expenditure commitments totaled $21 million. Significant commitments includedexpenditures and delayed certain projects and the purchase of certain program-related equipment and tooling and equipment expenditures for new and renewal programs with customers in the Americas and Europe segments.
Dividends
our vehicular businesses. We did not pay dividendsare currently planning to increase our capital investments in fiscal 2016, 2015, or 2014. We currently do not intend to pay dividends in2022, as compared with fiscal 2017.2021.
Debt
Our total debt outstanding increased $14decreased $143 million to $163$340 million at March 31, 2016,2021 compared with the prior year, primarily due to borrowings in China and Mexico for capital investments. See Note 16 of the Notes to Consolidated Financial Statements for additional information regarding our debt agreements.repayments during fiscal 2021.
Our debtcredit agreements require us to maintain compliance with various covenants. Under our primary debt agreements in the U.S., we are subject tocovenants, including a leverage ratio covenant whichand an interest expense coverage ratio covenant discussed further below. Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales. In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.
The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a certain portion of our cash balance, both as defined by the credit agreement,agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”). We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.
Our As of March 31, 2021, our leverage ratio for the four fiscal quarters ended March 31, 2016 was 1.2, which was below the maximum permitted ratio of 3.25. Ourand interest expense coverage ratio for the four fiscal quarters ended March 31, 2016 was 10.5, which exceeded the minimum requirement of 3.0.were 1.9 and 9.3, respectively. We wereexpect to remain in compliance with our debt covenants as of March 31, 2016 and expect to remain in compliance during fiscal 20172022 and beyond. In
See Note 17 of the event of an acquisition,Notes to Consolidated Financial Statements for additional information regarding our leverage ratio may be temporarily raised for several quarters, per the terms of our debtcredit agreements.
Off-Balance Sheet Arrangements
None.
Contractual Obligations
| | March 31, 2016 | |
(in millions) | | Total | | | Less than 1 year | | | 1 - 3 years | | | 4 - 5 years | | | More than 5 years | |
| | | | | | | | | | | | | | | |
Long-term debt | | $ | 125.4 | | | $ | 8.0 | | | $ | 32.2 | | | $ | 85.2 | | | $ | - | |
Interest associated with long-term debt | | | 30.3 | | | | 8.5 | | | | 14.1 | | | | 7.7 | | | | - | |
Capital lease obligations | | | 8.6 | | | | 0.5 | | | | 0.8 | | | | 0.8 | | | | 6.5 | |
Operating lease obligations | | | 53.5 | | | | 8.1 | | | | 10.4 | | | | 8.7 | | | | 26.3 | |
Capital expenditure commitments | | | 20.5 | | | | 20.0 | | | | 0.5 | | | | - | | | | - | |
Other long-term obligations | | | 3.6 | | | | 1.7 | | | | 1.2 | | | | 0.7 | | | | - | |
Total contractual obligations | | $ | 241.9 | | | $ | 46.8 | | | $ | 59.2 | | | $ | 103.1 | | | $ | 32.8 | |
Our liabilities for pensions, postretirement benefits, and uncertain tax positions totaled $129 million as of March 31, 2016. We are unable to determine the ultimate timing of payments for these liabilities; therefore, we have excluded these amounts from the contractual obligations table above. We expect to contribute $8 million to our U.S. pension plans during fiscal 2017.
Critical Accounting Policies
The following critical accounting policies reflect the more significant judgments and estimates used in preparing our consolidated financial statements. Application of these policies results in accounting estimates that have the greatest potential for a significant impact on our financial statements. The following discussion of these judgments and estimates is intended to supplement the significant accounting policies presented in Note 1 of the Notes to Consolidated Financial Statements. In addition, recently issued accounting pronouncements that either have or could significantly impact our financial statementsstatement are includeddisclosed in Note 1 of the Notes to Consolidated Financial Statements.
Revenue Recognition
We recognize revenue including agreed-upon commodity prices, when the risksbased upon consideration specified in a contract and rewards of ownership are transferredas we satisfy performance obligations by transferring control over our products to our customers, which generally occursmay be at a point in time or over time. The majority of our revenue is recognized at a point in time, based upon shipment. Revenue is recorded netshipment terms. A limited number of applicable provisionsour customer contracts provide an enforceable right to payment for sales rebates, volume incentives,performance completed to date. For these contracts, we recognize revenue over time based upon our estimated progress towards the satisfaction of the contract’s performance obligations. We record an allowance for credit losses and returns and allowances. Atwe accrue for estimated warranty costs at the time of revenue recognition, we also record estimates for bad debt expense and warranty expense.sale. We base these estimates onupon historical experience, current business trends and current economic conditions. We recognize price increases that are agreed upon in advance as revenue whenconditions, and risks specific to the products are shipped to our customers.
underlying accounts receivable or warranty claims.
Impairment of Long-Lived Assets
We perform impairment evaluations of long-lived assets, including property, plant and equipment and intangible assets, and equity investments, whenever business conditions or events indicate that those assets may be impaired. We consider factors such as operating losses, declining financial outlooks and market conditions when evaluating the necessity for an impairment analysis. When the net asset values exceed undiscounted cash flows expected to be generated by the assets, or the decline in value is considered to be “other than temporary,” we write down the assets to fair value and record an impairment charge to current operations. We estimate fair value in various ways depending on the nature of the assets under review.underlying assets. Fair value is generally based onupon appraised value, estimated salvage value, or selling prices under negotiation, as applicable.
The most significant long-lived assets we evaluated for impairment indicators were property, plant and equipment and intangible assets, which totaled $339$270 million and $101 million, respectively, at March 31, 2016.2021. Within property, plant and equipment, the most significant assets evaluated are buildings and improvements and machinery and equipment. Our most significant intangible assets evaluated are customer relationships, trade names, and acquired technology, the majority of which are related to our CIS segment. We evaluate impairment at the lowest level of separately identifiable cash flows, which is generally at the manufacturing plant level. We monitor manufacturing plant financial performance to determine whether indicators exist that would require an impairment evaluation for the facility. This includes significant adverse changes in plant profitability metrics; substantial changes in the mix of customer products manufactured in the plant; changes in manufacturing strategy; and the shifting of programs to other facilities under a manufacturing realignment strategy. When such indicators are present, we perform an impairment evaluation.
During fiscal 2016,2021 and upon classifying the liquid- and air-cooled automotive businesses within the Automotive segment as held for sale, we recordedevaluated the disposal groups for impairment. Based upon the selling prices of the businesses and anticipated costs to sell, we estimated implied losses in excess of the respective carrying value of each disposal group’s long-lived assets. As a $10 million impairment charge relatedresult, we wrote down the carrying value of the disposal groups’ long-lived assets, which consist entirely of property, plant and equipment and right-of-use lease assets, to a manufacturing facility in Germany.zero. See Note 62 of the Notes to the Consolidated Financial Statements for additional information.information regarding the $167 million of impairment charges that we recorded during fiscal 2021.
Impairment of Goodwill
We perform goodwill impairment tests annually, as of March 31, unless business events or other conditions exist that require a more frequent evaluation. At March 31, 2016, our goodwill totaled $16 million, primarily related to our Building HVAC segment. We consider factors such as operating losses, declining financial and market outlooks, and market capitalization when evaluating the necessity for an interim impairment analysis. Goodwill is testedWe test goodwill for impairment at a reporting unit level,level. Reporting units resulting from recent acquisitions generally represent the highest risk of impairment, which we have determined to be attypically decreases as the businesses are integrated into the Company and positioned for future operating segment level. Our first step in thisand financial performance. We test is to comparegoodwill for impairment by comparing the fair value of theeach reporting unit towith its carrying value. We determine the fair value of a reporting unit based upon the present value of estimated future cash flows. If the fair value of thea reporting unit exceeds the carrying value of the reporting unit’s net assets, goodwill of that reporting unit is not impaired and further testing is not required. Ifimpaired. However, if the carrying value of the reporting unit’s net assets exceeds theits fair value, ofwe would conclude goodwill is impaired and would record an impairment charge equal to the unit, then we perform the second step of the impairment test to determine the implied fair value ofamount that the reporting unit’s goodwill and any impairment charge. In estimating the implied fair value of goodwill for a reporting unit, we assign the fair value to the assets and liabilities associated with the reporting unit as if the reporting unit had been acquired in a business combination. Any excess of the carrying value of the reporting unit goodwill overexceeds its implied fair value is recorded as an impairment charge. value.
Determining the fair value of a reporting unit involves judgment and the use of significant estimates and assumptions, which include assumptions regarding the revenue growth rates and operating profit margins used to calculate estimated future cash flows, the risk-adjusted discount rate,rates, business trends and market conditions. We determine the expected future revenue growth rates and operating profit margins after consideration of our historical revenue growth rates and earnings levels, our assessment of future market potential and our expectations of future business performance. The discount raterates used in determining discounted cash flows is a rateare rates corresponding to our cost of capital, adjusted for country-specific risks where appropriate. While we believe the assumptions used in our goodwill impairment tests are appropriate and result in a reasonable estimate of the fair value of each reporting unit, future events or circumstances could have a potential negative effect on the estimated fair value of our reporting units. These events or circumstances include lower than forecasted revenues, market trends that fall below our current expectations, actions of key customers, increases in discount rates, and the continued economic uncertainty and impacts associated with the COVID-19 pandemic. We cannot predict the occurrence of certain events or changes in circumstances that might adversely affect the carrying value of goodwill.
At March 31, 2021, our goodwill totaled $171 million related to our CIS and BHVAC segments. Each of these segments is comprised of two reporting units. We conducted our annual assessment for goodwill impairment during the fourth quartertests as of fiscal 2016March 31, 2021 by applying a fair value-based test and determined the fair value of each of our reporting units substantially exceeded theirthe respective book values.value.
Acquisitions
From time to time, we make strategic acquisitions that have a material impact on our consolidated results of operations or financial position. We allocate the purchase price of acquired businesses to the identifiable tangible and intangible assets acquired and liabilities assumed in the transaction based upon their estimated fair values as of the acquisition date. We determine the estimated fair values using information available to us and engage third-party valuation specialists when necessary. The estimates we use to determine the fair value of long-lived assets, such as intangible assets, can be complex and require significant judgments. While we use our best estimates and assumptions, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statement of operations. We also estimate the useful lives of intangible assets to determine the amount of amortization expense to record in future periods. We periodically review the estimated useful lives assigned to our intangible assets to determine whether such estimated useful lives continue to be appropriate.
Warranty Costs
We estimate costs related to product warranties and accrue for such costs at the time of the sale, within cost of sales. We estimate warranty costs based upon the best information available, which includes statistical and analytical analysis of both historical and current claim data. We monitor and adjust our warranty accruals, which totaled $8$5 million at March 31, 2016,2021, if it is probable that expected claims will differ from previous estimates.
Pension Obligations
Our calculation of the expense and liabilities of our pension plans is dependent upon various assumptions. At March 31, 2016,2021, our pension liabilities totaled $120$77 million. The most significant assumptions include the discount rate, long-term expected return on plan assets, and mortality rate tables.rates. We base our selection of assumptions on historical trends and economic and market conditions at the time of valuation. In accordance with U.S. GAAP, actual results that differ from these assumptions are accumulated and amortized over future periods. These differences impact future pension expenses. Currently, participants in our domestic pension plans are not accruing benefits based onupon their current service as the plans do not include increases in annual earnings or for future service in calculating the average annual earnings and years of credited service under the pension plan formula.
For the following discussion regarding sensitivity of assumptions, all amounts presented are in reference to our domestic pension plans, since our domestic plans comprise all of our benefitpension plan assets and the large majority of our pension plan expense.
To determine the expected rate of return on pension plan assets, we consider such factors as (a) the actual return earned on plan assets, (b) historical rates of return on the various asset classes in the plan portfolio, (c) projections of returns on those asset classes, (d) the amount of active management of the assets, (e) capital market conditions and economic forecasts, and (f) administrative expenses paid with the plan assets. The long-term rate of return utilized in both fiscal 20162021 and 20152020 was 8.07.5 percent. For fiscal 2017,2022, we have also assumed a rate of 8.07.5 percent. The impactA change of a 25 basis point decreasepoints in the expected rate of return on assets would result in an increase ofimpact our fiscal 2022 pension expense by $0.4 million in fiscal 2017 pension expense.million.
The discount rate reflects rates available on long-term, high-quality fixed-income corporate bonds on the measurement date of March 31. For fiscal 2016,2021 and 2020, for purposes of determining pension expense, we used a discount rate of 4.1 percent, compared with3.4 and 4.0 percent, in fiscal 2015.respectively. We determined these rates based upon a yield curve that was created following an analysis of the projected cash flows from the affectedour plans. See Note 1718 of the Notes to Consolidated Financial Statements for additional information. A change in the assumed discount rate of 25 basis points would impact our fiscal 20172022 pension expense by less than $0.1$1 million.
Income Taxes
We operate in numerous taxing jurisdictions andjurisdictions; therefore, we are therefore subject to regular examinations by federal, state and non-U.S. taxing authorities. Due to the application of complex and sometimes ambiguous tax laws and rulings in the jurisdictions in which we do business, there is an inherent level of uncertainty within our worldwide tax provisions. Despite our belief that our tax return positions are consistent with applicable tax laws, it is possible that taxing authorities could challenge certain positions.
Our deferred tax assets and liabilities reflect temporary differences between the amount of assets and liabilities for financial and tax reporting purposes. We adjust these amounts to reflect changes in tax rates expected to be in effect when the temporary differences reverse. We record a valuation allowance if we determine it is more likely than not that the net deferred tax assets in certain jurisdictionsa particular jurisdiction will not be realized. This determination, involves significant judgment. In performing this assessmentwhich is made on a jurisdiction-by-jurisdiction basis, we consider historicalinvolves judgment and projected financial results along with other pertinent information.
the use of significant estimates and assumptions, including expectations of future taxable income and tax planning strategies. We have not recorded a provision for U.S. income taxes on undistributed earnings from our non-U.S. subsidiariesbelieve the assumptions that we have determined to be permanently reinvestedused are appropriate and result in our foreign operations. If management’s intentionsa reasonable determination regarding the future realizability of deferred tax assets. However, future events or U.S. tax lawcircumstances, such as lower-than-expected taxable income or unfavorable changes in the future, therefinancial outlook of our operations in certain jurisdictions, could be a significant negative impact on our provision for income taxes.cause us to record additional valuation allowances.
See Note 8 of the Notes to Consolidated Financial Statements for additional information regarding income taxes.
Other Loss Reserves
We maintain liabilities and reserves for a number of other loss exposures, such as environmental remediation costs, self-insurance reserves, uncollectible accounts receivable, regulatoryreserves, estimated credit losses associated with trade receivables, regulatory compliance matters, and litigation. Establishing loss reserves for these exposures requires the use of estimates and judgment to determine the risk exposure and ultimate potential liability. We estimate these reserve requirements by using consistent and suitable methodologies for the particular type of loss reserve being calculated. See Note 1920 of the Notes to Consolidated Financial Statements for additional information regarding contingencies and litigation.
Forward-Looking Statements
This report, including, but not limited to, the discussion under Item 7. 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 this report.report and identified in our other public filings with the U.S. Securities and Exchange Commission. Other risks and uncertainties include, but are not limited to, the following:
Market Risks:
| · | 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, inflation, changes in interest rates, recession and recovery therefrom, restrictions associated with importing and exporting and foreign ownership, and, in particular, the continuing recovery and/or instability of certain markets in which we operate in China and North America, and the continued deterioration in and weak forecasts for the Brazilian economy; |
The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers, customers, and employees;
| · | The impact of potential increases in commodity prices, including our ability to successfully manage our exposure and/or pass increasing prices of aluminum, copper, steel and stainless steel (nickel) on to customers, as well as the inherent lag in timing of such pass-through arrangements; and |
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 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 increasing price-down focus of our original equipment manufacturer customers in light of economic and market-specific challenges, and the potential impact on us from any deterioration in the stability or performance of any of our major customers; |
| · | 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 pressures from customers, particularly in the face of macro-economic instability; |
| · | Our ability to effectively and efficiently realize expected commercial and operational efficiencies and associated cost savings and other benefits associated with our Strengthen, Diversify and Grow transformational strategy; |
| · | Unanticipated product or manufacturing difficulties or inefficiencies, including unanticipated program launch and product transfer challenges and warranty claims; |
| · | Our ability to obtain and retain profitable business in our Asia segment, and, in particular, in China; |
| · | Unanticipated delays or modifications initiated by major customers with respect to product launches, product applications or requirements; |
| · | Unanticipated problems with suppliers meeting our time, quantity, quality and price demands, and the overall health of our suppliers, particularly in light of some continuing economic challenges in areas of the world in which we and our suppliers operate; |
| · | Our ability to effectivelyThe impact of potential price increases associated with raw materials, including aluminum, copper, steel and stainless steel (nickel), and other purchased component inventory including, but not limited to, increases in the underlying material cost based upon the London Metal Exchange and related premiums 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 efficiently complete restructuring activities in our Europe segment and realize expected cost reductions and increased competitiveness and profitability as a result; |
| · | Our ability to complete the transition of our Washington, Iowa production to other facilities efficiently and effectively; |
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.
| · | Costs and other effects of the remediation of environmental contamination; |
Operational Risks:
| · | 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; |
The overall health and continually increasing price-down focus of our vehicular customers in light of economic and market-specific factors, and the potential impact on us from any deterioration in the stability or performance of any of our major customers;
| · | Work stoppages or interference at our facilities or those of our major customers and/or suppliers; and |
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;
| · | Costs and other effects of unanticipated litigation or claims, and the constant pressures associated with healthcare and insurance costs. |
Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offset or otherwise address increasing pricing pressures from competitors and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;
The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims and delays or inefficiencies resulting from restrictions imposed in response to the COVID-19 pandemic;
The impact of any delays or modifications initiated by major customers with respect to 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 identify and execute appropriate opportunities to enable us to achieve our Strengthen, Diversify and Grow transformational strategy in order to position us for long-term success. |
Our ability to successfully complete the pending sale of our liquid-cooled automotive business, including the receipt of governmental and third-party approvals and the risk that the sale will not close because of a failure to satisfy one or more of the closing conditions (including governmental and third-party approvals) on a timely basis or at all, 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 BHVAC and CIS businesses, while maintaining appropriate focus on the market opportunities presented by our vehicular 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 particularly those in our Asia business segment,for Modine’s current operations and meet our long-term commitments in the event of any unexpected disruption in or tightening of the credit markets or extended recessionary conditions in the global economy; |
The impact of potential increases in interest rates, particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations, and of the continued uncertainty around the utilization of LIBOR or alternative reference rates;
| · | The impact of foreign currency exchange rate fluctuations, particularly the value of the euro, Brazilian real, British pound, and Indian rupee relative to the U.S. dollar; and |
The impact of changes in federal, state or local taxes that could have the effect of increasing our income tax expense;
| · | Our ability to realize the benefits of tax assets in various jurisdictions in which we operate. |
In additionOur ability to comply with the risks set forth above, we are subject to other risks and uncertainties as identifiedfinancial covenants in our public filings withcredit 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 U.S. Securities and Exchange Commission. Webenefits 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 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
In the normal course of business, we are subject to market exposure from changes in foreign currency exchange rates, interest rates, commodity prices, credit risk and economic conditions.other market changes.
Foreign Currency Risk
We are subject to the risk of changes in foreign currency exchange rates due to our operations in foreign countries. We have manufacturing facilities in Brazil, China, India, Mexico, South Africa, and throughout Europe. We also have joint ventures in China Japan and South Korea. We sell and distribute products throughout the world and also purchase raw materials from suppliers in foreign countries. As a result, our financial results are affected by changes in foreign currency exchange rates and economic conditions in the foreign markets in which we do business. WeWhenever possible, we attempt to mitigate foreign currency risks on transactions with customers and suppliers in foreign countries by entering into contracts that are denominated in the functional currency of the subsidiaryentity engaging in the transaction. OurIn addition, for certain transactions that are denominated in a currency other than the engaging entity’s functional currency, we may enter into foreign currency derivative contracts to further manage our foreign currency risk. In fiscal 2021, we recorded a net loss of less than $1 million within our statement of operations related to foreign currency derivative contracts. In addition, our consolidated financial results are principally exposed toimpacted by the translation of revenue and expenses in foreign currencies into U.S. dollars. These translation impacts are primarily affected by changes in exchange rates between the U.S. dollar and European currencies, primarily the euro, and changes between the U.S. dollar and the Brazilian real, and between the euro and the British pound.real. In fiscal 2016, 2015, and 2014,2021, more than 50 percent of our sales were generated in countries outside the U.S. A change in foreign currency exchange rates will positively or negatively affect our sales; however, this impact will be offset, usually to a large degree, with a corresponding effect on our cost of sales and other expenses. In fiscal 2016,2021, changes in foreign currencies negativelycurrency exchange rates favorably impacted our sales by $110$28 million; however, the impact on our operating income was only $4$2 million. Foreign currency exchange rate risk can be estimated by measuring the impact of a near-term adverse movement of 10 percent in foreign currency exchange rates. If these rates were 10 percent higher or lower during fiscal 2016,2021, there would not have been a material impact on our fiscal 20162021 earnings.
We maintain from time to time, foreign-denominated, long-termforeign currency-denominated debt obligations and long-term intercompany loans that are subject to foreign currency exchange risk. As of March 31, 2016, we did not have any long-termWe seek to mitigate this risk through maintaining offsetting positions between external and intercompany loans for which changes in foreign currency exchange rates would impact our net earnings. Fromloans; however, from time to time, we also enter into foreign currency rate derivative contracts to manage the foreigncurrency exchange rate exposure on these types of loans.exposure. These derivative instruments are typically not treatedaccounted for as hedges, and accordingly, gains or losses on the derivatives are recorded in other income and expense in the consolidated statements of operations and act totypically offset anythe foreign currency movementchanges on the outstanding loans receivable or payable.loans.
Interest Rate Risk
We actively seek to reduce the potential volatility of earnings that could arise from changes in interest rates. We generally utilize a mixture of debt maturities and both fixed-rate and floating-ratevariable-rate debt to manage exposure to changes in interest rates. Our domesticInterest on both our term loans and borrowings under our primary multi-currency revolving credit facility is based onupon a variable interest rate, of London Interbank Offered Rate (“LIBOR”)primarily either LIBOR or EURIBOR, plus 125137.5 to 225250 basis points, depending on our leverage ratio. WeAs a result, we are subject to risk of fluctuations in LIBOR and EURIBOR and changes in our leverage ratio, which would affect the variable interest rate on our term loans and revolving credit facility and could create variability in interest expense. There were noAs of March 31, 2021, our outstanding borrowings outstanding underon variable-rate term loans and the revolving credit facility as of March 31, 2016.totaled $179 million and $5 million, respectively. Based onupon our outstanding debt with variable interest rates at March 31, 2016,2021, a 100 basis100-basis point increase in interest rates would increase our annual interest expense in fiscal 20172022 by less than $1approximately $2 million.
Commodity Price Riskand Supply Risks
We are dependent upon the supply of raw materials and supplies in theour production processprocesses and, from time to time, enter into firm purchase commitments for aluminum, copper, nickel, and natural gas. We maintain agreements with certain customers to pass through specified raw material price fluctuations in orderseek to mitigate commodity price risk. The majority of these agreements containrisk by adjusting product pricing in response to any applicable price increases. In addition, we maintain contract provisions with certain vehicular customers that provide for prospective price adjustments based upon changes in which the pass-through of theraw material prices. These prospective price fluctuations canadjustments generally lag behind the actual raw material price fluctuations by three months or longer, and typically the arrangementscontract provisions are limited to the underlying material cost based upon the London Metal Exchange.
Credit Risk
Credit risk represents the possibility of loss from a customer failing to make payment according to contract terms. Our principal credit risk consists of outstanding trade accounts receivable. At March 31, 2016, 45 percent of our trade accounts receivable balance was concentrated with our top ten customers. These customers operate primarily in the automotive, commercial vehicle,Exchange and off-highway markets and are influenced by similar market and general economic factors. In the past, credit losses from our customers have not been significant.
We manage credit risk through a focus on the following:
| · | Cash and investments – We review cash deposits and short-term investments to ensure banks have acceptable credit ratings, and short-term investments are maintained in secured or guaranteed instruments. We consider our holdings in cash and investments to be stable and secure at March 31, 2016; |
| · | Trade accounts receivable – Prior to granting credit, we evaluate each customer, taking into consideration the customer's financial condition, payment experience and credit information. After credit is granted, we actively monitor the customer's financial condition and applicable business news; |
| · | Pension assets – We have retained outside advisors to assist in the management of the assets in our pension plans. In making investment decisions, we utilize an established risk management protocol that focuses on protection of the plan assets against downside risk. We ensure that investments within these plans provide appropriate diversification, the investments are monitored by investment teams, and portfolio managers adhere to the established investment policies. We believe the plan assets are subject to appropriate investment policies and controls; and |
| · | Insurance – We monitor our insurance providers to ensure they have acceptable financial ratings. We have not identified any concerns in this regard based upon our reviews. |
Economic Risk
Economic risk represents the possibility of loss resulting from economic instability in certain areas of the world or downturns in markets in which we operate. We sell a broad range of products that provide thermal solutions to customers operating primarily in the commercial vehicle, automotive, off-highway, and building HVAC markets. We operate in diversified markets as a strategy for offsetting the risk associated with a downturn in any of the markets we serve. However, risk associated with market downturns,exclude additional cost elements, such as the global downturn experienced in fiscal 2009related premiums and fiscal 2010, is still present.fabrication.
We monitor economic conditions in the U.S., inIn an effort to manage and reduce our foreign markets and elsewhere.costs, we have been consolidating our supply base. As a result, we expand our global presence, we also encounter risks imposed by potential trade restrictions, including tariffs, embargoes and the like. We continue to pursue non-speculative opportunities to mitigate these economic risks, and capitalize, when possible, on changing market conditions.
We pursue new market opportunities after careful consideration of the potential associated risks and benefits. Successes in new markets are dependent upon our ability to commercialize our investments. Current exampleslimited sources of new and emerging marketssupply for us include those related to waste heat recovery, coils, andcertain components used in the Chinese and Indian markets. Our investment in these areas is subject to the risks associated with business integration, technological success, customer and market acceptance, and our ability to meet the demandsmanufacture of our customers as these markets grow.
We anticipate that recovery within some of our geographic and end markets, and particularly growth in China may put production pressure on certain suppliers of our raw materials. In particular, there are a limited number of suppliers ofproducts, including aluminum, copper, steel and stainless steel material.(nickel). We are exposed to the risk of suppliers of certain raw materials not being able or willing to meet strong customer demand (including the potential effects of trade laws and tariffs), as they may not increase their output capacity as quickly as customers increase their orders, and of increased prices being charged by raw material suppliers.
In addition, we purchase parts from suppliers that use our tooling to create the parts. In most instances, and for financial reasons, we do not have duplicate tooling for the manufacture of the purchased parts. As a result, we are exposed to the risk of a supplier being unable to provide the quantity or quality of parts that we require. Even in situations where suppliers are manufacturing parts without the use of our tooling, we face the challenge of obtaining consistently high-quality parts from suppliers that are financially stable. We utilize a supplier risk management program that leverages internal and third-party tools to identify and mitigate higher-risk supplier situations.
Credit Risk
Credit risk represents the possibility of loss from a customer failing to make payment according to contract terms. Our principal credit risk consists of outstanding trade accounts receivable. At March 31, 2021, 35 percent of our trade accounts receivable was concentrated with our top ten customers. These customers operate primarily in the commercial vehicle, off-highway, automotive and light vehicle, commercial air conditioning, and refrigeration markets and are influenced by similar market and general economic factors. In the past, credit losses from our customers have not been significant, nor have we experienced a significant increase in credit losses in connection with the COVID-19 pandemic.
We manage credit risk through a focus on the following:
| • | Cash and investments – We review cash deposits and short-term investments to ensure banks have acceptable credit ratings, and short-term investments are maintained in secured or guaranteed instruments. We consider our holdings in cash and investments to be stable and secure at March 31, 2021; |
| • | Trade accounts receivable – Prior to granting credit, we evaluate each customer, taking into consideration the customer’s financial condition, payment experience and credit information. After credit is granted, we actively monitor the customer’s financial condition and applicable business news; |
| • | Pension assets – We have retained outside advisors to assist in the management of the assets in our pension plans. In making investment decisions, we utilize an established risk management protocol that focuses on protection of the plan assets against downside risk. We ensure that investments within these plans provide appropriate diversification, the investments are monitored by investment teams, and portfolio managers adhere to the established investment policies. We believe the plan assets are subject to appropriate investment policies and controls; and |
| • | Insurance – We monitor our insurance providers to ensure they maintain financial ratings that are acceptable to us. We have not identified any concerns in this regard based upon our reviews. |
In addition, to the above risks on the supply side, we are also exposed to risks associated with demands by our customers for decreases in the price of our products. We attempt to offset this risk with firm agreements with our customers whenever possible, but these agreements oftensometimes contain provisions for future price reductions. In addition,
Economic and Market Risk
Economic risk represents the possibility of loss resulting from economic instability in certain areas of the world or downturns in markets in which we operate. We sell a broad range of products that provide thermal solutions to customers occasionally link price reductionsoperating in diverse markets, including the commercial, industrial, and building HVAC&R and commercial vehicle, off-highway, and automotive and light vehicle markets. The COVID-19 pandemic has negatively impacted many of these markets. While conditions in these markets have been steadily improving, future impacts of the COVID-19 pandemic are uncertain.
Considering our global presence, we also encounter risks imposed by potential trade restrictions, including tariffs, embargoes, and the like. We continue to future program awards,pursue non-speculative opportunities to mitigate these economic risks, and we must assesscapitalize, when possible, on changing market conditions. We pursue new market opportunities after careful consideration of the overall implicationspotential associated risks and benefits. Successes in new markets are dependent upon our ability to commercialize our investments. Current examples of such requests on a case-by-case basis.new and emerging markets for us include those related to electric vehicles, coils and coolers in certain markets, and coatings. Our investment in these areas is subject to the risks associated with technological success, customer and market acceptance, and our ability to meet the demands of our customers as these markets grow.
Hedging and Foreign Currency Forward Contracts
We use derivative financial instruments as a tool to manage certain financial risks. We prohibit the use of leveraged derivatives.
Commodity derivatives: Derivatives
From time to time, we enter into futuresover-the-counter forward contracts related to certain forecasted purchases of aluminum and copper. Our strategy is to reduce our exposure to changing market prices for future purchases of these commodities. In fiscal 2016, 2015,2021 and 2014, expenses2020, we designated certain commodity forward contracts as cash flow hedges for accounting purposes. Accordingly, for these designated hedges, we record unrealized gains and losses related to the change in the fair value of the contracts in other comprehensive income (loss) within shareholders’ equity and subsequently recognize the gains and losses within cost of sales as the underlying inventory is sold. In fiscal 2021, 2020 and 2019, net gains and losses recognized in cost of sales related to commodity derivativeforward contracts totaledwere less than $1 million in each year.
Foreign currency forward contracts: Our foreign exchange risk management strategy usesCurrency Forward Contracts
We use derivative financial instruments in a limited way to mitigate foreign currency exchange risk. We periodically enter into foreign currency exchangeforward contracts to hedge specific foreign currency-denominated assets and liabilities.liabilities as well as forecasted transactions. We have designated certain hedges of forecasted transactions as cash flow hedges for accounting purposes. Accordingly, for these designated hedges, we record unrealized gains and losses related to the change in the fair value of the contracts in other comprehensive income (loss) within shareholders’ equity and subsequently recognize the gains and losses as a component of earnings at the same time and in the same financial statement line that the underlying transactions impact earnings. In fiscal 2021, 2020, and 2019, net gains and losses recognized in sales and cost of sales related to foreign currency forward contracts were less than $1 million in each year. We have not designated these forward contracts related to foreign currency-denominated assets and liabilities as hedges. Accordingly, for these non-designated contracts, we record unrealized gains and losses related to the change in the fair value of the contracts in other income and expense. Gains and losses on these non-designated foreign currency forward contracts are offset by foreign currency gains and losses associated with the related assets and liabilities.
Counterparty risks: Risks
We manage counterparty risks by ensuring that counterparties to derivative instruments havemaintain credit ratings acceptable to us. At March 31, 2016,2021, all counterparties had a sufficient long-term credit rating.
| FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA DATA. |
MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended March 31, 2016, 20152021, 2020 and 20142019
(In millions, except per share amounts)
| | 2016 | | 2015 | | 2014 | | 2021 | | | 2020 | | | 2019 | |
Net sales | | $ | 1,352.5 | | | $ | 1,496.4 | | | $ | 1,477.6 | | | $ | 1,808.4 | | | $ | 1,975.5 | | | $ | 2,212.7 | |
Cost of sales | | | 1,129.0 | | | | 1,249.9 | | | | 1,239.4 | | | | 1,515.0 | | | | 1,668.0 | | | | 1,847.2 | |
Gross profit | | | 223.5 | | | | 246.5 | | | | 238.2 | | | | 293.4 | | | | 307.5 | | | | 365.5 | |
Selling, general and administrative expenses | | | 204.5 | | | | 184.5 | | | | 181.7 | | | | 210.9 | | | | 249.6 | | | | 244.1 | |
Restructuring expenses | | | 16.6 | | | | 4.7 | | | | 16.1 | | | | 13.4 | | | | 12.2 | | | | 9.6 | |
Impairment charges | | | 9.9 | | | | 7.8 | | | | 3.2 | | | | 166.8 | | | | 8.6 | | | | 0.4 | |
Gain on sale of wind tunnel | | | - | | | | (3.2 | ) | | | - | | |
(Gain) loss on sale of assets | | | | 0 | | | | (0.8 | ) | | | 1.7 | |
Operating (loss) income | | | (7.5 | ) | | | 52.7 | | | | 37.2 | | | | (97.7 | ) | | | 37.9 | | | | 109.7 | |
Interest expense | | | (11.1 | ) | | | (11.7 | ) | | | (12.4 | ) | | | (19.4 | ) | | | (22.7 | ) | | | (24.8 | ) |
Other income (expense) – net | | | 8.7 | | | | 0.2 | | | | (0.8 | ) | |
(Loss) earnings from continuing operations before income taxes | | | (9.9 | ) | | | 41.2 | | | | 24.0 | | |
Benefit (provision) for income taxes | | | 8.9 | | | | (19.0 | ) | | | 107.9 | | |
(Loss) earnings from continuing operations | | | (1.0 | ) | | | 22.2 | | | | 131.9 | | |
Earnings from discontinued operations, net of income taxes | | | - | | | | 0.6 | | | | - | | |
Other expense - net | | | | (2.2 | ) | | | (4.8 | ) | | | (4.1 | ) |
(Loss) earnings before income taxes | | | | (119.3 | ) | | | 10.4 | | | | 80.8 | |
(Provision) benefit for income taxes | | | | (90.2 | ) | | | (12.4 | ) | | | 5.1 | |
Net (loss) earnings | | | (1.0 | ) | | | 22.8 | | | | 131.9 | | | | (209.5 | ) | | | (2.0 | ) | | | 85.9 | |
Net earnings attributable to noncontrolling interest | | | (0.6 | ) | | | (1.0 | ) | | | (1.5 | ) | | | (1.2 | ) | | | (0.2 | ) | | | (1.1 | ) |
Net (loss) earnings attributable to Modine | | $ | (1.6 | ) | | $ | 21.8 | | | $ | 130.4 | | | $ | (210.7 | ) | | $ | (2.2 | ) | | $ | 84.8 | |
| | | | | | | | | | | | | |
(Loss) earnings per share from continuing operations attributable to Modine shareholders: | | | | | | | | | | | | | |
Basic | | $ | (0.03 | ) | | $ | 0.45 | | | $ | 2.75 | | |
Diluted | | $ | (0.03 | ) | | $ | 0.44 | | | $ | 2.72 | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net (loss) earnings per share attributable to Modine shareholders: | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | $ | (0.03 | ) | | $ | 0.46 | | | $ | 2.75 | | | $ | (4.11 | ) | | $ | (0.04 | ) | | $ | 1.67 | |
Diluted | | $ | (0.03 | ) | | $ | 0.45 | | | $ | 2.72 | | | $ | (4.11 | ) | | $ | (0.04 | ) | | $ | 1.65 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Weighted-average shares outstanding: | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | | 47.3 | | | | 47.2 | | | | 46.9 | | | | 51.3 | | | | 50.8 | | | | 50.5 | |
Diluted | | | 47.3 | | | | 47.8 | | | | 47.6 | | | | 51.3 | | | | 50.8 | | | | 51.3 | |
The notes to consolidated financial statements are an integral part of these statements.
MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended March 31, 2016, 20152021, 2020 and 20142019
(In millions)
| | 2016 | | 2015 | | 2014 | | 2021 | | | 2020 | | | 2019 | |
Net (loss) earnings | | $ | (1.0 | ) | | $ | 22.8 | | | $ | 131.9 | | | $ | (209.5 | ) | | $ | (2.0 | ) | | $ | 85.9 | |
Other comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency translation | | | 4.6 | | | | (68.2 | ) | | | 9.7 | | | | 30.9 | | | | (19.2 | ) | | | (37.6 | ) |
Defined benefit plans, net of income taxes of $11.8, ($13.2) and $9.8 million | | | 19.7 | | | | (26.7 | ) | | | 13.9 | | |
Cash flow hedges, net of income taxes of $0, $0 and $0.6 million | | | - | | | | - | | | | 1.1 | | |
Defined benefit plans, net of income taxes of $10.4, ($8.3) and ($0.3) million | | | | 30.1 | | | | (24.6 | ) | | | (1.4 | ) |
Cash flow hedges, net of income taxes of $0.6, ($0.5) and $0.1 million | | | | 1.6 | | | | (1.5 | ) | | | 0.4 | |
Total other comprehensive income (loss) | | | 24.3 | | | | (94.9 | ) | | | 24.7 | | | | 62.6 | | | | (45.3 | ) | | | (38.6 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive income (loss) | | | 23.3 | | | | (72.1 | ) | | | 156.6 | | | | (146.9 | ) | | | (47.3 | ) | | | 47.3 | |
Comprehensive income attributable to noncontrolling interest | | | (0.5 | ) | | | (0.8 | ) | | | (1.7 | ) | |
Comprehensive (income) loss attributable to noncontrolling interest | | | | (1.7 | ) | | | 0.2 | | | | (0.6 | ) |
Comprehensive income (loss) attributable to Modine | | $ | 22.8 | | | $ | (72.9 | ) | | $ | 154.9 | | | $ | (148.6 | ) | | $ | (47.1 | ) | | $ | 46.7 | |
The notes to consolidated financial statements are an integral part of these statements.
MODINE MANUFACTURING COMPANY
CONSOLIDATED BALANCE SHEETS
March 31, 20162021 and 20152020
(In millions, except per share amounts)
| | 2016 | | 2015 | | 2021 | | | 2020 | |
ASSETS | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 68.9 | | | $ | 70.5 | | | $ | 37.8 | | | $ | 70.9 | |
Trade accounts receivable – net | | | 189.1 | | | | 192.9 | | | | 267.9 | | | | 292.5 | |
Inventories | | | 111.0 | | | | 107.7 | | | | 195.6 | | | | 207.4 | |
Assets held for sale | | | | 107.6 | | | | 0 | |
Other current assets | | | 43.5 | | | | 79.7 | | | | 35.9 | | | | 62.5 | |
Total current assets | | | 412.5 | | | | 450.8 | | | | 644.8 | | | | 633.3 | |
Property, plant and equipment – net | | | 338.6 | | | | 322.1 | | | | 269.9 | | | | 448.0 | |
Intangible assets – net | | | 8.2 | | | | 9.9 | | | | 100.6 | | | | 106.3 | |
Goodwill | | | 15.8 | | | | 16.2 | | | | 170.7 | | | | 166.1 | |
Deferred income taxes | | | 123.1 | | | | 115.4 | | | | 24.5 | | | | 104.8 | |
Other noncurrent assets | | | 22.7 | | | | 16.5 | | | | 66.2 | | | | 77.6 | |
Total assets | | $ | 920.9 | | | $ | 930.9 | | | $ | 1,276.7 | | | $ | 1,536.1 | |
| | | | | | | | | | | | | | | | |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | |
Short-term debt | | $ | 28.6 | | | $ | 18.6 | | | $ | 1.4 | | | $ | 14.8 | |
Long-term debt – current portion | | | 8.5 | | | | 0.5 | | | | 21.9 | | | | 15.6 | |
Accounts payable | | | 142.4 | | | | 152.0 | | | | 233.9 | | | | 227.4 | |
Accrued compensation and employee benefits | | | 58.6 | | | | 56.7 | | | | 66.5 | | | | 65.0 | |
Liabilities held for sale | | | | 103.3 | | | | 0 | |
Other current liabilities | | | 35.5 | | | | 83.0 | | | | 42.2 | | | | 49.2 | |
Total current liabilities | | | 273.6 | | | | 310.8 | | | | 469.2 | | | | 372.0 | |
Long-term debt | | | 125.5 | | | | 129.6 | | | | 311.2 | | | | 452.0 | |
Deferred income taxes | | | 4.2 | | | | 3.1 | | | | 5.9 | | | | 8.1 | |
Pensions | | | 118.6 | | | | 110.4 | | | | 58.6 | | | | 130.9 | |
Other noncurrent liabilities | | | 16.3 | | | | 16.4 | | | | 75.7 | | | | 79.5 | |
Total liabilities | | | 538.2 | | | | 570.3 | | | | 920.6 | | | | 1,042.5 | |
Commitments and contingencies (see Note 19) | | | | | | | | | |
Shareholders' equity: | | | | | | | | | |
Preferred stock, $0.025 par value, authorized 16.0 million shares, issued - none | | | - | | | | - | | |
Common stock, $0.625 par value, authorized 80.0 million shares, issued 49.0 million and 48.6 million shares | | | 30.6 | | | | 30.4 | | |
Commitments and contingencies (see Note 20) | | | | 0 | | | | 0 | |
Shareholders’ equity: | | | | | | | | | |
Preferred stock, $0.025 par value, authorized 16.0 million shares, issued - NaN | | | | 0 | | | | 0 | |
Common stock, $0.625 par value, authorized 80.0 million shares, issued 54.3 million and 53.4 million shares | | | | 33.9 | | | | 33.3 | |
Additional paid-in capital | | | 185.6 | | | | 180.6 | | | | 255.0 | | | | 245.1 | |
Retained earnings | | | 358.2 | | | | 359.8 | | | | 259.2 | | | | 469.9 | |
Accumulated other comprehensive loss | | | (174.2 | ) | | | (198.6 | ) | | | (161.2 | ) | | | (223.3 | ) |
Treasury stock, at cost, 1.6 million and 0.7 million shares | | | (24.0 | ) | | | (16.2 | ) | |
Total Modine shareholders' equity | | | 376.2 | | | | 356.0 | | |
Treasury stock, at cost, 2.7 million and 2.5 million shares | | | | (38.2 | ) | | | (37.1 | ) |
Total Modine shareholders’ equity | | | | 348.7 | | | | 487.9 | |
Noncontrolling interest | | | 6.5 | | | | 4.6 | | | | 7.4 | | | | 5.7 | |
Total equity | | | 382.7 | | | | 360.6 | | | | 356.1 | | | | 493.6 | |
Total liabilities and equity | | $ | 920.9 | | | $ | 930.9 | | | $ | 1,276.7 | | | $ | 1,536.1 | |
The notes to consolidated financial statements are an integral part of these statements.
MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended March 31, 2016, 20152021, 2020 and 20142019
(In millions)
| | 2016 | | 2015 | | 2014 | | 2021 | | | 2020 | | | 2019 | |
Cash flows from operating activities: | | | | | | | | | | | | | | | | | | |
Net (loss) earnings | | $ | (1.0 | ) | | $ | 22.8 | | | $ | 131.9 | | | $ | (209.5 | ) | | $ | (2.0 | ) | | $ | 85.9 | |
Adjustments to reconcile net (loss) earnings to net cash provided by operating activities: | | | | | | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization | | | 50.2 | | | | 51.6 | | | | 58.1 | | | | 68.6 | | | | 77.1 | | | | 76.9 | |
Insurance proceeds from Airedale fire | | | 5.9 | | | | 12.9 | | | | 16.9 | | |
Impairment charges | | | 9.9 | | | | 7.8 | | | | 3.2 | | | | 166.8 | | | | 8.6 | | | | 0.4 | |
Gain on sale of wind tunnel | | | - | | | | (3.2 | ) | | | - | | |
Pension and postretirement expense | | | 45.1 | | | | 2.3 | | | | 3.2 | | |
Loss from disposition of property, plant and equipment | | | 0.4 | | | | 1.1 | | | | 2.6 | | |
(Gain) loss on sale of assets | | | | 0 | | | | (0.8 | ) | | | 1.7 | |
Stock-based compensation expense | | | | 6.3 | | | | 6.6 | | | | 7.9 | |
Deferred income taxes | | | (18.8 | ) | | | 5.9 | | | | (116.1 | ) | | | 67.9 | | | | 1.0 | | | | (4.4 | ) |
Stock-based compensation expense | | | 4.9 | | | | 4.0 | | | | 3.6 | | |
Other – net | | | (0.3 | ) | | | (0.7 | ) | | | (0.5 | ) | | | 6.3 | | | | 5.6 | | | | 5.3 | |
Changes in operating assets and liabilities, excluding acquisitions: | | | | | | | | | | | | | |
Changes in operating assets and liabilities: | | | | | | | | | | | | | |
Trade accounts receivable | | | 8.0 | | | | (0.1 | ) | | | (18.2 | ) | | | (17.1 | ) | | | 36.6 | | | | (15.3 | ) |
Inventories | | | (2.7 | ) | | | (4.2 | ) | | | (0.1 | ) | | | (5.0 | ) | | | (12.0 | ) | | | (22.0 | ) |
Accounts payable | | | (9.9 | ) | | | (2.4 | ) | | | 15.2 | | | | 44.0 | | | | (37.7 | ) | | | 16.6 | |
Accrued compensation and employee benefits | | | 0.8 | | | | (5.3 | ) | | | 17.5 | | | | 15.7 | | | | (15.2 | ) | | | (10.1 | ) |
Other assets | | | (14.5 | ) | | | (24.5 | ) | | | 2.1 | | | | 27.5 | | | | 14.7 | | | | (11.8 | ) |
Other liabilities | | | (5.6 | ) | | | (4.5 | ) | | | (14.9 | ) | | | (21.7 | ) | | | (24.6 | ) | | | (27.8 | ) |
Net cash provided by operating activities | | | 72.4 | | | | 63.5 | | | | 104.5 | | | | 149.8 | | | | 57.9 | | | | 103.3 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | | | | | |
Expenditures for property, plant and equipment | | | (62.8 | ) | | | (58.3 | ) | | | (53.1 | ) | | | (32.7 | ) | | | (71.3 | ) | | | (73.9 | ) |
Insurance proceeds from Airedale fire | | | 27.4 | | | | 12.2 | | | | 20.7 | | |
Costs to replace building and equipment damaged in Airedale fire | | | (41.7 | ) | | | (16.7 | ) | | | (4.2 | ) | |
Acquisitions – net of cash acquired | | | (1.4 | ) | | | - | | | | (7.8 | ) | |
Proceeds from dispositions of assets | | | 0.4 | | | | 7.6 | | | | 2.9 | | | | 0.7 | | | | 6.2 | | | | 0.3 | |
Proceeds from sale of investment in affiliate | | | | 0 | | | | 3.8 | | | | 0 | |
Proceeds from maturities of short-term investments | | | | 3.4 | | | | 4.1 | | | | 4.9 | |
Purchases of short-term investments | | | (2.7 | ) | | | (5.2 | ) | | | - | | | | (3.6 | ) | | | (3.3 | ) | | | (3.8 | ) |
Proceeds from maturities of short-term investments | | | 2.1 | | | | 2.4 | | | | - | | |
Other – net | | | 0.9 | | | | 0.8 | | | | - | | | | 0.9 | | | | 0 | | | | (0.3 | ) |
Net cash used for investing activities | | | (77.8 | ) | | | (57.2 | ) | | | (41.5 | ) | | | (31.3 | ) | | | (60.5 | ) | | | (72.8 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | | | | | |
Borrowings of debt | | | 38.0 | | | | 36.4 | | | | 152.6 | | | | 32.7 | | | | 672.0 | | | | 221.3 | |
Repayments of debt | | | (27.1 | ) | | | (50.9 | ) | | | (152.4 | ) | | | (183.6 | ) | | | (630.3 | ) | | | (241.9 | ) |
Purchases of treasury stock under share repurchase program | | | (6.9 | ) | | | - | | | | - | | |
Borrowings on bank overdraft facilities – net | | | | 3.6 | | | | 1.2 | | | | (0.1 | ) |
Dividend paid to noncontrolling interest | | | | 0 | | | | (1.3 | ) | | | (1.8 | ) |
Purchase of treasury stock under share repurchase program | | | | 0 | | | | (2.4 | ) | | | (0.6 | ) |
Financing fees paid | | | - | | | | (0.1 | ) | | | (0.9 | ) | | | (0.8 | ) | | | (2.8 | ) | | | 0 | |
Dividend paid to noncontrolling interest | | | (0.9 | ) | | | - | | | | (0.5 | ) | |
Other – net | | | (0.4 | ) | | | - | | | | (0.3 | ) | | | 3.0 | | | | (3.1 | ) | | | (2.8 | ) |
Net cash provided by (used for) financing activities | | | 2.7 | | | | (14.6 | ) | | | (1.5 | ) | |
Net cash (used for) provided by financing activities | | | | (145.1 | ) | | | 33.3 | | | | (25.9 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Effect of exchange rate changes on cash | | | 1.1 | | | | (8.4 | ) | | | 1.9 | | | | 1.4 | | | | (1.6 | ) | | | (2.7 | ) |
Net (decrease) increase in cash and cash equivalents | | | (1.6 | ) | | | (16.7 | ) | | | 63.4 | | |
Cash and cash equivalents - beginning of year | | | 70.5 | | | | 87.2 | | | | 23.8 | | |
Cash and cash equivalents - end of year | | $ | 68.9 | | | $ | 70.5 | | | $ | 87.2 | | |
Net (decrease) increase in cash, cash equivalents, restricted cash and cash held for sale | | | | (25.2 | ) | | | 29.1 | | | | 1.9 | |
Cash, cash equivalents, restricted cash and cash held for sale - beginning of year | | | | 71.3 | | | | 42.2 | | | | 40.3 | |
Cash, cash equivalents, restricted cash and cash held for sale - end of year | | | $ | 46.1 | | | $ | 71.3 | | | $ | 42.2 | |
The notes to consolidated financial statements are an integral part of these statements.
MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS'SHAREHOLDERS’ EQUITY
For the years ended March 31, 2016, 20152021, 2020 and 20142019
(In millions)
| | Common stock | | | Additional paid-in | | | Retained | | | Accumulated other comprehensive | | | Treasury stock, at | | | Non- controlling | | | Total |
| | Shares | | | Amount | | | capital | | | earnings | | | loss | | | cost | | | interest | | | | |
Balance, March 31, 2013 | | | 47.8 | | | $ | 29.9 | | | $ | 171.2 | | | $ | 207.6 | | | $ | (128.4 | ) | | $ | (14.6 | ) | | $ | 2.6 | | | $ | 268.3 | |
Net earnings attributable to Modine | | | - | | | | - | | | | - | | | | 130.4 | | | | - | | | | - | | | | - | | | | 130.4 | |
Other comprehensive income | | | - | | | | - | | | | - | | | | - | | | | 24.5 | | | | - | | | | 0.2 | | | | 24.7 | |
Stock options and awards including related tax benefits | | | 0.5 | | | | 0.3 | | | | 0.9 | | | | - | | | | - | | | | - | | | | - | | | | 1.2 | |
Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.6 | ) | | | - | | | | (0.6 | ) |
Stock-based compensation expense | | | - | | | | - | | | | 3.6 | | | | - | | | | - | | | | - | | | | - | | | | 3.6 | |
Dividend paid to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.5 | ) | | | (0.5 | ) |
Net earnings attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1.5 | | | | 1.5 | |
Balance, March 31, 2014 | | | 48.3 | | | | 30.2 | | | | 175.7 | | | | 338.0 | | | | (103.9 | ) | | | (15.2 | ) | | | 3.8 | | | | 428.6 | |
Net earnings attributable to Modine | | | - | | | | - | | | | - | | | | 21.8 | | | | - | | | | - | | | | - | | | | 21.8 | |
Other comprehensive loss | | | - | | | | - | | | | - | | | | - | | | | (94.7 | ) | | | - | | | | (0.2 | ) | | | (94.9 | ) |
Stock options and awards including related tax benefits | | | 0.3 | | | | 0.2 | | | | 0.9 | | | | - | | | | - | | | | - | | | | - | | | | 1.1 | |
Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1.0 | ) | | | - | | | | (1.0 | ) |
Stock-based compensation expense | | | - | | | | - | | | | 4.0 | | | | - | | | | - | | | | - | | | | - | | | | 4.0 | |
Net earnings attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1.0 | | | | 1.0 | |
Balance, March 31, 2015 | | | 48.6 | | | | 30.4 | | | | 180.6 | | | | 359.8 | | | | (198.6 | ) | | | (16.2 | ) | | | 4.6 | | | | 360.6 | |
Net loss attributable to Modine | | | - | | | | - | | | | - | | | | (1.6 | ) | | | - | | | | - | | | | - | | | | (1.6 | ) |
Other comprehensive income | | | - | | | | - | | | | - | | | | - | | | | 24.4 | | | | - | | | | (0.1 | ) | | | 24.3 | |
Stock options and awards including related tax benefits | | | 0.4 | | | | 0.2 | | | | 0.1 | | | | - | | | | - | | | | - | | | | - | | | | 0.3 | |
Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (7.8 | ) | | | - | | | | (7.8 | ) |
Stock-based compensation expense | | | - | | | | - | | | | 4.9 | | | | - | | | | - | | | | - | | | | - | | | | 4.9 | |
Contribution by noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 2.3 | | | | 2.3 | |
Dividend paid to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.9 | ) | | | (0.9 | ) |
Net earnings attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 0.6 | | | | 0.6 | |
Balance, March 31, 2016 | | | 49.0 | | | $ | 30.6 | | | $ | 185.6 | | | $ | 358.2 | | | $ | (174.2 | ) | | $ | (24.0 | ) | | $ | 6.5 | | | $ | 382.7 | |
| | Common stock | | | Additional paid-in | | | Retained | | | Accumulated other | | | Treasury stock, | | | Non-controlling | | | | |
| | Shares | | | Amount | | | capital | | | earnings | | | comprehensive loss | | | at cost | | | interest | | | Total | |
Balance, March 31, 2018 | | | 52.3 | | | $ | 32.7 | | | $ | 229.9 | | | $ | 394.9 | | | $ | (140.3 | ) | | $ | (27.1 | ) | | $ | 8.4 | | | $ | 498.5 | |
Adoption of new accounting guidance (Note 1) | | | - | | | | 0 | | | | 0 | | | | (7.6 | ) | | | 0 | | | | 0 | | | | 0 | | | | (7.6 | ) |
Net earnings | | | - | | | | 0 | | | | 0 | | | | 84.8 | | | | 0 | | | | 0 | | | | 1.1 | | | | 85.9 | |
Other comprehensive loss | | | - | | | | 0 | | | | 0 | | | | 0 | | | | (38.1 | ) | | | 0 | | | | (0.5 | ) | | | (38.6 | ) |
Stock options and awards | | | 0.5 | | | | 0.3 | | | | 0.8 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 1.1 | |
Purchase of treasury stock | | | - | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | (4.3 | ) | | | 0 | | | | (4.3 | ) |
Stock-based compensation expense | | | - | | | | 0 | | | | 7.9 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 7.9 | |
Dividend paid to noncontrolling interest | | | - | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | (1.8 | ) | | | (1.8 | ) |
Balance, March 31, 2019 | | | 52.8 | | | | 33.0 | | | | 238.6 | | | | 472.1 | | | | (178.4 | ) | | | (31.4 | ) | | | 7.2 | | | | 541.1 | |
Net (loss) earnings | | | - | | | | 0 | | | | 0 | | | | (2.2 | ) | | | 0 | | | | 0 | | | | 0.2 | | | | (2.0 | ) |
Other comprehensive loss | | | - | | | | 0 | | | | 0 | | | | 0 | | | | (44.9 | ) | | | 0 | | | | (0.4 | ) | | | (45.3 | ) |
Stock options and awards | | | 0.6 | | | | 0.3 | | | | (0.1 | ) | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0.2 | |
Purchase of treasury stock | | | - | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | (5.7 | ) | | | 0 | | | | (5.7 | ) |
Stock-based compensation expense | | | - | | | | 0 | | | | 6.6 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 6.6 | |
Dividend paid to noncontrolling interest | | | - | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | (1.3 | ) | | | (1.3 | ) |
Balance, March 31, 2020 | | | 53.4 | | | | 33.3 | | | | 245.1 | | | | 469.9 | | | | (223.3 | ) | | | (37.1 | ) | | | 5.7 | | | | 493.6 | |
Net (loss) earnings | | | - | | | | 0 | | | | 0 | | | | (210.7 | ) | | | 0 | | | | 0 | | | | 1.2 | | | | (209.5 | ) |
Other comprehensive income | | | - | | | | 0 | | | | 0 | | | | 0 | | | | 62.1 | | | | 0 | | | | 0.5 | | | | 62.6 | |
Stock options and awards | | | 0.9 | | | | 0.6 | | | | 3.6 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 4.2 | |
Purchase of treasury stock | | | - | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | (1.1 | ) | | | 0 | | | | (1.1 | ) |
Stock-based compensation expense | | | - | | | | 0 | | | | 6.3 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 6.3 | |
Balance, March 31, 2021 | | | 54.3 | | | $ | 33.9 | | | $ | 255.0 | | | $ | 259.2 | | | $ | (161.2 | ) | | $ | (38.2 | ) | | $ | 7.4 | | | $ | 356.1 | |
The notes to consolidated financial statements are an integral part of these statements.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 1: | Note 1: Significant Accounting Policies |
Nature of operations:Operations
Modine Manufacturing Company (“Modine” or the “Company”) specializes in providing innovative thermal management systems and components, bringing heating and cooling technology and solutions to diversified global markets.markets and customers. The Company is a global leader in thermal management technology and solutions for sale into a wide array of commercial, industrial, and building heating, ventilating, air conditioning, and refrigeration (“HVAC&R”) markets. In addition, the Company is a leading global developer, manufacturerprovider of engineered heat transfer systems and marketer ofhigh-quality heat exchangers and systemstransfer components for use in on-highwayon- and off-highway original equipment manufacturer (“OEM”) vehicular applications, and a wide array of building, industrial and refrigeration markets.applications. The Company’s primary product linesgroups include radiators and radiator cores, condensers, oil coolers, charge air coolers, heat-transfer modules and assemblies, exhaust gas recirculation (“EGR”) coolers, buildingi) heating, ventilatingventilation and air conditioningconditioning; ii) coils, coolers, and coatings; and iii) powertrain cooling and engine cooling.
In March 2020, the World Health Organization declared the outbreak of the novel coronavirus, COVID-19, a pandemic. See Note 20 for additional information regarding the risks and uncertainties to our business resulting from this global pandemic.
Disposition of Air-cooled Automotive Business
On February 19, 2021, the Company signed a definitive agreement to sell its air-cooled automotive business to Schmid Metall GmbH. In connection with this sale, which closed on April 30, 2021, the Company classified the air-cooled automotive business as held for sale as of March 31, 2021. Accordingly, the Company has reported the assets and liabilities of this business as held for sale on the March 31, 2021 consolidated balance sheet. See Note 2 for additional information.
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, has reported the assets and liabilities of this business as held for sale on the March 31, 2021 consolidated balance sheet. See Note 2 for additional information.
Chief Executive Officer (“HVAC”CEO”) equipment,Transition
In August 2020, Thomas A. Burke stepped down from his position as President and coils.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 and transition to his successor, the Company recorded costs totaling $6.7 million during fiscal 2021. These costs, which were recorded as selling, general and administrative (“SG&A”) expenses at Corporate, primarily consisted of severance and benefit-related expenses based upon the terms of Mr. Burke’s transition and separation agreement and costs directly associated with the CEO search, partially offset by the impact of Mr. Burke’s forfeited stock-based compensation awards.
Sale of Facility in Germany
During 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 $0.8million 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 fiscal 2020, the Company completed the sale of its 50 percent ownership interest in NEX for a selling price of $3.8 million. 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. Prior to its sale, the Company accounted for its investment in NEX using the equity method and reported its equity in earnings from NEX within other income and expense in the consolidated statements of operations. The Company’s share of NEX’s earnings for fiscal 2020 and 2019 was $0.1 million and $0.7 million, respectively.
Sale of AIAC Air Conditioning South Africa (Pty) Ltd.
During fiscal 2019, the Company completed the sale of its AIAC Air Conditioning South Africa (Pty) Ltd. business, which was reported within the Building HVAC Systems segment, for a selling price of $0.5 million. As a result of this transaction, the Company recorded a loss of $1.7 million, which included the write-off of accumulated foreign currency translation losses of $0.8 million. The Company reported this loss within the loss on sale of assets line on the consolidated statements of operations. Annual net sales attributable to this disposed business were less than $2.0 million.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Basis of presentation:Presentation
The Company prepares its consolidated financial statements in conformity with generally accepted accounting principles (“GAAP”) in the United States. These principles require management to make certain estimates and assumptions in determining assets, liabilities, revenue, expenses and related disclosures. Actual amounts could differ materially from those estimates.
Consolidation principles:Principles
The consolidated financial statements include the accounts of Modine Manufacturing Company and its majority-owned or Modine-controlled subsidiaries. The Company eliminates intercompany transactions and balances in consolidation.
Revenue Recognition
The Company accounts for investmentsrecognizes revenue based upon consideration specified in non-consolidated affiliated companiesa contract and as it satisfies performance obligations by transferring control over its products to its customers, which may be at a point in which its ownership is 20 percenttime or more using the equity method.over time. The Company states these investments at cost, plus or minus a proportionate share of undistributed net income (loss). The Company includes Modine’s sharemajority of the affiliate’s net incomeCompany’s revenue is recognized at a point in other income and expense.time, based upon shipment terms. A portion of the Company’s revenue is recognized over time, based upon estimated progress towards satisfaction of the contractual performance obligations. See Note 123 for additional information.
Discontinued operations: Shipping and Handling Costs
The Company records shipping and handling costs incurred upon the shipment of products to its customers in cost of sales, and related amounts billed to these customers in net sales.
Trade Accounts Receivable
The Company records trade receivables at the invoiced amount. Trade receivables do not bear interest if paid according to the original terms. The Company maintains an allowance for credit losses, representing its estimate of expected losses associated with its trade accounts receivable. The Company bases its estimate using historical loss experience and considers the aging of the receivables and risks specific to customers where appropriate. At March 31, 2021 and 2020, the allowance for credit losses was $1.3 million and $1.9 million, respectively.
The Company enters into supply chain financing programs from time to time to sell accounts receivable, without recourse, to third-party financial institutions. Sales of accounts receivable are reflected as a reduction of accounts receivable on the consolidated balance sheets and the proceeds are included in cash flows from operating activities in the consolidated statements of cash flows. During fiscal 2009,2021, 2020, and 2019, the Company sold its Electronics Cooling business. The buyer financed a portion$88.7 million, $75.4 million, and $85.1 million, respectively, of the selling price by issuing promissory notes payableaccounts receivable to Modine.accelerate cash receipts. During fiscal 2015, the Company received $1.5 million from the buyer, which represented the final payment on the promissory notes. The Company had previously recorded a reserve against a portion of the promissory notes due to collectability concerns. As a result,2021, 2020, and 2019, the Company recorded a gain of $0.9 million ($0.6 million after income taxes) during fiscal 2015.
Assets held for sale: The Company considers assets to be held for sale when management approves and commits to a formal plan to actively market the assets for sale at a price reasonable in relation to its fair value, the asset is available for immediate sale in its present condition, an active program to locate a buyer and other actions required to complete the sale have been initiated,loss on the sale of the asset is expected to be completed within one year and it is unlikely that significant changes will be made to the plan. Upon designation as held for sale, the Company records the carrying value of the assets at the lower of its carrying value or its estimated fair value, less costs to sell, within other noncurrent assets. The Company ceases to record depreciation expense at the time of designation as held for sale.
Revenue recognition: The Company recognizes sales revenue, including agreed upon commodity prices, when it is both earned and realized or realizable. The Company’s policy is to recognize revenue when title to the product and risk of loss have transferred to the customer, persuasive evidence of an arrangement exists, and collection of the sales proceeds is reasonably assured, all of which generally occur upon shipment of goods to customers. The Company makes appropriate provisions for uncollectible accounts receivable based on historical data or specific customer economic data. The Company records sales discounts, which are offered for prompt payment by certain customers, as a reduction to net sales.
Tooling costs: The Company accounts for production tooling costs as a component of property, plant and equipment when it owns title to the tooling and amortizes the capitalized cost to cost of sales over the estimated life of the asset, which is generally three years. At March 31, 2016 and 2015, Company-owned tooling totaled $18.8$0.2 million, $0.5 million, and $18.7$0.6 million, respectively. In certain instances,respectively, in the Company makes upfront payments for customer-owned tooling costs, and subsequently receives reimbursement from customers for the upfront payments. The Company accounts for unbilled customer-owned tooling costs as a receivable within other current assets when the customer has guaranteed reimbursement to the Company. No significant arrangements exist where customer-owned tooling costs were not accompanied by guaranteed reimbursement. At March 31, 2016 and 2015, cost reimbursement receivables related to customer-owned tooling totaled $8.5 million and $11.6 million, respectively.consolidated statements of operations.
Warranty:Warranty
The Company provides product warranties for specific product lines and accrues for estimated future warranty costs in the period in which the sale is recorded. The Company records warranty expense, within cost of sales, based upon historical and current claims data or based upon estimated future claims. Accrual balances, which are recorded within other current liabilities, are monitored and adjusted if it is probable that expected claims will differ from previous estimates. See Note 15 for additional information.
Tooling
The Company accounts for production tooling costs as a component of property, plant and equipment when it owns title to the tooling and amortizes the capitalized cost to cost of sales over the estimated life of the asset, which is generally three years. At March 31, 2021 and 2020, Company-owned tooling totaled $14.1 million and $23.3 million, respectively. The decrease in Company-owned tooling during fiscal 2021 was primarily due to asset impairment charges recorded within the Automotive segment upon classification of the liquid- and air-cooled automotive businesses as held for sale. See Note 2 for additional information.
In certain instances, tooling is customer-owned. At the time customer-owned tooling is completed and customer acceptance is obtained, the Company records tooling revenue and related production costs within net sales and cost of sales, respectively, in the consolidated statements of operations.If the customer has agreed to reimburse the Company, unbilled customer-owned tooling costs are recorded as a receivable within other current assets. No significant arrangements exist where customer-owned tooling costs were not accompanied by guaranteed reimbursement. At March 31, 2021 and 2020, customer-owned tooling receivables totaled $8.1 million and $7.8 million, respectively. Of the $8.1 million, $5.6 million was included within assets held for sale on the March 31, 2021 consolidated balance sheet.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Shipping and handling costs:
Stock-based Compensation
The Company records shippingrecognizes stock-based compensation using the fair value method. Accordingly, compensation expense for stock options, restricted stock and handling costs incurredperformance-based stock awards is calculated based upon the shipmentfair value of products to its OEM customers in costthe instruments at the time of sales,grant, and related amounts billed to these customers in net sales. The Company records shipping and handling costs incurred uponis recognized as expense over the shipment of products to its HVAC customers in selling, general and administrative (“SG&A”) expenses. For the years ended March 31, 2016, 2015, and 2014, shipping and handling costs recorded in SG&A expenses were $2.5 million, $4.9 million, and $4.0 million, respectively.respective vesting periods. See Note 5 for additional information.
Research and development:Development
The Company expenses research and development costs as incurred within SG&A expenses. For the years ended March 31, 2016, 2015,During fiscal 2021, 2020, and 2014,2019, research and development costs charged to operations totaled $61.1$46.3 million, $62.0$59.5 million, and $61.7$69.8 million, respectively.
Translation of foreign currencies:Foreign Currencies
The Company translates assets and liabilities of foreign subsidiaries and equity investments into U.S. dollars at the period-end exchange rates, and translates income and expense items at the monthly average exchange rate for the period in which the transactions occur. The Company reports resulting translation adjustments within accumulated other comprehensive income (loss) within shareholders'shareholders’ equity. The Company includes foreign currency transaction gains or losses in the statement of operations within other income and expense.
Derivative instruments:Instruments
The Company enters into derivative financial instruments from time to time to manage certain financial risks. The Company enters into futuresforward contracts to reduce exposure to changing future purchase prices for aluminum and copper and into foreign currency exchange contracts to hedge specific foreign currency-denominated assets and liabilities.liabilities as well as forecasted transactions. The Company designates certain derivative financial instruments as cash flow hedges for accounting purposes. These instruments are used to manage financial risks and are not speculative. See Note 1819 for additional information.
Income taxes: Taxes
The Company determines deferred tax assets and liabilities based upon the difference between the amounts reported in the financial statements and the tax basis of assets and liabilities, using enacted tax rates in effect in the years in which the differences are expected to reverse. The Company establishes a valuation allowance if it is more likely than not that a deferred tax asset, or portion thereof, will not be realized. The Company records the tax effects of global intangible low-taxed income (“GILTI”) as a period expense in the applicable tax year. The Company uses the portfolio approach for releasing income tax effects from accumulated other comprehensive income (loss). See Note 8 for additional information.
Earnings per share:Share
The Company calculates basic earnings per share based upon the weighted-average number of common shares outstanding during the period, while the calculation of diluted earnings per share includes the dilutive effect of potential common shares outstanding during the period. The calculation of diluted earnings per share excludes all potential common shares if their inclusion would have an anti-dilutive effect. RestrictedIn prior years, certain restricted stock awardawards provided recipients havewith a non-forfeitable right to receive dividends declared by the Company. Therefore, theseThese restricted stock awards arehave been included in computing earnings per share pursuant to the two-class method. See Note 9 for additional information.
Cash and cash equivalents: Cash Equivalents
The Company considers all highly-liquid investments with original maturities of three months or less to be cash equivalents. Under the Company’s cash management system, cash balances at certain banks are funded when checks are presented for payment. To the extent checks issued, but not yet presented for payment, exceed the balance on hand at the specific bank against which they were written, the Company reports the amount of those un-presented checks is includedwithin accounts payable in accounts payable.the consolidated balance sheets.
Short-term investments: Investments
The Company invests in time deposits with original maturities of more than three months but nonot more than one year. The Company records these short-term investments at cost, which approximates fair value, within other current assets in the consolidated balance sheets. As of March 31, 20162021 and 2015,2020, the Company’s short-term investments totaled $3.3$3.7 million and $2.8$3.2 million, respectively.
Deferred compensation trust: The Company maintains a deferred compensation trust to fund future obligations under its non-qualified deferred compensation plan. The trust’s investments in third-party debt and equity securities are presented within other noncurrent assets in the consolidated balance sheets.Inventories
Trade accounts receivable: The Company records trade receivables at the invoiced amount. Trade receivables do not bear interest if paid according to the original terms. The Company recorded an allowance for doubtful accounts of $0.5 million and $1.0 million at March 31, 2016 and 2015, respectively, representing its estimated uncollectible receivables. The Company enters into supply chain financing programs from time to time to sell accounts receivable without recourse to third-party financial institutions. Sales of accounts receivable are reflected as a reduction of accounts receivable on the consolidated balance sheets and the proceeds are included in cash flows from operating activities in the consolidated statements of cash flows. During the years ended March 31, 2016, 2015, and 2014, the Company sold, without recourse, $71.3 million, $87.0 million, and $82.4 million of accounts receivable to accelerate cash receipts. During each of the years ended March 31, 2016, 2015, and 2014, the Company recorded a loss on the sale of accounts receivables of $0.3 million in the consolidated statements of operations.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Inventories: The Company values inventories using a first-in, first-out or weighted-average basis, at the lower of cost and net realizable value.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Property, plantPlant and equipment: Equipment
The Company records property, plant and equipment at cost. For financial reporting purposes, the Company computes depreciation using the straight-line method over the expected useful lifelives of the asset.assets. The Company chargesexpenses maintenance and repair costs to operations as incurred. The Company capitalizes costs of improvements. Upon the sale or other disposition of an asset, the Company removes the cost and related accumulated depreciation from the accounts and includes the gain or loss in the consolidated statements of operations. Capital expenditures of $7.9 million, $8.7 million and $17.9 million were accrued at March 31, 2021, 2020 and 2019, respectively. Of the $7.9 million, $2.7 million was included within liabilities held for sale on the March 31, 2021 consolidated balance sheet. All of the other accrued capital expenditure amounts are presented within accounts payable.
Goodwill:Leases
The Company’s most significant leases represent leases of real estate, such as manufacturing facilities, warehouses, and office buildings. The Company also leases certain manufacturing and IT equipment and vehicles. The Company recognizes right-of-use (“ROU”) assets and lease liabilities at the commencement date, based upon the present value of lease payments over the lease term. See Note 16 for additional information.
Goodwill
The Company does not amortize goodwill; rather, it tests for impairment annually unless conditions exist that would require a more frequent evaluation. The Company performs an assessment of the fair value of its reporting units for goodwill impairment testing based upon, among other things, the present value of expected future cash flows. The Company performed its goodwill impairment test as of March 31, 2016, which did not result in an impairment charge.2021 and determined the fair value of each of its reporting units exceeded the respective book value. See Note 14 for additional information.
ImpairmentImpairment of long-lived assets:Held and Used Long-lived Assets
The Company reviews held and used long-lived assets, including property, plant and equipment and intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be fully recoverable. In these instances, the Company compares the undiscounted future cash flows expected to be generated from the asset with its carrying value. If the asset’s carrying value exceeds expected future cash flows, the Company measures and records an impairment loss, if any, as the amount by which the carrying value of the asset exceeds its fair value. The Company estimates fair value using a variety of valuation techniques, including discounted cash flows, market values and comparison values for similar assets.
Assets Held for Sale
The Company considers assets to be held for sale when management approves and commits to a formal plan to actively market the asset for sale at a reasonable price in relation to its fair value, the asset is available for immediate sale in its present condition, an active program to locate a buyer and other actions required to complete the sale have been initiated, the sale of the asset is expected to be completed within one year and it is unlikely that significant changes will be made to the plan. Upon designation as held for sale, the Company records the carrying value of the assets at the lower of its carrying value or its estimated fair value, less costs to sell. The Company ceases to record depreciation expense at the time of designation as held for sale. During fiscal 2021, the Company classified the liquid- and air-cooled automotive businesses as held for sale and recorded impairment charges totaling $166.8 million within the Automotive segment. See Note 62 for additional information.
Environmental liabilities:Deferred Compensation Trusts
The Company records liabilities for environmental assessmentsmaintains deferred compensation trusts to fund future obligations under its non-qualified deferred compensation plans. The trusts’ investments in third-party debt and remediation effortsequity securities are presented within other noncurrent assets in the period which its responsibility is probable and the costs can be reasonably estimated. To the extent that the required remediation procedures change, or additional contamination is identified, the Company’s estimate of environmental liabilities may change. See Note 19 for additional information.consolidated balance sheets.
Self-insurance reserves:Reserves
The Company retains a portion of the financial risk for variouscertain insurance coverage, including property, general liability, workers compensation, and employee healthcare, and therefore maintains reserves that estimate the impact of unreported and under-reported claims that fall below various stop-loss limits and deductibles under its insurance policies. The Company maintains reserves for the estimated settlement cost of known claims, as well as estimates of incurred but not reported claims. The Company charges costs of claims, including the impact of changes in reserves due to claim experience and severity, to operations. The Company reviews and updates the amount of its insurance-related reserves on a quarterly basis.
Stock-based compensation:Environmental Liabilities
The Company recognizes stock-based compensation usingrecords liabilities for environmental assessments and remediation activities in the fair value method. Accordingly, compensation expense for stock options, restricted stockperiod in which its responsibility is probable and performance-based stock awardsthe costs can be reasonably estimated. The Company records environmental indemnification assets from third parties, including prior owners, when recovery is calculated based uponprobable. To the fair value ofextent that the instruments atrequired remediation procedures change, or additional contamination is identified, the time of grant, and is recognized as expense over the respective vesting periods.Company’s estimated environmental liabilities may also change. See Note 520 for additional information.
New accounting guidance: In March 2016, the Financial Accounting Standards Board (“FASB”) issued new guidance to simplify several aspects of accounting for share-based payment transactions, including the income tax consequences. This guidance is effective for the Company’s first quarter of fiscal 2018. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.
In February 2016, the FASB issued new comprehensive lease accounting guidance that supersedes existing lease accounting guidance. Upon adoption of this new guidance, the Company will be required to recognize most leases on its balance sheet. This guidance is effective for the Company’s first quarter of fiscal 2020. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.
In November 2015, the FASB issued new guidance, as part of its simplification initiative, that requires all deferred tax assets and liabilities to be classified as noncurrent on the balance sheet. The Company adopted this guidance, on a retrospective basis, for its fiscal year ending March 31, 2016. As a result, the Company reclassified approximately $13.0 million of deferred tax assets from current assets to noncurrent assets as of March 31, 2015 to conform to the current-period presentation.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Supplemental Cash Flow Information
| | Years ended March 31, | |
| | 2021 | | | 2020 | | | 2019 | |
Interest paid | | $ | 17.9 | | | $ | 21.4 | | | $ | 22.3 | |
Income taxes paid | | | 19.7 | | | | 18.8 | | | | 22.2 | |
See Note 16 for supplemental cash flow information related to the Company’s leases.
New Accounting Guidance Adopted in Fiscal 2021
Credit Losses
In June 2016, the Financial Accounting Standards Board (“FASB”) 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.
New Accounting Guidance Adopted in Fiscal 2020
In February 2016, the FASB issued new comprehensive lease accounting guidance that requires balance sheet recognition for most leases. The Company adopted this guidance effective April 1, 2019 using a modified-retrospective transition method, under which it elected not to adjust comparative periods. The Company elected the package of practical expedients permitted under the new guidance, and, as a result, the Company did not reassess the classification of existing leases or initial direct costs thereof, or whether existing contracts contain leases. In addition, the Company elected accounting policies to not record short-term leases on the balance sheet and to not separate lease and non-lease components. The Company did not elect the hindsight practical expedient.
Upon adoption of this new guidance on April 1, 2019, the Company recognized right-of-use assets for operating leases totaling $61.3 million and corresponding current and noncurrent operating lease liabilities of $12.4 million and $48.9 million, respectively. In addition, the Company assessed 2 existing build-to-suit arrangements, for which it had recorded property, plant and equipment and long-term debt on its consolidated balance sheet as of March 31, 2019. The Company determined these arrangements represent operating leases under the new accounting guidance. As a result, the Company derecognized the previously-recorded balances and recorded $5.2 million of operating lease right-of-use assets and corresponding lease liabilities. As a result of adopting the new guidance, there was not a significant impact on the Company’s accounting for its previously-recorded capital leases, which are now classified as finance leases under the new guidance. In addition, there was no impact to retained earnings. Also, the adoption did not have a material impact on the Company’s consolidated statement of operations or consolidated statement of cash flows. See Note 16 for additional information regarding the Company’s leases.
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
In February 2018, the FASB issued new guidance related to the accounting for certain stranded income tax effects in accumulated other comprehensive income (loss) resulting from tax reform legislation that was enacted in the U.S. in December 2017. This guidance provided companies the option to reclassify stranded income tax effects to retained earnings. The Company adopted this guidance as of April 1, 2019 and chose not to reclassify stranded income tax effects; therefore, the adoption of this guidance did not impact the Company’s consolidated financial statements.
New Accounting Guidance Adopted in Fiscal 2019
Revenue Recognition
In May 2014, the FASB issued new guidance that outlines a comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The core principle of the new guidance is that companies are to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company adopted this new guidance also includes a cohesive set of disclosure requirements intended to provide users of financial statements with comprehensive information about revenue arising from contracts with customers. This new guidance is effective for fiscal 2019 using the Company’s first quarter of fiscal 2019. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.
Supplemental cash flow information:
| | Years ended March 31, | |
| | 2016 | | | 2015 | | | 2014 | |
Interest paid | | $ | 10.7 | | | $ | 10.3 | | | $ | 12.6 | |
Income taxes paid | | | 10.1 | | | | 15.9 | | | | 11.4 | |
Note 2: | Airedale Facility Fire |
On September 6, 2013, a fire caused significant destruction to the Company’s Airedale manufacturing facility and offices in Rawdon (Leeds), United Kingdom. The Company reports Airedale’s financial results within the Building HVAC segment. There were no injuries caused by the fire. The Rawdon facility, which is leased, was used to manufacture cooling products and solutions for a variety of applications, including data centers, clean rooms, retail, leisure and process cooling. The Company suspended operations at the Rawdon site asmodified-retrospective transition method. As a result of the fire; however, it transferred operations to temporary facilities while it rebuilt the leased facility. The Company completed the reconstruction and relocation to the Rawdon facility in fiscal 2016.
The Company’s insurance covered damage to the leased facility, equipment, inventory, and other assets, as well as business interruption and lost profits, and recovery-related expenses caused by the fire. Since the dateits adoption of the fire, the Company has received cumulative cash proceeds of $96.0 million from its insurance provider for covered losses, and has recorded losses and costs caused by the fire in the same statement of operations line as the related insurance recovery. In fiscal 2016,new guidance, the Company recorded a $9.5an increase of $0.7 million gain within other income to retained earnings as of April 1, 2018, along with related to an insurance settlementbalance sheet reclassifications. See Note 3 for equipment losses. This gain represents the replacement assets’ cost in excess of the carrying value of the equipment at the time it was destroyed by the fire. During fiscal 2015, the Company recorded $4.6 million of recoveries from business interruption insurance relating to fiscal 2015 and 2014 lost profits within SG&A expenses.
The terms of the Rawdon lease agreement obligated the Company to rebuild the damaged facility. Upon completion of the rebuilt facility in fiscal 2016, the Company fulfilled this obligation and removed both the liability to rebuild the facility and the capitalized reconstruction costs from its consolidated balance sheet. As of March 31, 2015, the other current liability to rebuild the facility was $48.0 million and other current assets related to receivables from the Company’s insurance provider and capitalized reconstructions costs totaled $39.2 million.
On January 29, 2016, the Company formed a joint venture, Modine Puxin Thermal Systems (Jiangsu) Co. Ltd. of Yangzhou, China, of which it owns 67%, and the joint venture partner, Jiangsu Puxin Heat Exchange System Co., Ltd, owns 33%. This joint venture, which is reported in the Asia segment, will expedite the Company’s introduction of stainless steel heat exchangers for the light-, medium-, and heavy-duty commercial vehicle markets in China. The Company contributed cash of $1.4 million, with additional cash consideration of $0.5 million payable after six months subject to the sellers’ indemnification obligations under the agreement, and equipment and other assets totaling $2.3 million. The Company recorded assets acquired and liabilities assumed at their respective fair values. The purchase price allocation resulted in acquired equipment and other long-lived assets totaling $1.5 million and working capital net assets of $0.8 million. The Company controls the primary management decisions and revenue-generating activities of the joint venture, and, therefore, the financial results of the joint venture are included in the Company’s consolidated financial statements.information regarding revenue recognition.
On February 28, 2014, the Company acquired 100 percent of the shares of Barkell Limited of Consett, United Kingdom for cash consideration of $7.8 million, net of cash acquired. This acquisition provides Modine with an expanded product offering into the air handling market within the Building HVAC segment. The Company recorded assets acquired and liabilities assumed at their respective fair values. The purchase price allocation resulted in intangible assets for acquired technology and customer relationships totaling $4.7 million; property, plant and equipment of $2.0 million; and working capital net assets of $1.1 million. Acquired technology consists of a fully developed product line and technical processes, and the customer relationships represent established sales channel and customer relationships. The Company is amortizing these acquired intangible assets over ten years.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Income Taxes: Intra-Entity Transfers of Assets Other than Inventory
In October 2016, the FASB issued new guidance related to income tax accounting for intercompany asset transfers. This new guidance requires companies to recognize the income tax effects of intercompany asset transfers other than inventory at the transaction date. The income tax effects of these transfers were previously deferred. The Company adopted this new guidance for fiscal 2019 using the modified-retrospective transition method. Upon adoption, the Company recorded a decrease to retained earnings of $8.3 million as of April 1, 2018.
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, subject to the receipt of governmental and third-party approvals and satisfaction of other closing conditions. As of March 31, 2021, the Company anticipated the transaction would close during the first quarter of fiscal 2022. However, the Company and the buyer are currently working together through the regulatory approval process. At this time, the Company is not able to estimate the ultimate impact of the regulatory approval process or the closing date for this transaction. The Company does not expect significant net cash proceeds from this transaction based upon the 1 dollar selling price and adjustments for cash, debt, and working capital, as defined within the definitive agreement. The Company evaluated this disposal group and determined that it does not qualify as a discontinued operation for reporting under U.S. GAAP. As part of its discontinued operations assessment, 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 Heavy Duty Equipment and Automotive segments. In addition, the Company will continue to operate in the same major geographical areas as it does today.
On February 19, 2021, the Company signed a definitive agreement to sell its air-cooled automotive business to Schmid Metall GmbH. This transaction closed on April 30, 2021. Based upon its preliminary accounting, the Company expects to record a loss on sale of approximately $6.0 million during the first quarter of fiscal 2022. The estimated loss on sale includes adjustments for cash, debt, and working capital, as defined within the definitive agreement. The Company evaluated this transaction in relation to the pending sale of the liquid-cooled automotive business, described above, and concluded each represents a separate disposal group for purposes of assessing discontinued operations. The Company determined that the air-cooled disposal group did not qualify as a discontinued operation.
The Company reports financial results of operationsboth the liquid- and air-cooled automotive businesses within its Automotive segment. Once the Company entered into the sale agreements with Board of these acquiredDirector approval, it classified the businesses are includedas held for sale beginning on November 2, 2020 and February 19, 2021, respectively, and ceased depreciating the long-lived assets within the disposal groups.
Upon classification as held for sale, the Company compared each disposal group’s carrying value with its fair value, less costs to sell. Based upon the selling prices for each transaction, the Company estimated implied losses in excess of the respective carrying value of each disposal group’s long-lived assets. The disposal groups’ long-lived assets consist entirely of property, plant and equipment and right-of-use lease assets. As a result, the Company recorded non-cash impairment charges totaling $165.1 million during fiscal 2021 to reduce the net carrying value of the disposal groups’ long-lived assets to 0. The impairment charges related to the liquid- and air-cooled automotive businesses totaled $138.3 million and $26.8 million, respectively. Also during fiscal 2021, the Company recorded an impairment charge of $1.7 million within the Automotive segment related to equipment that will not convey as part of the sale transactions 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 since the datesoperations.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The Company did not present pro forma financial informationclassified the assets and liabilities of the liquid- and air-cooled automotive businesses as held for sale on the effectMarch 31, 2021 consolidated balance sheet. The major classes of these acquisitionsassets and liabilities held for sale were as follows:
| | March 31, 2021 | |
ASSETS | | | |
Cash and cash equivalents | | $ | 8.0 | |
Trade accounts receivables - net | | | 54.4 | |
Inventories | | | 24.7 | |
Other current assets | | | 12.8 | |
Property, plant and equipment - net | | | 164.0 | |
Other noncurrent assets | | | 8.8 | |
Impairment of carrying value | | | (165.1 | ) |
Total assets held for sale | | $ | 107.6 | |
| | | | |
LIABILITIES | | | | |
Short-term debt | | $ | 5.0 | |
Accounts payable | | | 46.3 | |
Accrued compensation and employee benefits | | | 15.5 | |
Other current liabilities | | | 12.2 | |
Pensions | | | 17.8 | |
Other noncurrent liabilities | | | 6.5 | |
Total liabilities held for sale | | $ | 103.3 | |
The Company will reassess the liquid-cooled disposal group’s fair value less costs to sell at each reporting period that it is not materialheld for sale until the transaction is completed. The Company expects to record a loss on sale of approximately $20.0 million to $30.0 million upon transaction completion. The loss on sale recorded will be impacted by changes in working capital, costs to sell, net actuarial losses in accumulated other comprehensive loss related to the disposal group’s pension plans, and cumulative translation adjustments. It is possible that the loss on sale recorded could differ materially from the Company’s estimate
Note 3: Revenue Recognition
The Company generates revenue from selling innovative thermal management products and solutions to diversified global markets and customers. The Company recognizes revenue based upon consideration specified in a contract and as it satisfies performance obligations by transferring control over its products to its resultscustomers, which may be at a point in time or over time. The majority of operationsthe Company’s revenue is recognized at a point in time, based upon shipment terms. The Company records an allowance for credit losses and accrues for estimated warranty costs at the time of sale. These estimates are based upon historical experience, current business trends, and current economic conditions. The Company accounts for shipping and handling activities as fulfilment costs rather than separate performance obligations, and records shipping and handling costs in cost of sales and related amounts billed to customers in net sales. The Company establishes payment terms with its customers based upon industry and regional practices, which typically do not exceed 90 days. As the Company expects to receive payment from its customers within one year from the time of sale, it disregards the effects of the time value of money in its determination of the transaction price. The Company has not disclosed the value of unsatisfied performance obligations because the revenue associated with customer contracts for which the original expected performance period is greater than one year is immaterial.
The following is a description of the Company’s principal revenue-generating activities:
Building HVAC Systems (“BHVAC”)
The BHVAC segment principally generates revenue from providing a variety of heating, ventilating, and air conditioning products, primarily for commercial buildings and data centers in North America and the U.K., as well as mainland Europe and the Middle East.
Heating products are manufactured in the U.S. and are largely sold to independent distributors, who in turn market the heating products to end customers. Because these products are sold to many different customers without contractual or financial position.practical limitations, the BHVAC segment recognizes revenue at the time control is transferred to the customer, generally the independent distributor, based upon shipping terms, which is generally upon shipment.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Ventilation and air conditioning products are highly-specified to a customer’s needs; however, the underlying sales contracts do not provide the Company with an enforceable right to payment for performance completed to date. As a result, the BHVAC segment recognizes revenue for these products at the time control is transferred to the customer based upon shipping terms, which is generally upon shipment.
Commercial and Industrial Solutions (“CIS”)
The CIS segment principally generates revenue from providing thermal management products, including customized coils and coolers, to the heating, ventilating, air conditioning, and refrigeration (“HVAC&R”) markets in North America, Europe, and Asia. In addition, the segment applies corrosion protection solutions, which are referred to as coatings, to heat-transfer equipment.
For the sale of coils and coolers, individual customer purchase orders generally represent the Company’s contract with its customers. With the exception of a small number of customers, the applicable customer contracts do not provide the Company with an enforceable right to payment for performance completed to date. As a result, the CIS segment recognizes revenue for its sale of coils and coolers primarily at the time control is transferred to the customer based upon shipping terms, which is generally upon shipment.
For both sales to customers whose contract cancellation terms provide an enforceable right to payment and sales from the coatings businesses, in which the customers control the heat-transfer equipment being enhanced by the coating application, the CIS segment recognizes revenue over time based upon its estimated progress towards satisfaction of the performance obligations. The segment measures progress by evaluating the production status towards completion of ordered products or services not yet shipped to its customers.
Heavy Duty Equipment (“HDE”) and Automotive
The HDE and Automotive segments principally generate revenue from providing engineered heat transfer systems and components for use in on- and off-highway original equipment. These segments provide powertrain and engine cooling products, including, but not limited to, radiators, charge air coolers, condensers, oil coolers, EGR coolers, and fuel coolers, to original equipment manufacturers (“OEMs”) in the commercial vehicle, off-highway and automotive and light vehicle markets in the Americas, Europe, and Asia regions. In addition, the segments design customer-owned tooling for OEMs. The HDE segment also serves Brazil’s commercial vehicle and automotive aftermarkets.
While the segments provide customized production and service parts to customers under multi-year programs, these programs typically do not contain contractually-guaranteed volumes to be purchased by the customer. As a result, individual purchase orders typically represent the quantities ordered by the customer. With the exception of a small number of HDE customers, the terms within the customer agreement, purchase order, or customer-owned tooling contract do not provide the Company with an enforceable right to payment for performance completed to date. As a result, both the HDE and Automotive segments recognize revenue primarily at the time control is transferred to the customer based upon shipping terms, which is generally upon shipment.
In regard to the HDE customers with contractual cancellation terms that provide an enforceable right to payment for performance completed to date, the Company recognizes revenue over time based upon its estimated progress towards satisfaction of the performance obligations. The HDE segment measures progress by evaluating the production status of ordered products not yet shipped to the customer.
For certain customer programs, the Company agrees to provide annual price reductions based upon contract terms. For these scheduled price reductions, the Company evaluates whether the provisions represent a material right to the customer, and if so, defers associated revenue as a result.
At times, the Company makes up-front incentive payments to certain customers related to future sales under multi-year programs. The Company capitalizes these incentive payments, which it expects to recover through future sales, and amortizes the assets as a reduction to revenue when the related products are sold to customers.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Disaggregation of Revenue
The tables below present revenue to external customers for each of the Company’s business segments by primary end market, geographic location, and based upon the timing of revenue recognition:
| | Year ended March 31, 2021 | |
| | BHVAC | | | CIS | | | HDE | | | Automotive | | | Segment Total | |
Primary end market: | | | | | | | | | | | | | | | |
Commercial HVAC&R | | $ | 181.6 | | | $ | 420.6 | | | $ | 0 | | | $ | 0 | | | $ | 602.2 | |
Data center cooling | | | 58.7 | | | | 47.3 | | | | 0 | | | | 0 | | | | 106.0 | |
Industrial cooling | | | 0 | | | | 55.4 | | | | 0 | | | | 0 | | | | 55.4 | |
Commercial vehicle | | | 0 | | | | 0 | | | | 250.4 | | | | 14.4 | | | | 264.8 | |
Off-highway | | | 0 | | | | 0 | | | | 260.7 | | | | 3.4 | | | | 264.1 | |
Automotive and light vehicle | | | 0 | | | | 0 | | | | 97.9 | | | | 357.8 | | | | 455.7 | |
Other | | | 0.3 | | | | 8.7 | | | | 73.1 | | | | 22.7 | | | | 104.8 | |
Net sales | | $ | 240.6 | | | $ | 532.0 | | | $ | 682.1 | | | $ | 398.3 | | | $ | 1,853.0 | |
| | | | | | | | | | | | | | | | | | | | |
Geographic location: | | | | | | | | | | | | | | | | | | | | |
Americas | | $ | 144.2 | | | $ | 267.7 | | | $ | 388.2 | | | $ | 51.0 | | | $ | 851.1 | |
Europe | | | 96.4 | | | | 219.8 | | | | 133.2 | | | | 282.0 | | | | 731.4 | |
Asia | | | 0 | | | | 44.5 | | | | 160.7 | | | | 65.3 | | | | 270.5 | |
Net sales | | $ | 240.6 | | | $ | 532.0 | | | $ | 682.1 | | | $ | 398.3 | | | $ | 1,853.0 | |
| | | | | | | | | | | | | | | | | | | | |
Timing of revenue recognition: | | | | | | | | | | | | | | | | | | | | |
Products transferred at a point in time | | $ | 240.6 | | | $ | 486.3 | | | $ | 655.2 | | | $ | 398.3 | | | $ | 1,780.4 | |
Products transferred over time | | | 0 | | | | 45.7 | | | | 26.9 | | | | 0 | | | | 72.6 | |
Net sales | | $ | 240.6 | | | $ | 532.0 | | | $ | 682.1 | | | $ | 398.3 | | | $ | 1,853.0 | |
| | Year ended March 31, 2020 | |
| | BHVAC | | | CIS | | | HDE | | | Automotive | | | Segment Total | |
Primary end market: | | | | | | | | | | | | | | | |
Commercial HVAC&R | | $ | 176.6 | | | $ | 463.1 | | | $ | 0 | | | $ | 0 | | | $ | 639.7 | |
Data center cooling | | | 42.7 | | | | 107.5 | | | | 0 | | | | 0 | | | | 150.2 | |
Industrial cooling | | | 0 | | | | 43.5 | | | | 0 | | | | 0 | | | | 43.5 | |
Commercial vehicle | | | 0 | | | | 0 | | | | 302.1 | | | | 21.6 | | | | 323.7 | |
Off-highway | | | 0 | | | | 0 | | | | 240.8 | | | | 13.1 | | | | 253.9 | |
Automotive and light vehicle | | | 0 | | | | 0 | | | | 108.4 | | | | 400.4 | | | | 508.8 | |
Other | | | 1.8 | | | | 9.8 | | | | 94.6 | | | | 9.8 | | | | 116.0 | |
Net sales | | $ | 221.1 | | | $ | 623.9 | | | $ | 745.9 | | | $ | 444.9 | | | $ | 2,035.8 | |
| | | | | | | | | | | | | | | | | | | | |
Geographic location: | | | | | | | | | | | | | | | | | | | | |
Americas | | $ | 139.1 | | | $ | 345.9 | | | $ | 484.5 | | | $ | 70.3 | | | $ | 1,039.8 | |
Europe | | | 82.0 | | | | 232.6 | | | | 141.2 | | | | 321.0 | | | | 776.8 | |
Asia | | | 0 | | | | 45.4 | | | | 120.2 | | | | 53.6 | | | | 219.2 | |
Net sales | | $ | 221.1 | | | $ | 623.9 | | | $ | 745.9 | | | $ | 444.9 | | | $ | 2,035.8 | |
| | | | | | | | | | | | | | | | | | | | |
Timing of revenue recognition: | | | | | | | | | | | | | | | | | | | | |
Products transferred at a point in time | | $ | 221.1 | | | $ | 518.2 | | | $ | 715.1 | | | $ | 444.9 | | | $ | 1,899.3 | |
Products transferred over time | | | 0 | | | | 105.7 | | | | 30.8 | | | | 0 | | | | 136.5 | |
Net sales | | $ | 221.1 | | | $ | 623.9 | | | $ | 745.9 | | | $ | 444.9 | | | $ | 2,035.8 | |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
| | Year ended March 31, 2019 | |
| | BHVAC | | | CIS | | | HDE | | | Automotive | | | Segment Total | |
Primary end market: | | | | | | | | | | | | | | | |
Commercial HVAC&R | | $ | 167.7 | | | $ | 506.3 | | | $ | 0 | | | $ | 0 | | | $ | 674.0 | |
Data center cooling | | | 41.3 | | | | 145.7 | | | | 0 | | | | 0 | | | | 187.0 | |
Industrial cooling | | | 0 | | | | 47.8 | | | | 0 | | | | 0 | | | | 47.8 | |
Commercial vehicle | | | 0 | | | | 0 | | | | 352.6 | | | | 35.0 | | | | 387.6 | |
Off-highway | | | 0 | | | | 0 | | | | 298.1 | | | | 16.0 | | | | 314.1 | |
Automotive and light vehicle | | | 0 | | | | 0 | | | | 116.7 | | | | 426.1 | | | | 542.8 | |
Other | | | 3.4 | | | | 7.8 | | | | 104.9 | | | | 11.8 | | | | 127.9 | |
Net sales | | $ | 212.4 | | | $ | 707.6 | | | $ | 872.3 | | | $ | 488.9 | | | $ | 2,281.2 | |
| | | | | | | | | | | | | | | | | | | | |
Geographic location: | | | | | | | | | | | | | | | | | | | | |
Americas | | $ | 124.9 | | | $ | 413.6 | | | $ | 543.0 | | | $ | 71.0 | | | $ | 1,152.5 | |
Europe | | | 87.5 | | | | 244.8 | | | | 177.4 | | | | 369.4 | | | | 879.1 | |
Asia | | | 0 | | | | 49.2 | | | | 151.9 | | | | 48.5 | | | | 249.6 | |
Net sales | | $ | 212.4 | | | $ | 707.6 | | | $ | 872.3 | | | $ | 488.9 | | | $ | 2,281.2 | |
| | | | | | | | | | | | | | | | | | | | |
Timing of revenue recognition: | | | | | | | | | | | | | | | | | | | | |
Products transferred at a point in time | | $ | 212.4 | | | $ | 571.1 | | | $ | 829.1 | | | $ | 488.9 | | | $ | 2,101.5 | |
Products transferred over time | | | 0 | | | | 136.5 | | | | 43.2 | | | | 0 | | | | 179.7 | |
Net sales | | $ | 212.4 | | | $ | 707.6 | | | $ | 872.3 | | | $ | 488.9 | | | $ | 2,281.2 | |
Contract Balances
Contract assets and contract liabilities from contracts with customers were as follows:
| | March 31, 2021 | | | March 31, 2020 | |
Contract assets | | $ | 5.7 | | | $ | 21.7 | |
Contract liabilities | | | 5.6 | | | | 5.6 | |
At March 31, 2021, contract assets and contract liabilities exclude amounts classified as held for sale. See Note 2 for additional information.
Contract assets, included within other current assets in the consolidated balance sheets, primarily consist of capitalized costs related to customer-owned tooling contracts, wherein the customer has guaranteed reimbursement, and assets recorded for revenue recognized over time, which represent the Company’s rights to consideration for work completed but not yet billed. The $16.0 million decrease in contract assets during fiscal 2021 primarily resulted from a decrease in contract assets for revenue recognized over time and $7.1 million of contract assets within the liquid- and air-cooled automotive businesses that have been classified as held for sale on the March 31, 2021 consolidated balance sheet.
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. During fiscal 2021, increases related to customer contracts for which payment was received in advance of the Company’s satisfaction of performance obligations was offset by $2.9 million of contract liabilities within the liquid- and air-cooled automotive businesses that have been classified as held for sale on the March 31, 2021 consolidated balance sheet.
Note 4: | 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. |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
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 is 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, and 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 and liabilities held for sale. The fair value of the Company’s long-term debt is disclosed in Note 17.
The Company holds trading securitiesinvestments in a deferred compensation trusttrusts to fund obligations under Modine’scertain non-qualified deferred compensation plan.plans. The securities’Company records the fair values, which are recorded asvalue of these investments within other noncurrent assets are determined based on quoted prices from active markets and classifiedits 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.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. TheAt March 31, 2021 and 2020, the fair values of the investments and obligations for the Company’s trading securities and deferred compensation obligationsplans each totaled $3.2$2.8 million and $3.0$3.8 million, at March 31, 2016 and 2015, respectively. The $1.0 million decrease in the fair value of the Company’s long-term debt is disclosed in Note 16.investments since March 31, 2020 was primarily due to participant withdrawals during fiscal 2021.
Plan assets related to the Company’s pension plans were classified as follows:
| | March 31, 2016 | | | March 31, 2021 | |
| | Level 1 | | | Level 2 | | | Total | | | Level 1 | | | Level 2 | | | Total | |
| | | | | | | | | | | | | | | | | | |
Money market investments | | $ | - | | | $ | 5.8 | | | $ | 5.8 | | | $ | 0 | | | $ | 2.5 | | | $ | 2.5 | |
Common stocks | | | 23.7 | | | | 1.3 | | | | 25.0 | | |
Corporate bonds | | | - | | | | 8.4 | | | | 8.4 | | |
Fixed income securities | | | | 0 | | | | 8.9 | | | | 8.9 | |
Pooled equity funds | | | 48.7 | | | | 7.3 | | | | 56.0 | | | | 37.3 | | | | 0 | | | | 37.3 | |
Pooled fixed-income funds | | | 26.3 | | | | - | | | | 26.3 | | |
U.S. government and agency securities | | | - | | | | 18.4 | | | | 18.4 | | | | 0 | | | | 14.5 | | | | 14.5 | |
Other | | | 0.4 | | | | 1.2 | | | | 1.6 | | | | 0.1 | | | | 1.0 | | | | 1.1 | |
Total | | $ | 99.1 | | | $ | 42.4 | | | $ | 141.5 | | |
Fair value excluding investments measured at net asset value | | | | 37.4 | | | | 26.9 | | | | 64.3 | |
Investments measured at net asset value | | | | | | | | | | | | 119.0 | |
Total fair value | | | | | | | | | | | $ | 183.3 | |
| | March 31, 2020 | |
| | Level 1 | | | Level 2 | | | Total | |
| | | | | | | | | |
Money market investments | | $ | 0 | | | $ | 2.4 | | | $ | 2.4 | |
Fixed income securities | | | 0 | | | | 8.7 | | | | 8.7 | |
Pooled equity funds | | | 17.9 | | | | 0 | | | | 17.9 | |
U.S. government and agency securities | | | 0 | | | | 13.1 | | | | 13.1 | |
Other | | | 0.1 | | | | 0.7 | | | | 0.8 | |
Fair value excluding investment measured at net asset value | | | 18.0 | | | | 24.9 | | | | 42.9 | |
Investments measured at net asset value | | | | | | | | | | | 88.2 | |
Total fair value | | | | | | | | | | $ | 131.1 | |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
| | March 31, 2015 | |
| | Level 1 | | | Level 2 | | | Total | |
| | | | | | | | | |
Money market investments | | $ | - | | | $ | 8.1 | | | $ | 8.1 | |
Common stocks | | | 40.5 | | | | 2.2 | | | | 42.7 | |
Corporate bonds | | | - | | | | 23.5 | | | | 23.5 | |
Pooled equity funds | | | 69.0 | | | | 11.4 | | | | 80.4 | |
Pooled fixed-income funds | | | 15.5 | | | | - | | | | 15.5 | |
U.S. government and agency securities | | | - | | | | 39.8 | | | | 39.8 | |
Other | | | 0.7 | | | | 6.3 | | | | 7.0 | |
Total | | $ | 125.7 | | | $ | 91.3 | | | $ | 217.0 | |
The Company determined the fair value of money market investments to approximate their net asset values, without discounts for credit quality or liquidity restrictions, and classified them within Level 2 of the valuation hierarchy. The Company determined the fair value of common stocks, pooled equity funds and pooled fixed-income funds based onupon quoted prices from active markets and classified them within Level 1 of the valuation hierarchy. The Company determined the fair value of certain common stocks, corporate bonds, pooled equity fundsfixed income securities and U.S. government and agency securities based upon recent bid prices or the average of recent bid and asking prices when available and, if not available, the Company valued them through matrix pricing models developed by sources considered by management to be reliable. The Company classified these assets within Level 2 of the valuation hierarchy. As of March 31, 20162021 and 2015,2020, the Company held no0 Level 3 assets within its pension plans.
Assets held
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
As a practical expedient, the Company valued certain investments, including pooled equity, fixed income and a real estate fund, using their net asset value (“NAV”) per unit, and therefore, has not classified these investments within the fair value hierarchy. The terms and conditions for sale:redemptions vary for the investments valued at NAV. The real estate and fixed income investment funds may be redeemed quarterly and monthly, respectively, with a 90-day and 60-day notice period, respectively. Other investments valued at NAV do not have significantly-restrictive redemption frequency or notice period requirements. The Company valued assets held for sale based on Level 3 market-based valuation inputs. The carrying valuedoes not intend to sell or otherwise dispose of assets held for sale totaled $8.5 million and $3.2 millionthese investments at March 31, 2016 and 2015, respectively. See prices different than the NAV per unit.
Note 6 for additional information.5: Stock-Based Compensation
Note 5: | Stock-Based Compensation |
The Company’s stock-based incentive programs consist of the following: (1) a long-term incentive compensation programplan (“LTIP”) for officers and other executives that consists of restricted stock andawards, stock options, and performance-based stock awards granted for retention and performance, (2) a discretionary equity program for other management and other key employees, and (3) stock awards and/or stock options for non-employee directors. The Company’s Board of Directors and the Officer NominationHuman Capital and Compensation Committee, as applicable, have discretionary authority to set the terms of the awards of stockstock-based awards. Grants to employees during fiscal 2021 were issued under the Company’s Amended and Restated 20082020 Incentive Compensation Plan (“Plan”).Plan. In lieu of performance-based stock awards, the Company granted performance cash awards to the LTIP participants in fiscal 2021. At present, the Company accomplishes the fulfillment of equity-based grants through the issuance of new common shares. As of March 31, 2016,2021, approximately 3.31.7 million shares authorized under the2020 Incentive Compensation Plan remain available for future grants. Employee participants have the opportunity to deliver back to the Company the number of shares from the vesting of stock awards sufficient to satisfy the individual’s minimum tax withholding obligations. These shares are held as treasury shares. The Company recorded stock-based compensation expense of $4.9$6.3 million $4.0, $6.6 million, and $3.6$7.9 million in fiscal 2016, 2015,2021,2020, and 2014,2019, respectively.
Stock Options:Options
The Company recorded $0.9$0.9 million $0.9, $1.3 million, and $0.8$1.2 million of compensation expense related to stock options in fiscal 2016, 2015,2021,2020, and 2014,2019, respectively. The fair value of stock options that vested during fiscal 2016, 2015,2021,2020, and 20142019, was $0.9$1.3 million $0.9, $1.2 million, and $0.8$1.2 million, respectively. As of March 31, 2016,2021, the total compensation expense not yet recognized related to non-vested stock options was $2.0$1.8 million and the weighted-average period in which the remaining expense is expected to be recognized was 2.52.8 years.
The Company estimated the fair value of option awards on the date of grant using the Black-Scholes option valuation model and the following assumptions:
| | 2016 | | 2015 | | 2014 |
Weighted-average fair value of options | | $ | 7.11 | | | $ | 10.21 | | | $ | 7.76 | |
Expected life of awards in years | | | 6.3 | | | | 6.3 | | | | 6.3 | |
Risk-free interest rate | | | 1.9 | % | | | 2.1 | % | | | 1.3 | % |
Expected volatility of the Company's stock | | | 66.9 | % | | | 76.1 | % | | | 88.7 | % |
Expected dividend yield on the Company's stock | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % |
| | Years ended March 31, | |
| | 2021 | | | 2020 | | | 2019 | |
Fair value of options | | $ | 3.46 | | | $ | 5.56 | | | $ | 7.81 | |
Expected life of awards in years | | | 6.1 | | | | 6.3 | | | | 6.3 | |
Risk-free interest rate | | | 0.4 | % | | | 2.2 | % | | | 2.8 | % |
Expected volatility of the Company’s stock | | | 54.1 | % | | | 39.2 | % | | | 39.7 | % |
Expected dividend yield on the Company’s stock | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Stock options expire no later than 10 years after the grant date and have an exercise price equal to the fair market value of theModine’s common stock on the date of grant. The risk-free interest rate was based onupon yields of U.S. Treasury zero-coupon issues with a term corresponding to the expected life of the options. The expected volatility assumption was based onupon changes in the Company’s historical common stock prices over the same time frameperiod as the expected life of the awards. The expected dividend yield is zero, as the Company currently does not anticipate paying dividends over the expected life of the options. The expected lives of the awards are based onupon historical patterns and the terms of the options. Outstanding options granted vest 25 percent annually for four years. The Company used a pre-vesting forfeiture rate
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
A summary of stock option activity for fiscal 20162021 was as follows:
| | Shares | | Weighted-average exercise price | | | Weighted-average remaining contractual term (years) | | | Aggregate intrinsic value | | | Shares | | | Weighted-average exercise price | | | Weighted-average remaining contractual term (years) | | | Aggregate intrinsic value | |
Outstanding, beginning | | | 1.5 | | | $ | 11.99 | | | | | | | | | | 1.4 | | | $ | 12.49 | | | | | | | |
Granted | | | 0.2 | | | | 11.39 | | | | | | | | | | 0.4 | | | | 6.88 | | | | | | | |
Exercised | | | (0.1 | ) | | | 5.82 | | | | | | | | | | (0.4 | ) | | | 10.56 | | | | | | | |
Forfeited or expired | | | (0.1 | ) | | | 27.33 | | | | | | | | | | (0.3 | ) | | | 10.94 | | | | | | | |
Outstanding, ending | | | 1.5 | | | $ | 10.82 | | | | 5.3 | | | $ | 3.0 | | | | 1.1 | | | $ | 11.63 | | | | 7.1 | | | $ | 3.9 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Exercisable, March 31, 2016 | | | 1.1 | | | $ | 10.41 | | | | 4.3 | | | $ | 3.0 | | |
Exercisable, March 31, 2021 | | | | 0.5 | | | $ | 13.80 | | | | 5.1 | | | $ | 0.9 | |
The aggregate intrinsic value represents the difference between the closing price of Modine’s common shares on the last trading day of fiscal 20162021 over the exercise price of the stock options, multiplied by the number of options outstanding or exercisable. The aggregate intrinsic value is not recorded for financial statement purposes, and this value will change based upon daily changes in the fair valueprice of Modine’s common shares.
Additional information related to stock options exercised during fiscal 2016, 2015, and 2014 wasis as follows:
| | | Years ended March 31, | |
| | 2016 | | | 2015 | | | 2014 | | | 2021 | | | 2020 | | | 2019 | |
Intrinsic value of stock options exercised | | $ | 0.4 | | | $ | 0.4 | | | $ | 1.1 | | | $ | 1.4 | | | $ | 0.1 | | | $ | 0.7 | |
Proceeds from stock options exercised | | $ | 0.5 | | | $ | 0.6 | | | $ | 1.1 | | | | 4.1 | | | | 0.1 | | | | 1.1 | |
Restricted Stock:Stock
The Company recorded $3.5$4.3 million, $2.8$4.5 million, and $2.2$4.3 million of compensation expense related to restricted stock in fiscal 2016, 2015,2021, 2020, and 2014,2019, respectively. The fair value of restricted stock awards that vested during fiscal 2016, 2015,2021, 2020, and 20142019 was $3.4$4.5 million, $2.3$4.4 million, and $1.6$4.3 million, respectively. At March 31, 2016,2021, the Company had $4.7$6.1 million of unrecognized compensation expense related to non-vested restricted stock, which it expects to recognize over a weighted-average period of 2.42.7 years. The Company values restricted stock awards using the closing market valueprice of its common shares on the date of grant. The restricted stock awards granted annually vest 25 percent annuallyper year for four years, with the exception of awards to non-employee directors, which fully vest upon grant.
A summary of restricted stock activity for fiscal 20162021 was as follows:
| | Shares | | Weighted- average price | | Shares | | | Weighted-average price | |
Non-vested balance, beginning | | | 0.7 | | | $ | 10.68 | | | | 0.5 | | | $ | 14.48 | |
Granted | | | 0.3 | | | | 11.18 | | | | 0.8 | | | | 7.53 | |
Vested | | | (0.4 | ) | | | 10.01 | | | | (0.5 | ) | | | 9.64 | |
Forfeited | | | | (0.1 | ) | | | 13.40 | |
Non-vested balance, ending | | | 0.6 | | | $ | 11.29 | | | | 0.7 | | | $ | 10.05 | |
Restricted Stock – Performance-Based Shares:Shares
The Company recorded $0.5$1.1 million, $0.3$0.8 million, and $0.6$2.4 million of compensation expense related to performance-based stock awards in fiscal 2016, 2015,2021, 2020, and 2014,2019, respectively. At March 31, 2016,2021, the Company had $1.2$0.5 million of total unrecognized compensation expense related to non-vested performance-based stock awards, which is expected to be recognized over a weighted-average period of 1.7 years.one year. The Company values performance-based stock awards using the closing market valueprice of its common shares on the date of grant.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Shares are earned under the performance portion of the restricted stock award program based upon the attainment of certain financial goals over a three-year period and are awarded after the end of that three-year performance period, if the performance targets have been achieved. A new performance period may begin each fiscal year; therefore, multiple performance periods, with distinct goals, may operate simultaneously.
The performance components ofmetrics for the programs initiatedperformance-based stock awards granted in fiscal 20162020 and fiscal 2015 were2019 are based upon both a target three-year average consolidated cash flow return on averageinvested capital employed (“ROACE”) and a target three-year average annual revenue growth at the end of a three-year performance period, commencing with the fiscal year of grant. ForAs noted above, the program initiatedCompany granted performance cash awards in fiscal 2014,2021 in lieu of performance-based stock awards. The performance metrics for these cash awards are the performance award was based upon a target three-year average ROACE, three-year average annual revenue growth,same as the metrics for the fiscal 2020 and Asia segment operating income at the end of the three-year performance period.2019 performance-based stock awards.
Note 6: | Restructuring Activities |
During fiscal 2016, the Company offered a voluntary retirement program to certain U.S. salaried employees. The program was offered as part of the Company’s Strengthen, Diversify and Grow transformational initiative and supports the objective of reducing operational and SG&A cost structures.
Also during fiscal 2016, the Company announced a plan to close its Washington, Iowa manufacturing facility and is in the process of transferring the facility’s production to other Americas segment manufacturing facilities, which it expects to complete by the end of fiscal 2017. In addition, the Company completed the transfer of production from its McHenry, Illinois manufacturing facility to other Americas segment manufacturing facilities. These restructuring activities reflect the Company’s focus on operating scale manufacturing facilities to improve overall competitiveness and profitability.
During fiscal 2015, the Company initiated a headcount reduction plan for its Brazil manufacturing facility within its Americas segment. The headcount reductions were in response to the economic slowdown in Brazil and reflect the Company’s objective to maintain profitability in this business despite lower sales volume.
In addition, the Company continues to execute restructuring activities within its Europe segment. These restructuring activities have included implementing headcount reductions, exiting certain non-core product lines based upon Modine’s global product strategy, reducing manufacturing costs, consolidating production facilities, and disposing of and selling certain underperforming or non-strategic assets. The Company designed these activities to align the cost structure of the segment with its strategic focus on the commercial vehicle, off-highway, automotive component, and engine product markets, while improving gross margin and return on average capital employed.
Restructuring and repositioning expenses were as follows:
| | Years ended March 31, | |
| | 2016 | | | 2015 | | | 2014 | |
Employee severance and related benefits | | $ | 12.8 | | | $ | 1.2 | | | $ | 14.8 | |
Accelerated depreciation | | | - | | | | - | | | | 4.3 | |
Other restructuring and repositioning expenses | | | 3.8 | | | | 3.5 | | | | 1.3 | |
Total | | $ | 16.6 | | | $ | 4.7 | | | $ | 20.4 | |
Other restructuring and repositioning expenses primarily consist of equipment transfer and plant consolidation costs.
During fiscal 2016, 2015, and 2014, the Company recorded $16.6 million, $4.7 million, and $16.1 million, respectively, of restructuring and repositioning expenses as restructuring expenses in the consolidated statement of operations. During fiscal 2014, the Company recorded $4.3 million of restructuring and repositioning expenses within cost of sales in the consolidated statement of operations.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)