| (in millions) | |
Year Ended March 31, 20162023 Compared with Year Ended March 31, 2015:2022
Fiscal 20162023 net sales decreased $143of $2,298 million were $248 million, or 12 percent, higher than the prior year, primarily due to higher sales volume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases. These increases were partially offset by a $111 million unfavorable impact of foreign currency exchange rates. Sales in the Performance Technologies and Climate Solutions segments increased $144 million and $101 million, respectively.
Fiscal 2023 cost of sales of $1,909 million increased $168 million, or 10 percent, primarily due to higher sales volume and higher raw material prices, which increased $34 million. These increases were partially offset by a $95 million favorable impact of foreign currency exchange rates. As a percentage of sales, cost of sales decreased 180 basis points to 83.1 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.
As a result of higher sales and lower cost of sales as a percentage of sales, fiscal 2023 gross profit increased $80 million and gross margin improved 180 basis points to 16.9 percent.
Fiscal 2023 SG&A expenses increased $19 million, yet decreased 30 basis points as a percentage of sales. The higher SG&A expenses were primarily driven by higher compensation-related expenses, which increased $20 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions. These increases were partially offset by an $8 million favorable impact of foreign currency exchange rates. In addition, strategic reorganization costs, costs associated with our review of strategic alternatives for our automotive businesses, and environmental charges related to a previously-closed manufacturing facility in the U.S., which are each recorded at Corporate, decreased $3 million, $2 million, and $2 million, respectively, during fiscal 2023 compared with the prior year.
Restructuring expenses of $5 million in fiscal 2023 decreased $19 million compared with the prior year, primarily due to lower severance-related expenses in the Performance Technologies segment.
The net impairment reversal of $56 million during fiscal 2022 primarily related to the liquid-cooled automotive business. In connection with the termination of the agreement to sell this business in the third quarter of fiscal 2022, we reversed a significant amount of previously-recorded impairment charges within the Performance Technologies segment.
We sold our Austrian air-cooled automotive business on April 30, 2021. As a result of the sale, we recorded a $7 million loss on sale at Corporate during fiscal 2022.
Operating income of $150 million during fiscal 2023 increased $31 million from the prior year, primarily due to loweran $80 million increase in gross profit, a $19 million decrease in restructuring expenses, and the absence of the $7 million loss on the sale of the Austrian air-cooled automotive business in the prior year. These drivers, which favorably impacted operating income in fiscal 2023, were partially offset by the absence of the $56 million net impairment reversal recorded in the prior year and higher SG&A expenses.
Interest expense in fiscal 2023 increased $5 million compared with the prior year, primarily due to unfavorable changes in interest rates. In addition, we amended and extended our U.S. credit agreement that provides for a multi-currency revolving credit facility and U.S. dollar- and euro- denominated term loans maturing in October 2027, along with shorter-duration swingline loans. In connection with this credit agreement modification, we recorded $1 million of costs as interest expense during fiscal 2023.
The benefit for income taxes was $28 million in fiscal 2023, compared with a provision for income taxes of $15 million in fiscal 2022. The $43 million change was primarily due to a $57 million income tax benefit recorded in the current year related to the reversal of the valuation allowance on certain deferred tax assets in the U.S., partially offset by the absence of a net $11 million income tax benefit related to valuation allowances on deferred tax assets in foreign jurisdictions in the prior year.
Year Ended March 31, 2022 Compared with Year Ended March 31, 2021
Fiscal 2022 net sales of $2,050 million were $242 million, or 13 percent, higher than the prior year, primarily due to higher sales volume in each of our segments, and favorable commercial pricing, including adjustments in response to raw material price increases. Sales in the Climate Solutions and Performance Technologies segments increased $180 million and $63 million, respectively.
Fiscal 2022 cost of sales of $1,741 million increased $226 million, or 15 percent, primarily due to higher raw material prices, which increased $148 million, and higher sales volume. In addition, cost of sales in fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic. These factors, which caused an increase in cost of sales compared with the prior year, were partially offset by lower depreciation expense in the Performance Technologies segment and improved operating efficiencies. As a percentage of sales, cost of sales increased 110 basis points to 84.9 percent.
As a result of higher sales and higher cost of sales as a percentage of sales, fiscal 2022 gross profit increased $16 million and gross margin declined 110 basis points to 15.1 percent.
Fiscal 2022 SG&A expenses increased $4 million. The increase in SG&A expenses was primarily due to higher compensation-related expenses, as the prior year was favorably impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19. In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3 million. These increases were partially offset by lower costs related to our Americasreview of strategic alternatives for the automotive businesses and Europe segments. Saleslower strategic reorganization costs, which decreased $4 million and $3 million, respectively. The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.
Restructuring expenses of $24 million in fiscal 2022 increased $11 million compared with the prior year, primarily due to higher severance-related expenses in the Performance Technologies segment, partially offset by lower severance-related expenses in the Climate Solutions segment.
In fiscal 2021, we recorded $167 million of impairment charges to write down the long-lived assets in the liquid-cooled and Austrian air-cooled automotive businesses when they were classified as held for sale. In fiscal 2022, we adjusted the long-lived assets in the liquid-cooled automotive business to the lower of carrying or fair value once they no longer met the held for sale classification criteria and, as a result, recorded a net impairment reversal of $56 million.
We sold our Austrian air-cooled automotive business on April 30, 2021. As a result of the sale, we recorded a $7 million loss on sale at Corporate during fiscal 2022.
Operating income of $119 million during fiscal 2022 represents an improvement of $217 million from the prior-year operating loss of $98 million. The operating income and operating loss during fiscal 2022 and 2021 included the significant impairment reversal and impairment charges within the Performance Technologies segment. In addition, as compared with the prior year, the fiscal 2022 operating income was favorably impacted by higher gross profit. Operating income was negatively impacted by higher restructuring expenses, the loss on sale of the Austrian air-cooled automotive business, and higher SG&A expenses.
The provision for income taxes was $15 million and $90 million in fiscal 2022 and 2021, respectively. The $75 million decrease was primarily due to the absence of $117 million of income tax charges recorded in fiscal 2021 to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11 million income tax benefit recorded in fiscal 2022 related to valuation allowances on deferred tax assets in foreign jurisdictions. These drivers, which decreased the provision for income taxes, were partially offset by the absence of income tax benefits totaling $47 million recorded in the prior year, including $38 million related to the impairment charges recorded for the held for sale automotive businesses and $9 million resulting from the allocation of the income tax provision between net earnings and other comprehensive income.
Segment Results of Operations
Effective April 1, 2022, we began managing the Company under two operating segments, Climate Solutions and Performance Technologies. Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management. This simplified segment structure allows us to better focus resources on targeted growth opportunities and better enables an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.
The Climate Solutions segment includes the previously-reported BHVAC and CIS segments, with the exception of CIS Coatings. The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS Coatings business.
The segment realignment had no impact on our consolidated financial position, results of operations, and cash flows. We have recast the segment financial information for fiscal 2022 and 2021 to conform to the fiscal 2023 presentation.
Climate Solutions
| | | Years ended March 31, | | | | | 2023 | | | 2022 | | | 2021 | | | (in millions) | | $’s | | | % of sales | | | $’s | | | % of sales | | | $’s | | | % of sales | | | Net sales | | $ | 1,012 | | | | 100.0 | % | | $ | 911 | | | | 100.0 | % | | $ | 731 | | | | 100.0 | % | | Cost of sales | | | 788 | | | | 77.9 | % | | | 744 | | | | 81.7 | % | | | 595 | | | | 81.3 | % | | Gross profit | | | 224 | | | | 22.1 | % | | | 166 | | | | 18.3 | % | | | 137 | | | | 18.7 | % | | Selling, general and administrative expenses | | | 97 | | | | 9.6 | % | | | 90 | | | | 9.9 | % | | | 82 | | | | 11.2 | % | | Restructuring expenses | | | 2 | | | | 0.2 | % | | | 2 | | | | 0.2 | % | | | 5 | | | | 0.7 | % | | Operating income | | $ | 124 | | | | 12.3 | % | | $ | 73 | | | | 8.1 | % | | $ | 50 | | | | 6.8 | % |
Year Ended March 31, 2023 Compared with Year Ended March 31, 2022
Climate Solutions net sales increased $101 million, or 11 percent, in fiscal 2023 compared with the prior year, primarily due to higher sales volume and favorable commercial pricing. These increases in our Europe segment were more thanpartially offset by a $76$52 million unfavorable impact of foreign currency exchange rate changes. In total, ourrates. Compared with the prior year, sales of data center cooling, heat transfer, and HVAC & refrigeration products increased $58 million, $33 million, and $11 million, respectively.
Climate Solutions cost of sales increased $44 million, or 6 percent, in fiscal 20162023, primarily due to higher sales were negatively affectedvolume, partially offset by a $110$44 million unfavorablefavorable impact of foreign currency exchange rate changes,rates. As a percentage of sales, cost of sales decreased 380 basis points to 77.9 percent, primarily associated withdue to the strengtheningfavorable impact of the U.S. dollar.higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher labor and inflationary costs.
GrossAs a result of higher sales and lower cost of sales as a percentage of sales, gross profit decreased $23increased $58 million to $224 million in fiscal 2016, yetand gross margin of 16.5 percent was consistentimproved 380 basis points to 22.1 percent.
Climate Solutions SG&A expenses increased $7 million compared with the prior year.year, yet decreased 30 basis points as a percentage of sales. The decreaseincrease in gross profitSG&A expenses was primarily due to a $14$5 million unfavorable impact of foreign currency exchange rate changes, $9 million of pension settlement losses,increase in compensation-related expenses, including commission expenses, and lower sales volumeincreases in the Americas segment,other general and administrative expenses that have been impacted by inflationary market conditions. These increases were 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 initiatives and a $10$4 million favorable impact of foreign currency exchange rate changes.
Restructuring expenses increased $12totaling $2 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 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 profit decreased $9 million, yet gross margin increased 80 basis points to 17.1 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 million favorable impact of foreign currency exchange rate changes. Fiscal 2015 SG&A expenses increased $3 million from the prior year, primarily due to the $3 million charge for the legal matter in fiscal 2015.
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, we recorded $3 million of restructuring expenses, primarily related to severance expenses in Brazil, to better align our cost structure with the market conditions in Brazil, and equipment transfer costs related to the closure of our McHenry, Illinois manufacturing facility, which we completed during fiscal 2016. We also recorded an $8 million goodwill impairment charge during fiscal 2015, primarily due to a decline in the financial outlook for Brazil.
Operating income of $36 million in fiscal 2016 increased $3 million compared with the prior year, primarily due to lower SG&A expenses and the absence of the goodwill impairment charge in the prior year, partially offset by lower gross profit and higher restructuring expenses. Operating income of $33 million in fiscal 2015 decreased $17 million 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 million2023 were consistent with the prior year as higher engineering and development costs were offset by a favorable impactprimarily consisted of foreign currency exchange rate changes.severance-related expenses.
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 $2 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 $132023 increased $51 million compared with the prior year, primarily due to an increase in restructuring expenses and impairment charges and the absence of a $3$124 million, gain on the sale of a wind tunnel in the prior year, partially offset by lower SG&A expenses. Operating income of $26 million 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, primarily due to lower sales volume to off-highway customers in China and Korea and a $4 million unfavorable impact of foreign currency exchange rate changes, partially offset by higher sales volume to automotive customers in China and increased overall sales in India. Sales increased $9 million, or 13 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 2016 compared with the prior year, primarily due to favorable sales mix. Gross profit increased $3 million and gross margin increased 170 basis points to 14.2 percent in fiscal 2015 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 with a joint venture that we formed in fiscal 2016. See Note 3 to the Notes to Consolidated Financial Statements for additional information on this joint venture. Fiscal 2015 SG&A expenses were consistent with the prior year, yet decreased as a percentage of sales.
Operating income of $1 million in fiscal 2016 increased $1 million compared with the prior year, primarily due to lower SG&A expenses. Operating income of less than $1 million in fiscal 2015 represented a $3 million improvement compared with the operating loss in the prior year, and was primarily due to higher gross profit on increased sales volume.
| | | 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 net sales decreased $5 million, or 3 percent, in fiscal 2016 compared with the prior year, primarily due to a $6 million unfavorable impact of foreign currency exchange rate changes and lower sales at our businesses in the U.K., as unfavorable currency conditions resulted in increased competition from other mainland European suppliers, partially offset by increased ventilation product sales in North America. Sales increased $40 million, or 27 percent, in fiscal 2015 compared with fiscal 2014, primarily due to a $23 million increase in sales at our businesses in the U.K. 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 2015 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 million compared with the prior year, primarily due to lower gross profit and higher SG&A expenses. Operating income of $19 million in fiscal 2015 increased $10 million compared with the prior year, primarily due to higher gross profit, partially offset by higher SG&A expenses.
Year Ended March 31, 2022 Compared with Year Ended March 31, 2021
Climate Solutions net sales increased $180 million, or 25 percent, in fiscal 2022 compared with the prior year, primarily due to higher sales volume and, to a lesser extent, favorable commercial pricing, including adjustments in response to raw material price increases. Sales of heat transfer, HVAC & refrigeration, and data center cooling products increased $101 million, $46 million, and $32 million, respectively.
Climate Solutions cost of sales increased $149 million, or 25 percent, in fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased $67 million. As a percentage of sales, cost of sales increased 40 basis points to 81.7 percent, primarily due to higher material costs, partially offset by favorable impacts of higher sales volume and improved operating efficiencies.
As a result of higher sales and higher cost of sales as a percentage of sales, gross profit increased $29 million and gross margin declined 40 basis points to 18.3 percent.
Climate Solutions SG&A expenses increased $8 million compared with the prior year, yet decreased 130 basis points as a percentage of sales. The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased $6 million and included higher commission expenses.
Restructuring expenses during fiscal 2022 decreased $3 million, primarily due to lower severance expenses. The fiscal 2022 severance expenses primarily related to targeted headcount reductions in Europe and China. The fiscal 2021 severance expenses primarily related to plant consolidation activities in China and targeted headcount reductions in North America.
Operating income in fiscal 2022 of $73 million increased $23 million, primarily due to higher gross profit, partially offset by higher SG&A expenses.
Performance Technologies
| | | Years ended March 31, | | | | | 2023 | | | 2022 | | | 2021 | | | (in millions) | | $’s | | | % of sales | | | $’s | | | % of sales | | | $’s | | | % of sales | | | Net sales | | $ | 1,316 | | | | 100.0 | % | | $ | 1,172 | | | | 100.0 | % | | $ | 1,109 | | | | 100.0 | % | | Cost of sales | | | 1,150 | | | | 87.4 | % | | | 1,030 | | | | 87.9 | % | | | 952 | | | | 85.8 | % | | Gross profit | | | 166 | | | | 12.6 | % | | | 142 | | | | 12.1 | % | | | 157 | | | | 14.2 | % | | Selling, general and administrative expenses | | | 98 | | | | 7.4 | % | | | 99 | | | | 8.4 | % | | | 93 | | | | 8.4 | % | | Restructuring expenses | | | 3 | | | | 0.2 | % | | | 22 | | | | 1.9 | % | | | 7 | | | | 0.6 | % | | Impairment charges (reversals) - net | | | - | | | | - | | | | (56 | ) | | | -4.8 | % | | | 167 | | | | 15.0 | % | | Operating income (loss) | | $ | 66 | | | | 5.0 | % | | $ | 77 | | | | 6.6 | % | | $ | (109 | ) | | | -9.8 | % |
Year Ended March 31, 2023 Compared with Year Ended March 31, 2022
Performance Technologies net sales increased $144 million, or 12 percent, in fiscal 2023 compared with the prior year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases. These increases were partially offset by a $59 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, the absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021. Sales of air-cooled, liquid-cooled, and advanced solutions products increased $86 million, $36 million, and $25 million, respectively.
Performance Technologies cost of sales increased $120 million, or 12 percent, primarily due to higher sales volume and higher raw material prices, which increased $29 million. In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales. During fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business until they reverted back to held and used classification during the third quarter of fiscal 2022. These increases were partially offset by a $52 million favorable impact of foreign currency exchange rates. As a percentage of sales, cost of sales decreased 50 basis points to 87.4 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher material, labor and inflationary costs.
As a result of higher sales and lower cost of sales as a percentage of sales, gross profit increased $24 million and gross margin improved 50 basis points to 12.6 percent.
Performance Technologies SG&A expenses decreased $1 million compared with the prior year. As a percentage of sales, SG&A expenses decreased by 100 basis points. The decrease in SG&A expenses was primarily due to a $4 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, partially offset by higher general and administrative expenses that have been impacted by inflationary market conditions.
Restructuring expenses during fiscal 2023 totaled $3 million, a decrease of $19 million compared with the prior year. This decrease was primarily driven by lower severance expenses in Europe for targeted headcount reductions.
The net impairment reversal of $56 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business. See Note 2 of the Notes to Consolidated Financial Statements for further information.
Operating income in fiscal 2023 decreased $11 million to $66 million, primarily due to the absence of the significant net impairment reversal recorded in the prior year, partially offset by higher gross profit and lower restructuring expenses.
Year Ended March 31, 2022 Compared with Year Ended March 31, 2021
Performance Technologies net sales increased $63 million, or 6 percent, in fiscal 2022 compared with the prior year, primarily due to favorable commercial pricing, including adjustments in response to raw material price increases, and to a lesser extent, higher sales volume. In regard to the higher sales volume, sales in the prior year were negatively impacted by the COVID-19 pandemic in fiscal 2021. Sales increased in fiscal 2022 to off-highway and commercial vehicle customers, as those underlying markets recovered. Sales to automotive customers, however, decreased in fiscal 2022, primarily due to $58 million of lower sales from our Austrian air-cooled automotive business, which we sold in the first quarter of fiscal 2022, and the negative impacts of the semiconductor chip shortage on the global automotive market. Compared with the prior year, sales of air-cooled and advanced solutions products increased $52 million and $21 million, respectively. Sales of liquid-cooled products decreased $11 million.
Performance Technologies cost of sales increased $78 million, or 8 percent, primarily due to higher raw material prices, which increased $81 million, and to a lesser extent, higher sales volume. These drivers, which increased cost of sales, were partially offset by lower depreciation expenses in the segment’s automotive businesses, which decreased $9 million. We ceased depreciating the property, plant and equipment assets within the liquid-cooled and Austrian air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021. Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business. As a percentage of sales, cost of sales increased 210 basis points to 87.9 percent, primarily due to the higher material prices.
As a result of higher sales and higher cost of sales as a percentage of sales, gross profit decreased $15 million and gross margin declined 210 basis points to 12.1 percent.
Performance Technologies SG&A expenses increased $6 million compared with the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $7 million, partially offset by lower development and other administrative costs.
Restructuring expenses during fiscal 2022 totaled $22 million, an increase of $15 million compared with the prior year. The increase was primarily driven by higher severance expenses in Europe related to targeted headcount reductions.
The fiscal 2022 net impairment reversal of $56 million primarily related to assets in our liquid-cooled automotive business. We remeasured the previously impaired long-lived assets within the liquid-cooled automotive business to the lower of their carrying or fair value once they were no longer held for sale. The fiscal 2021 impairment charges totaling $167 million related to assets in the liquid-cooled and Austrian air-cooled automotive businesses, which were first classified as held for sale in fiscal 2021. See Note 2 of the Notes to Consolidated Financial Statements for further information.
Operating income of $77 million during fiscal 2022 represents a $186 million improvement from the prior-year operating loss of $109 million. The operating income and operating loss during fiscal 2022 and 2021 were largely driven by the significant net impairment reversal and impairment charges, respectively. In addition, as compared with the prior year, operating income was unfavorably impacted by lower gross profit and higher 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, 20162023 of $69$67 million, and an available borrowing capacity of $207$270 million under lines ofour revolving credit provided by banks in the United States and abroad.facility. Given our extensive international operations, $49approximately $63 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 long-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 $42 million as of March 31, 2023. As a result of funding relief provisions within the American Rescue Plan Act of 2021, we do not expect to encounter, any difficulty meeting the liquidity requirements ofmake cash contributions to our global operations.U.S. pension plans during fiscal 2024.
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 20162023 was $72$108 million, an increase of $8$96 million from $64$12 million in the prior year. This increase in operating cash flow was primarily due to the favorable impact of higher earnings and favorable net changes in working capital, includingas compared with the prior year. While inventories have increased $44 million from the prior year, the increase has been less significant than the increase in the prior year. In fiscal 2023, the Company increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases. In fiscal 2022, the higher inventory levels largely resulted from increased raw material prices and impacts from global supply constraints and challenges, which continued to impact our businesses in fiscal 2023. In addition, the favorable changes in working capital include lower payments for incentive compensation payments duringand lower pension plan contributions in fiscal 2016 and2023, as compared with the timing of value-added tax payments.prior year.
Net cash provided by operating activities in fiscal 20152022 was $64$12 million, a decrease of $41$138 million from $105$150 million in the prior year. This decrease in operating cash flow was primarily due to unfavorable net changes in working capital, including higher inventory and accounts receivable levels and higher payments for incentive compensation payments during fiscal 2015 relatedand employee benefits as compared with the prior year. Inventory increased $61 million from March 31, 2021 to fiscal 2014 performance, and the timing of customer-owned tooling reimbursements.March 31, 2022.
Capital Expenditures
Capital expenditures of $63$51 million during fiscal 20162023 increased $5$11 million compared with fiscal 2015. In fiscal 2016, our2022. Our capital spending primarily occurredin fiscal 2023 in the AmericasPerformance Technologies and EuropeClimate Solutions segments which totaled $27$25 million and $25$24 million, respectively. Capital projectsexpenditures in fiscal 2016 includedthe Performance Technologies segment include tooling and equipment purchases in conjunction with new and renewal programs with customers.
At March 31, 2016, our capital expenditure commitments totaled $21 million. Significant commitments included tooling and equipment expenditures for new and renewal programs with customers Capital spending in the Americas and Europe segments.Climate Solutions segment include investments supporting our strategic growth initiatives, including expanding our data center business.
Dividends
We did not pay dividends in fiscal 2016, 2015, or 2014. We currently do not intend to pay dividends in fiscal 2017.
Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275 million revolving credit facility and term loan facilities maturing in October 2027. This credit agreement modified our then existing $250 million revolver and term loan facilities, which would have matured in June 2024.
Our total debt outstanding increased $14decreased $25 million to $163$353 million at March 31, 2016,2023 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 2023.
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 and an interest expense coverage ratio covenant, which are discussed further below. Indebtedness under our credit agreements is secured by liens on substantially all domestic assets. These agreements further require compliance with various covenants that may limit our ability to incur additional indebtedness; grant liens; make investments, loans, or guarantees; engage in certain transactions with affiliates; or make restricted payments including dividends. Also, the credit agreements may require prepayments in the event of certain asset sales.
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 leverage ratio for the four fiscal quarters ended As of March 31, 2016 was 1.2, which was below the maximum permitted ratio of 3.25. Our interest expense coverage ratio for the four fiscal quarters ended March 31, 2016 was 10.5, which exceeded the minimum requirement of 3.0. We2023, we were in compliance with our debt covenants as of March 31, 2016 andcovenants. We expect to remain in compliance with our debt covenants during fiscal 20172024 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 termscredit agreements.
Share Repurchase Program
During fiscal 2023, we repurchased $7 million of our debt 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 ascommon stock. As of March 31, 2016. We are unable2023, we had $45 million of authorized share repurchases remaining under our current repurchase program, which expires in November 2024. Our decision whether and to determine the ultimate timingwhat extent to repurchase additional shares depends on a number 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.factors, including business conditions, other cash priorities, and stock price.
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 significantlymaterially impact our financial statements 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 toward 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. WhenIn the event 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.charge. 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$315 million and $81 million, respectively, at March 31, 2016.2023. 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 Climate Solutions 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 2016,2022, we recorded a $10net impairment reversal of $56 million, impairment chargeprimarily related to a manufacturing facilityassets that were held for sale in Germany. Seethe Performance Technologies segment. In fiscal 2021, we recorded $167 million of impairment charges to write down the long-lived assets in the liquid- and air-cooled automotive businesses when they were classified as held for sale. In fiscal 2022, we adjusted the long-lived assets in the liquid-cooled automotive business to the lower of carrying or fair value when they no longer met the held for sale classification criteria. See Note 62 of the Notes to the Consolidated Financial Statements for additional information.
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. Goodwill resulting from recent acquisitions generally represents 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 theand risk-adjusted discount rate, business trends and market conditions.rates. 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-specificcountry- and business-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 continued inflationary market conditions, including the impacts associated with the military conflict in Ukraine and 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, 2023, our goodwill totaled $166 million related to our Climate Solutions and Performance Technologies segments. We conducted our annual assessment for goodwill impairment during the fourth quartertests as of fiscal 2016March 31, 2023 by applying a fair value-based test and determined the fair value of ourthe reporting units substantiallyin each of our operating segments exceeded their respective book values.value. A 10 percent decrease in the estimated fair value of each reporting unit would not have resulted in a different conclusion. 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 million at March 31, 2016, 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, 2016,2023, our pension liabilities totaled $120$42 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 benefit cost. Our domestic pension expenses. Currently,plans are closed to new participants; therefore, participants in our domestic pensionthese 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 fiscal 20162023 and 20152022 was 8.0 percent.7.0 percent and 7.5 percent, respectively. For fiscal 2017,2024, we have also assumed a rate of 8.06.5 percent. The impactA change of a 25 basis point decreasepoints in the expected rate of return on assets would result in an increase of $0.4 million inimpact our fiscal 20172024 pension expense.expense by less than $1 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 2016,2023 and 2022, for purposes of determining pension expense, we used a discount rate of 4.13.9 and 3.2 percent, compared with 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 affectedfor our 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 20172024 pension expense and projected benefit obligation by less than $0.1 million.$1 million and approximately $4 million, respectively.
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-jurisdictionlegal entity-by-legal entity 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 asincluding environmental remediation costs, product warranties, self-insurance reserves, uncollectible accounts receivable,costs, 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 19Notes 15 and 20 of the Notes to Consolidated Financial Statements for additional information regarding product warranties and contingencies and litigation. litigation, respectively.
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 potential adverse developments or disruptions in the global economy and financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the military conflict between Russia and Ukraine;
| · | 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 |
The impact of other 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 foreign currency exchange rate fluctuations; increases in interest rates; recession and recovery therefrom; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade that have been or may be implemented in the U.S. or abroad;
| · | 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. |
The impact of potential further 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, including through our quotation process or through contract provisions for prospective price adjustments, as well as the inherent lag in timing of such contract provisions;
Our ability to mitigate increased labor costs and labor shortages;
The impact of public health threats, such as COVID-19, on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; and
The impact of current and future environmental laws and regulations on our business and the businesses of our customers, including our ability to take advantage of opportunities to supply alternative new technologies to meet environmental and/or energy standards and objectives.
Operational Risks:
| · | The overall health and 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; |
34The impact of problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;
The overall health of and price-reduction pressure from our vehicular customers in light of economic and market-specific factors, the potential lower overall win rate for sales programs with contractual price reductions as a result of pricing strategies to ensure satisfactory profit margins for the duration of the programs, and the potential impact on us from any deterioration in the stability or performance of any of our major customers;
| · | Our ability to effectively 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 maintain current customer relationships and compete effectively for new business, including our ability to achieve profit margins acceptable to us by offsetting or otherwise addressing any cost increases associated with supply chain challenges and inflationary market conditions;
| · | Our ability to complete the transition of our Washington, Iowa production to other facilities efficiently and effectively; |
The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims;
| · | Costs and other effects of the remediation of environmental contamination; |
The impact of delays or modifications initiated by major customers with respect to program launches, product applications or requirements;
| · | 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; |
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;
| · | Work stoppages or interference at our facilities or those of our major customers and/or suppliers; and |
Our ability to effectively and efficiently manage our cost structure in response to sales volume increases or decreases and to complete restructuring activities and realize the anticipated benefits of those activities;
| · | Costs and other effects of unanticipated litigation or claims, and the constant pressures associated with healthcare and insurance costs. |
Costs and other effects of the investigation and remediation of environmental contamination; including when related to the actions or inactions of others and/or facilities over which we have no control;
Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, in light of tight global labor markets;
Our ability to protect our proprietary information and intellectual property from theft or attack by internal or external sources;
The impact of a 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 realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles to our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;
Our ability to identify and execute on organic growth opportunities and acquisitions, and to efficiently and successfully integrate acquired businesses;
Our ability to successfully execute strategies to reduce costs and improve operating margins; and
The potential impacts from 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 infor our Asia business segment,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 increases in interest rates in relation to our variable-rate debt obligations; | · | 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. |
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 2023, we recorded a net gain 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, more than2023, approximately 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 2016,2023, changes in foreign currencies negativelycurrency exchange rates unfavorably impacted our sales by $110$111 million; however, the impact on our operating income was only $4$7 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 2016,2023, there would not have been a material impact on our fiscal 20162023 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, including swingline borrowings, is variable and is currently based primarily on a variable interest rate of London Interbank Offered Rate (“LIBOR”)either SOFR or EURIBOR, plus 125137.5 to 225175 basis points, depending on our leverage ratio. WeAs a result, we are subject to risk of fluctuations in LIBORSOFR 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.
As of March 31, 2023, our outstanding borrowings on variable-rate term loans totaled $216 million. There were no outstanding borrowings outstanding under theon our revolving credit facility as of March 31, 2016.2023. Based onupon our outstanding debt with variable interest rates at March 31, 2016,2023, a 100 basis100-basis point increase in interest rates would increase our annual interest expense in fiscal 20172024 by less than $1approximately $2 million.
Commodity Price and Supply Risk
We are dependent uponTo produce the supply ofproducts we sell, we purchase raw materials and supplies in the production process and, from time to time, enter into firm purchase commitments forincluding aluminum, copper, nickel,steel and stainless steel (nickel), refrigerants, and gases such as natural gas. gas, helium, and nitrogen. In addition, we also purchase components and parts that are integrated into our end products.
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 agreementsrisk primarily by adjusting product pricing in response to applicable price increases. Our contracts with certain vehicular customers contain provisions 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 marketsexclude additional cost elements, such as related premiums and are influenced by similar market and general economic factors. fabrication. 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 offsettinginstances where the risk associatedis not covered contractually, we seek to adjust product pricing in response to price increases, including through our quotation process and through price list increases.
In fiscal 2023, we continued to experience a significant increase in raw material prices and price increases on other goods and services in connection with a downturn in any of the marketsglobal supply chain challenges and inflationary market conditions. In response, we serve. However, risk associated with market downturns, such as the global downturn experienced in fiscal 2009 and fiscal 2010, isimplemented selling price increases for our products. Nevertheless, we are still present.
We monitor economic conditions in the U.S., in our foreign markets and elsewhere. As 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 examples of new and emerging markets for us include those related to waste heat recovery, coils, and the Chinese and Indian markets. Our investment in these areas is subject to the risks associatedrisk of further price increases on commodities, components, and other goods and services that we purchase.
Regarding supply risk in light of current supply chain challenges, we are engaged with business integration, technological success, customerour suppliers to ensure availability of purchased commodities and market acceptance,components and we have added key suppliers to our ability to meetsupply base during the demandslast year. However, we are still dependent upon limited sources of supply for certain components used in the manufacture 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. We(nickel). Even with this expanded supply base, we are exposed to the risk of suppliers of certain raw materials not being able or willing to meet strong customer demand, as they may not increase their output capacity as quickly as customers increase their orders, the impact of trade laws and oftariffs, and increased prices being charged by raw material suppliers.
In addition, weWe also 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, 2023, 37 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, data center cooling, and 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 current inflationary market conditions.
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, 2023; |
| • | 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 price reduction pressure applied by OEM customers. If contractual price downs are unavoidable, we contemplate them in our overall strategy and adjust pricing as necessary to provide profit margins that are acceptable to us.
Economic and Market Risk
Economic risk represents the possibility of loss resulting from economic instability in certain areas of the world, such as that caused by geopolitical uncertainly or pandemics, or downturns in markets in which we operate. We sell a broad range of thermal solution systems to customers operating in diverse markets, including the commercial, industrial, and building HVAC&R and commercial vehicle, off-highway, and automotive and light vehicle markets.
Considering our global presence, we also encounter risks imposed by potential trade restrictions, including tariffs, embargoes, sanctions, 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 examples of new and emerging markets for us include those related to electric vehicles, data centers, indoor air quality, and aftermarket coatings. Our investments in these areas are subject to the risks associated with technological success, customer and market acceptance, and our ability to meet the demands byof our customers for decreases in the price of our products. We attempt to offset this risk with firm agreements with our customers whenever possible, butas these agreements often contain provisions for future price reductions. In addition, customers occasionally link price reductions to future program awards, and we must assess the overall implications of such requests on a case-by-case basis.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. We periodically designate certain commodity forward contracts as cash flow hedges for accounting purposes. 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 2016, 2015,2023, 2022, and 2014, expenses2021, net gains and losses recognized in cost of sales related to commodity derivativeforward contracts totaled less thanwere approximately $1 million or less 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 and designate certain hedges of forecasted transactions as cash flow hedges for accounting purposes. 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 2023, 2022, and 2021, net gains and losses recognized in sales and cost of sales related to foreign currency forward contracts were $1 million or less 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, 2016,2023, all counterparties had a sufficient long-term credit rating.
| 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. |
MODINE MANUFACTURING COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended March 31, 2016, 20152023, 2022 and 20142021 (In millions, except per share amounts)
| | | 2016 | | 2015 | | 2014 | | 2023 | | | 2022 | | | 2021 | | | Net sales | | $ | 1,352.5 | | | $ | 1,496.4 | | | $ | 1,477.6 | | | $ | 2,297.9 | | | $ | 2,050.1 | | | $ | 1,808.4 | | | Cost of sales | | | 1,129.0 | | | | 1,249.9 | | | | 1,239.4 | | | | 1,908.5 | | | | 1,740.8 | | | | 1,515.0 | | | Gross profit | | | 223.5 | | | | 246.5 | | | | 238.2 | | | | 389.4 | | | | 309.3 | | | | 293.4 | | | Selling, general and administrative expenses | | | 204.5 | | | | 184.5 | | | | 181.7 | | | | 234.0 | | | | 215.1 | | | | 210.9 | | | Restructuring expenses | | | 16.6 | | | | 4.7 | | | | 16.1 | | | | 5.0 | | | | 24.1 | | | | 13.4 | | | Impairment charges | | | 9.9 | | | | 7.8 | | | | 3.2 | | | | Gain on sale of wind tunnel | | | - | | | | (3.2 | ) | | | - | | | | Operating (loss) income | | | (7.5 | ) | | | 52.7 | | | | 37.2 | | | | Impairment charges (reversals) – net | | | | - | | | | (55.7 | ) | | | 166.8 | | | Loss on sale of assets | | | | - | | | | 6.6 | | | | - | | | Operating income (loss) | | | | 150.4 | | | | 119.2 | | | | (97.7 | ) | | Interest expense | | | (11.1 | ) | | | (11.7 | ) | | | (12.4 | ) | | | (20.7 | ) | | | (15.6 | ) | | | (19.4 | ) | | Other income (expense) – net | | | 8.7 | | | | 0.2 | | | | (0.8 | ) | | | (Loss) earnings from continuing operations before income taxes | | | (9.9 | ) | | | 41.2 | | | | 24.0 | | | | Other expense – net | | | | (4.4 | ) | | | (2.1 | ) | | | (2.2 | ) | | Earnings (loss) before income taxes | | | | 125.3 | | | | 101.5 | | | | (119.3 | ) | | Benefit (provision) for income taxes | | | 8.9 | | | | (19.0 | ) | | | 107.9 | | | | 28.3 | | | | (15.2 | ) | | | (90.2 | ) | | (Loss) earnings from continuing operations | | | (1.0 | ) | | | 22.2 | | | | 131.9 | | | | Earnings from discontinued operations, net of income taxes | | | - | | | | 0.6 | | | | - | | | | Net (loss) earnings | | | (1.0 | ) | | | 22.8 | | | | 131.9 | | | | Net earnings (loss) | | | | 153.6 | | | | 86.3 | | | | (209.5 | ) | | Net earnings attributable to noncontrolling interest | | | (0.6 | ) | | | (1.0 | ) | | | (1.5 | ) | | | (0.5 | ) | | | (1.1 | ) | | | (1.2 | ) | | Net (loss) earnings attributable to Modine | | $ | (1.6 | ) | | $ | 21.8 | | | $ | 130.4 | | | | Net earnings (loss) attributable to Modine | | | $ | 153.1 | | | $ | 85.2 | | | $ | (210.7 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | (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: | | | | | | | | | | | | | | | Net earnings (loss) per share attributable to Modine shareholders: | | | | | | | | | | | | | | | Basic | | $ | (0.03 | ) | | $ | 0.46 | | | $ | 2.75 | | | $ | 2.93 | | | $ | 1.64 | | | $ | (4.11 | ) | | Diluted | | $ | (0.03 | ) | | $ | 0.45 | | | $ | 2.72 | | | $ | 2.90 | | | $ | 1.62 | | | $ | (4.11 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | Weighted-average shares outstanding: | | | | | | | | | | | | | | | | | | | | | | | | | | Basic | | | 47.3 | | | | 47.2 | | | | 46.9 | | | | 52.3 | | | | 52.0 | | | | 51.3 | | | Diluted | | | 47.3 | | | | 47.8 | | | | 47.6 | | | | 52.8 | | | | 52.5 | | | | 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, 20152023, 2022 and 20142021 (In millions)
| | | 2016 | | 2015 | | 2014 | | 2023 | | | 2022 | | | 2021 | | | Net (loss) earnings | | $ | (1.0 | ) | | $ | 22.8 | | | $ | 131.9 | | | | Net earnings (loss) | | | $ | 153.6 | | | $ | 86.3 | | | $ | (209.5 | ) | | Other comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | | | | | | Foreign currency translation | | | 4.6 | | | | (68.2 | ) | | | 9.7 | | | | (18.9 | ) | | | (8.3 | ) | | | 30.9 | | | 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 $1.1, $0 and $10.4 million | | | | 6.7 | | | | 19.7 | | | | 30.1 | | Cash flow hedges, net of income taxes of $0, $0 and $0.6 million | | | | 0.1 | | | | 0.1 | | | | 1.6 | | | Total other comprehensive income (loss) | | | 24.3 | | | | (94.9 | ) | | | 24.7 | | | | (12.1 | ) | | | 11.5 | | | | 62.6 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Comprehensive income (loss) | | | 23.3 | | | | (72.1 | ) | | | 156.6 | | | | 141.5 | | | | 97.8 | | | | (146.9 | ) | | Comprehensive income attributable to noncontrolling interest | | | (0.5 | ) | | | (0.8 | ) | | | (1.7 | ) | | | - | | | | (0.9 | ) | | | (1.7 | ) | | Comprehensive income (loss) attributable to Modine | | $ | 22.8 | | | $ | (72.9 | ) | | $ | 154.9 | | | $ | 141.5 | | | $ | 96.9 | | | $ | (148.6 | ) |
The notes to consolidated financial statements are an integral part of these statements.
MODINE MANUFACTURING COMPANY CONSOLIDATED BALANCE SHEETS March 31, 20162023 and 20152022 (In millions, except per share amounts)
| | | 2016 | | 2015 | | 2023 | | | 2022 | | ASSETS | | | | | | | | | | | | | | Cash and cash equivalents | | $ | 68.9 | | | $ | 70.5 | | | $ | 67.1 | | | $ | 45.2 | | | Trade accounts receivable – net | | | 189.1 | | | | 192.9 | | | | 398.0 | | | | 367.5 | | | Inventories | | | 111.0 | | | | 107.7 | | | | 324.9 | | | | 281.2 | | | Other current assets | | | 43.5 | | | | 79.7 | | | | 56.4 | | | | 63.7 | | | Total current assets | | | 412.5 | | | | 450.8 | | | | 846.4 | | | | 757.6 | | | Property, plant and equipment – net | | | 338.6 | | | | 322.1 | | | | 314.5 | | | | 315.4 | | | Intangible assets – net | | | 8.2 | | | | 9.9 | | | | 81.1 | | | | 90.3 | | | Goodwill | | | 15.8 | | | | 16.2 | | | | 165.6 | | | | 168.1 | | | Deferred income taxes | | | 123.1 | | | | 115.4 | | | | 83.7 | | | | 27.2 | | | Other noncurrent assets | | | 22.7 | | | | 16.5 | | | | 74.6 | | | | 68.4 | | | Total assets | | $ | 920.9 | | | $ | 930.9 | | | $ | 1,565.9 | | | $ | 1,427.0 | | | | | | | | | | | | | | | | | | | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | | | | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | | | Short-term debt | | $ | 28.6 | | | $ | 18.6 | | | $ | 3.7 | | | $ | 7.7 | | | Long-term debt – current portion | | | 8.5 | | | | 0.5 | | | | 19.7 | | | | 21.7 | | | Accounts payable | | | 142.4 | | | | 152.0 | | | | 332.8 | | | | 325.8 | | | Accrued compensation and employee benefits | | | 58.6 | | | | 56.7 | | | | 89.8 | | | | 85.1 | | | Other current liabilities | | | 35.5 | | | | 83.0 | | | | 61.1 | | | | 54.2 | | | Total current liabilities | | | 273.6 | | | | 310.8 | | | | 507.1 | | | | 494.5 | | | Long-term debt | | | 125.5 | | | | 129.6 | | | | 329.3 | | | | 348.4 | | | Deferred income taxes | | | 4.2 | | | | 3.1 | | | | 4.8 | | | | 5.9 | | | Pensions | | | 118.6 | | | | 110.4 | | | | 40.2 | | | | 47.2 | | | Other noncurrent liabilities | | | 16.3 | | | | 16.4 | | | | 84.9 | | | | 72.9 | | | Total liabilities | | | 538.2 | | | | 570.3 | | | | 966.3 | | | | 968.9 | | | 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) | | | |
| | | |
| | | 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 55.4 million and 54.8 million shares | | | | 34.6 | | | | 34.2 | | | Additional paid-in capital | | | 185.6 | | | | 180.6 | | | | 270.8 | | | | 261.6 | | | Retained earnings | | | 358.2 | | | | 359.8 | | | | 497.5 | | | | 344.4 | | | Accumulated other comprehensive loss | | | (174.2 | ) | | | (198.6 | ) | | | (161.1 | ) | | | (149.5 | ) | | 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, 3.3 million and 2.8 million shares | | | | (49.0 | ) | | | (40.0 | ) | | Total Modine shareholders’ equity | | | | 592.8 | | | | 450.7 | | | Noncontrolling interest | | | 6.5 | | | | 4.6 | | | | 6.8 | | | | 7.4 | | | Total equity | | | 382.7 | | | | 360.6 | | | | 599.6 | | | | 458.1 | | | Total liabilities and equity | | $ | 920.9 | | | $ | 930.9 | | | $ | 1,565.9 | | | $ | 1,427.0 | |
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, 20152023, 2022 and 20142021 (In millions)
| | | 2016 | | 2015 | | 2014 | | 2023 | | | 2022 | | | 2021 | | | Cash flows from operating activities: | | | | | | | | | | | | | | | | | | | | Net (loss) earnings | | $ | (1.0 | ) | | $ | 22.8 | | | $ | 131.9 | | | | Adjustments to reconcile net (loss) earnings to net cash provided by operating activities: | | | | | | | | | | | | | | | Net earnings (loss) | | | $ | 153.6 | | | $ | 86.3 | | | $ | (209.5 | ) | | Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: | | | | | | | | | | | | | | | Depreciation and amortization | | | 50.2 | | | | 51.6 | | | | 58.1 | | | | 54.5 | | | | 54.8 | | | | 68.6 | | | Insurance proceeds from Airedale fire | | | 5.9 | | | | 12.9 | | | | 16.9 | | | | Impairment charges | | | 9.9 | | | | 7.8 | | | | 3.2 | | | | 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 | | | | Impairment charges (reversals) – net | | | | - | | | | (55.7 | ) | | | 166.8 | | | Loss on sale of assets | | | | - | | | | 6.6 | | | | - | | | Stock-based compensation expense | | | | 6.6 | | | | 5.7 | | | | 6.3 | | | Deferred income taxes | | | (18.8 | ) | | | 5.9 | | | | (116.1 | ) | | | (59.6 | ) | | | (3.8 | ) | | | 67.9 | | | Stock-based compensation expense | | | 4.9 | | | | 4.0 | | | | 3.6 | | | | Other – net | | | (0.3 | ) | | | (0.7 | ) | | | (0.5 | ) | | | 4.8 | | | | 3.1 | | | | 6.3 | | | Changes in operating assets and liabilities, excluding acquisitions: | | | | | | | | | | | | | | | Changes in operating assets and liabilities: | | | | | | | | | | | | | | | Trade accounts receivable | | | 8.0 | | | | (0.1 | ) | | | (18.2 | ) | | | (40.7 | ) | | | (55.6 | ) | | | (17.1 | ) | | Inventories | | | (2.7 | ) | | | (4.2 | ) | | | (0.1 | ) | | | (49.4 | ) | | | (70.7 | ) | | | (5.0 | ) | | Accounts payable | | | (9.9 | ) | | | (2.4 | ) | | | 15.2 | | | | 10.2 | | | | 55.1 | | | | 44.0 | | | Accrued compensation and employee benefits | | | 0.8 | | | | (5.3 | ) | | | 17.5 | | | | 6.4 | | | | 9.8 | | | | 15.7 | | | Other assets | | | (14.5 | ) | | | (24.5 | ) | | | 2.1 | | | | 19.6 | | | | (2.4 | ) | | | 27.5 | | | Other liabilities | | | (5.6 | ) | | | (4.5 | ) | | | (14.9 | ) | | | 1.5 | | | | (21.7 | ) | | | (21.7 | ) | | Net cash provided by operating activities | | | 72.4 | | | | 63.5 | | | | 104.5 | | | | 107.5 | | | | 11.5 | | | | 149.8 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | | | | | | | Expenditures for property, plant and equipment | | | (62.8 | ) | | | (58.3 | ) | | | (53.1 | ) | | | (50.7 | ) | | | (40.3 | ) | | | (32.7 | ) | | 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 | | | | Proceeds from (payments for) dispositions of assets | | | | 0.3 | | | | (7.6 | ) | | | 0.7 | | | Disbursements for loan origination (see Note 1) | | | | - | | | | (4.7 | ) | | | - | | | Proceeds from maturities of short-term investments | | | | 3.4 | | | | 3.6 | | | | 3.4 | | | Purchases of short-term investments | | | (2.7 | ) | | | (5.2 | ) | | | - | | | | (3.4 | ) | | | (3.9 | ) | | | (3.6 | ) | | Proceeds from maturities of short-term investments | | | 2.1 | | | | 2.4 | | | | - | | | | Other – net | | | 0.9 | | | | 0.8 | | | | - | | | | - | | | | 1.9 | | | | 0.9 | | | Net cash used for investing activities | | | (77.8 | ) | | | (57.2 | ) | | | (41.5 | ) | | | (50.4 | ) | | | (51.0 | ) | | | (31.3 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | | | | | | | Borrowings of debt | | | 38.0 | | | | 36.4 | | | | 152.6 | | | | 374.3 | | | | 351.8 | | | | 32.7 | | | Repayments of debt | | | (27.1 | ) | | | (50.9 | ) | | | (152.4 | ) | | | (403.4 | ) | | | (306.7 | ) | | | (183.6 | ) | | Purchases of treasury stock under share repurchase program | | | (6.9 | ) | | | - | | | | - | | | | Borrowings (repayments) on bank overdraft facilities – net | | | | 3.0 | | | | (4.3 | ) | | | 3.6 | | Purchase of treasury stock under share repurchase program
| | | | (7.3 | ) | | | - | | | | - | | | Dividend paid to noncontrolling interest | | | | (0.6 | ) | | | (0.9 | ) | | | - | | | Financing fees paid | | | - | | | | (0.1 | ) | | | (0.9 | ) | | | (0.6 | ) | | | (0.2 | ) | | | (0.8 | ) | | Dividend paid to noncontrolling interest | | | (0.9 | ) | | | - | | | | (0.5 | ) | | | Other – net | | | (0.4 | ) | | | - | | | | (0.3 | ) | | | 1.3 | | | | (0.5 | ) | | | 3.0 | | | Net cash provided by (used for) financing activities | | | 2.7 | | | | (14.6 | ) | | | (1.5 | ) | | | Net cash (used for) provided by financing activities | | | | (33.3 | ) | | | 39.2 | | | | (145.1 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | Effect of exchange rate changes on cash | | | 1.1 | | | | (8.4 | ) | | | 1.9 | | | | (2.0 | ) | | | (0.4 | ) | | | 1.4 | | | 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 increase (decrease) in cash, cash equivalents and restricted cash | | | | 21.8 | | | | (0.7 | ) | | | (25.2 | ) | | Cash, cash equivalents and restricted cash – beginning of year | | | | 45.4 | | | | 46.1 | | | | 71.3 | | | Cash, cash equivalents and restricted cash – end of year | | | $ | 67.2 | | | $ | 45.4 | | | $ | 46.1 | |
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, 20152023, 2022 and 20142021 (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 comprehensive | | | Treasury stock, at | | | Non- controlling | | | | | | | Shares | | | Amount | | | capital | | | earnings | | | loss | | | cost | | | interest | | | Total | | | Balance, March 31, 2020 | | | 53.4 | | | $ | 33.3 | | | $ | 245.1 | | | $ | 469.9 | | | $ | (223.3 | ) | | $ | (37.1 | ) | | $ | 5.7 | | | $ | 493.6 | | | Net (loss) earnings | | | - | | | | - | | | | - | | | | (210.7 | ) | | | - | | | | - | | | | 1.2 | | | | (209.5 | ) | Other comprehensive income
| | | - | | | | - | | | | - | | | | - | | | | 62.1 | | | | - | | | | 0.5 | | | | 62.6 | | | Stock options and awards | | | 0.9 | | | | 0.6 | | | | 3.6 | | | | - | | | | - | | | | - | | | | - | | | | 4.2 | | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1.1 | ) | | | - | | | | (1.1 | ) | | Stock-based compensation expense | | | - | | | | - | | | | 6.3 | | | | - | | | | - | | | | - | | | | - | | | | 6.3 | | Balance, March 31, 2021 | | | 54.3 | | | | 33.9 | | | | 255.0 | | | | 259.2 | | | | (161.2 | ) | | | (38.2 | ) | | | 7.4 | | | | 356.1 | | | Net earnings | | | - | | | | - | | | | - | | | | 85.2 | | | | - | | | | - | | | | 1.1 | | | | 86.3 | | Other comprehensive income (loss)
| | | - | | | | - | | | | - | | | | - | | | | 11.7 | | | | - | | | | (0.2 | ) | | | 11.5 | | | Stock options and awards | | | 0.5 | | | | 0.3 | | | | 0.9 | | | | - | | | | - | | | | - | | | | - | | | | 1.2 | | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1.8 | ) | | | - | | | | (1.8 | ) | | Stock-based compensation expense | | | - | | | | - | | | | 5.7 | | | | - | | | | - | | | | - | | | | - | | | | 5.7 | | Dividend paid to noncontrolling interest
| | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.9 | ) | | | (0.9 | ) | Balance, March 31, 2022 | | | 54.8 | | | | 34.2 | | | | 261.6 | | | | 344.4 | | | | (149.5 | ) | | | (40.0 | ) | | | 7.4 | | | | 458.1 | | | Net earnings | | | - | | | | - | | | | - | | | | 153.1 | | | | - | | | | - | | | | 0.5 | | | | 153.6 | | | Other comprehensive loss | | | - | | | | - | | | | - | | | | - | | | | (11.6 | ) | | | - | | | | (0.5 | ) | | | (12.1 | ) | | Stock options and awards | | | 0.6 | | | | 0.4 | | | | 2.6 | | | | - | | | | - | | | | - | | | | - | | | | 3.0 | | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (9.0 | ) | | | - | | | | (9.0 | ) | | Stock-based compensation expense | | | - | | | | - | | | | 6.6 | | | | - | | | | - | | | | - | | | | - | | | | 6.6 | | | Dividend paid to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.6 | ) | | | (0.6 | ) | Balance, March 31, 2023 | | | 55.4 | | | $ | 34.6 | | | $ | 270.8 | | | $ | 497.5 | | | $ | (161.1 | ) | | $ | (49.0 | ) | | $ | 6.8 | | | $ | 599.6 | |
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 and environmentally responsible thermal management systems and components, bringing heating and cooling technologyproducts and solutions to diversified global markets and customers in a wide array of commercial, industrial, and building heating, ventilating, air conditioning, and refrigeration (“HVAC&R”) markets. TheIn 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 radiatorsi) heat transfer; ii) HVAC & refrigeration; iii) data center cooling; iv) air-cooled; v) liquid-cooled; and radiator cores, condensers, oil coolers,vi) advanced solutions.
Disposition of Austrian Air-cooled Automotive Business in Fiscal 2022 On April 30, 2021, the Company sold its Austrian air-cooled automotive business to Schmid Metall GmbH. As a result of this transaction, the Company recorded a loss of $6.6 million during fiscal 2022, which included the write-off of $1.7 million of net actuarial losses related to its pension plan. The Company reported this loss within the loss on sale of assets line on the consolidated statement of operations. Upon transaction closing, $5.9 million of cash within the business transferred to the buyer. Later in fiscal 2022, the Company paid the buyer $2.4 million upon the finalization of a purchase price adjustment for net working capital and certain other items. Financial results of this business, prior to the disposition, are reported within the Performance Technologies segment. See Note 2 for information regarding the accounting for this business while it was held for sale. Net sales of this business were $63.0 million in fiscal 2021.
In connection with the sale of this business, the Company provided the buyer with a 5-year, €4.0 million loan facility. Borrowings under the agreement currently bear interest at 5.4 percent. During fiscal 2022, the Company disbursed €4.0 million ($4.7 million) to the buyer under this facility. At both March 31, 2023 and 2022, the Company recorded the loan receivable within other noncurrent assets on its consolidated balance sheet because the Company expects to receive the principal repayment more than twelve months from the balance sheet date.
Disposition of Previously-Closed Facility in Fiscal 2022 During fiscal 2022, the Company sold a previously-closed manufacturing facility in the U.S. and received net cash proceeds of $0.7 million. As a result of the sale, the Company recorded an impairment charge air coolers, heat-transfer modulesof $0.3 million within the Climate Solutions segment to write down the property to fair value less costs to sell.
Chief Executive Officer (“CEO”) Transition in Fiscal 2021 In August 2020, Thomas A. Burke stepped down from his position as President and assemblies, exhaust gas recirculationCEO. 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 (“EGR”SG&A”) coolers, building heating, ventilatingexpenses at Corporate, primarily consisted of severance and air conditioning (“HVAC”) equipment,benefit-related expenses based upon the terms of Mr. Burke’s transition and coils.separation agreement and costs directly associated with the CEO search, partially offset by the impact of Mr. Burke’s forfeited stock-based compensation awards. 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 toward 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, 2023 and 2022, the allowance for credit losses was $2.2 million and $1.7 million, respectively. The changes to the Company’s allowance for credit losses during fiscal 2023 and 2022 were not material and primarily consisted of current-period provisions, write-offs charged against the allowance, recoveries collected, and foreign currency translation.
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 2009,2023, 2022, and 2021, the Company sold its Electronics Cooling business. The buyer financed a portion$150.6 million, $126.4 million, and $88.7 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,2023, 2022, and 2021, the Company recorded a gain of $0.9costs totaling $1.2 million, ($0.6$0.3 million, after income taxes) during fiscal 2015.
Assets held for sale: The Company considers assetsand $0.2 million, respectively, related 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, 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 uncollectibleselling 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.in the consolidated statements of operations.
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 million and $18.7 million, respectively. In certain instances, 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.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, 2023 and 2022, Company-owned tooling totaled $17.1 million and $18.3 million, respectively.
In certain instances, tooling is owned by the customer. 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, 2023 and 2022, customer-owned tooling receivables totaled $10.9 million and $12.3 million, respectively.
Stock-based Compensation The Company recognizes stock-based compensation using the fair value method. Accordingly, compensation expense for stock options, restricted stock and performance-based stock awards is calculated based upon the fair value of the instruments at the time of grant and is recognized as expense over the respective vesting periods. See Note 5 for additional information.
Research and Development The Company expenses research and development costs as incurred within SG&A expenses. During fiscal 2023, 2022, and 2021, research and development costs totaled $44.0 million, $50.3 million, and $46.3 million, respectively.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Shipping and handling costs: The Company records shipping and handling costs incurred upon the shipment of products to its OEM customers in cost of sales, and related amounts billed to these customers in net sales. The Company records shipping and handling costs incurred upon 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.
Research and development: The Company expenses research and development costs as incurred within SG&A expenses. For the years ended March 31, 2016, 2015, and 2014, research and development costs charged to operations totaled $61.1 million, $62.0 million, and $61.7 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. Restricted stock award recipients have a non-forfeitable right to receive dividends declared by the Company. Therefore, these restricted stock awards are 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 amount of those un-presented checks is included in accounts payable.
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, 20162023 and 2015,2022, the Company’s short-term investments totaled $3.3$3.5 million and $2.8$3.7 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.
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 $13.6 million, $9.0 million, and $7.9 million were accrued within accounts payable at March 31, 2023, 2022 and 2021, respectively.
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 manufacturing and information technology equipment and vehicles. The Company recognizes right-of-use (“ROU”) assets and lease liabilities at the lease 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.2023 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 classifies an asset as held for sale when (i) 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; (ii) the asset is available for immediate sale in its present condition; (iii) an active program to locate a buyer and other actions required to complete the sale have been initiated; (iv) the sale of the asset is expected to be completed within one year; and (v) it is unlikely that significant changes will be made to the plan. Upon classification as held for sale, the Company records the carrying value of the asset at the lower of its carrying value or its estimated fair value, less costs to sell. In addition, the Company ceases to record depreciation for assets held for sale. 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.cost of sales or SG&A expenses. 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 guidanceSupplemental Cash Flow Information
| | Years ended March 31, | | | | | 2023 | | | 2022 | | | 2021 | | | Interest paid | | $ | 18.4 | | | $ | 14.1 | | | $ | 17.9 | | | Income taxes paid | | | 31.9 | | | | 21.8 | | | | 19.7 | |
See Note 16 for supplemental cash flow information related 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.leases.
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)
New Accounting Guidance
Supplier Finance Programs
In May 2014,September 2022, the FASBFinancial Accounting Standards Board (“FASB”) issued new guidance that outlines a comprehensive model for entitieswill require companies that use supplier finance programs 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 new guidance also includes a cohesive set of disclosure requirements intended to provide users of financial statements with comprehensivedisclose information about revenue arising from contracts with customers. Thisthe programs, including key terms, outstanding obligations under such programs and where outstanding amounts are presented within their financial statements. In addition, a roll forward of obligations under supplier finance programs will be required annually. The new guidance is effective for the Company’s first quarterfiscal 2024 financial statements, with the exception of fiscal 2019.the roll forward disclosure requirement, which will become effective one year later. The Company is currently evaluating the impact thisnew disclosures, but does not expect the guidance will have a material impact 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 | |
Income Tax Simplification
Note 2: | Airedale Facility Fire |
On September 6, 2013, a fire caused significant destructionIn December 2019, the FASB issued new guidance designed to simplify the accounting for income taxes. The new guidance eliminated certain exceptions related to the Company’s Airedale manufacturing facilityapproach for intraperiod tax allocations and offices in Rawdon (Leeds), United Kingdom.the methodology for deferred tax liabilities. The Company reports Airedale’s financial results within the Building HVAC segment. There were no injuries caused by the fire.adopted this guidance as of April 1, 2021. The Rawdon facility, which is leased, was used to manufacture cooling products and solutions foradoption did not have a variety of applications, including data centers, clean rooms, retail, leisure and process cooling. The Company suspended operations at the Rawdon site 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 date 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, the Company recorded a $9.5 million gain within other income related to an insurance settlement 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 inmaterial impact on the Company’s consolidated financial statements.
Credit Losses In June 2016, the 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 modified the credit loss model to measure and recognize credit losses based upon expected losses rather than incurred losses. The Company adopted this guidance as of April 1, 2020. The adoption did not have a material impact on the Company’s consolidated balance sheets, statements of operations or statements of cash flows.
Note 2: Assets Held for Sale
On February 28, 2014,November 2, 2020, the Company acquired 100 percentsigned a definitive agreement to sell its liquid-cooled automotive business to Dana Incorporated (“Dana”). Beginning at that time, the Company classified this business as held for sale and ceased recording depreciation expense for its long-lived assets. On October 25, 2021, the Company announced that it agreed with Dana to terminate the sale agreement. Both companies had been actively engaged in the regulatory review process in Germany for many months and agreed that it was no longer in the best interest of either party to pursue the sale transaction further.
In connection with the termination of the sharessale agreement, the Company determined that the liquid-cooled automotive business no longer met the requirements to be classified as held for sale. As a result, the Company remeasured the long-lived assets reverting back to held and used classification at the lower of Barkell Limitedtheir (i) carrying value, as if held for sale classification had not been met; or (ii) fair value at the date of Consett, United Kingdomthe decision not to sell and reversed $57.2 million of held for cash considerationsale impairment charges during the third quarter of $7.8 million, netfiscal 2022. The long-lived assets primarily consisted 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 assets and were fully impaired while classified as held for sale. For purposes of $2.0 million;the remeasurement, the Company engaged third-party valuation specialists to assist in estimating the fair values of the assets. The Company primarily used the market and working capital netcost valuation approaches and utilized third-party information from various industry-accepted sources, including applicable government-published statistics and data from appraisal and resale service providers. The market approach focused on prices for comparable assets in arm’s length transactions. For land and building assets, for example, sales of similar properties near the Company’s facilities were analyzed. For machinery and equipment assets, the Company referenced available third-party information regarding the selling prices of similar equipment. The cost approach focused on the amount for which an asset could be replaced or reproduced. The cost of an asset was then adjusted downward based on various factors including, but not limited to, age, location, and physical condition. After estimating the fair values of the assets reverting back to held and used classification, the Company compared the fair value for each asset to its carrying value. Carrying value represented each asset’s carrying value before the initial impairment charge, reduced for depreciation that would have been recorded if the asset had not been classified as held for sale. The Company then adjusted each asset to the lower of fair value or carrying value, resulting in the reversal of $57.2 million of previous impairment charges. In addition, the Company resumed depreciating the property, plant and equipment assets of $1.1 million. Acquired technology consiststhe liquid-cooled automotive business based on the remeasured asset values during the third quarter 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.fiscal 2022.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The results$57.2 million held for sale impairment reversal during the third quarter of operationsfiscal 2022 was partially offset by $1.2 million of net held for sale impairment charges recorded earlier in fiscal 2022. At both June 30, 2021 and September 30, 2021, while the liquid-cooled automotive business was held for sale, the Company reassessed its fair value less costs to sell. As a result of these acquired businesses are includedevaluations, the Company recorded a total of $8.6 million of impairment charges during the first and second quarters of fiscal 2022. These impairment charges reduced the net carrying value of property, plant and equipment additions during each quarter to zero. In addition, in connection with a modification of the sale perimeter in the first quarter of fiscal 2022, the Company determined that certain manufacturing operations no longer met the requirements to be classified as held for sale. As a result, the Company reversed $7.4 million of previous impairment charges to adjust the long-lived assets within the asset groups impacted by the sale perimeter change to their estimated fair value. The Company’s determination of fair value for the long-lived assets within the businesses impacted by the sale perimeter change in the first quarter involved judgement and the use of significant estimates and assumptions, including assumptions regarding future revenue projections and operating profit margins and risk-adjusted discount rates.
When the liquid-cooled automotive business was initially classified as held for sale during the third quarter of fiscal 2021, the Company assessed the disposal group’s fair value less costs to sell and reduced the net carrying value of the disposal group’s long-lived assets to zero. During fiscal 2021, the Company recorded impairment charges totaling $138.3 million related to the long-lived assets within the liquid-cooled automotive business.
Also during fiscal 2021, the Company signed a definitive agreement to sell its Austrian air-cooled automotive business to Schmid Metall GmbH. Upon classification as held for sale, the Company estimated an implied loss in excess of the carrying value of the disposal group’s long-lived assets, which primarily consisted of property, plant and equipment assets. As a result, the Company recorded a $26.8 million impairment charge related to this business, reducing the carrying value of the disposal group’s long-lived assets to zero. In addition, the Company recorded an impairment charge of $1.7 million related to other equipment within the Performance Technologies segment. See Note 1 for additional information regarding the accounting for the sale of the Austrian air-cooled automotive business, which was completed in fiscal 2022.
The Company reported the impairment charges and reversals during fiscal 2022 and 2021 within the impairment charges (reversals) line on the consolidated statements of operations since the dates of acquisition. operations.
Note 3: Revenue Recognition
The Company did not present pro forma financial informationgenerates 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 the effect of these acquisitions is not materialit 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 the 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:
Climate Solutions The Climate Solutions segment principally generates revenue from selling heat transfer products, heating, ventilating, air conditioning, and refrigeration (“HVAC & refrigeration”) products, and data center cooling solutions.
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 practical limitations, the Climate Solutions 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.
Ventilation and air conditioning products are highly-specified to a customer’s needs; the majority of the underlying sales contracts do not provide the Company with an enforceable right to payment for performance completed to date. As a result, the Climate Solutions segment recognizes revenue for the majority of its products at the time control is transferred to the customer based upon shipping terms, which is generally upon shipment.
For the sale of heat transfer products, refrigeration products, and data center cooling solutions, 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 Climate Solutions segment recognizes revenue for these products primarily at the time control is transferred to the customer based upon shipping terms, which is generally upon shipment.
For sales to customers whose contract cancellation terms provide an enforceable right to payment, the Climate Solutions segment recognizes revenue over time based upon its estimated progress toward satisfaction of the performance obligations. The segment measures progress by evaluating the production status toward completion of ordered products not yet shipped to its customers.
Performance Technologies The Performance Technologies segment provides products and solutions that enhance the performance of customer applications. The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications. Air-cooled products include radiators, charge air coolers, condensers, and engine cooling modules. Liquid-cooled products include engine oil coolers, charge air coolers, condensers, and exhaust gas recirculation coolers. In addition, the Performance Technologies segment provides advanced solutions, which are designed to improve battery range and vehicle life, to zero-emission and hybrid commercial vehicle, automotive, bus and specialty vehicle customers. These solutions include battery thermal management systems, electronics cooling packages, and battery chillers. The advanced solutions provided by the segment also include coating products and application services that extend the life of equipment and components by protecting against corrosion.
While the Performance Technologies segment provides 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 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, the Performance Technologies segment recognizes revenue primarily at the time control is transferred to the customer based upon shipping terms, which is generally upon shipment.
In regard to the Performance Technologies 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 toward satisfaction of the performance obligations. The Performance Technologies segment measures progress by evaluating the production status of ordered products not yet shipped to the customer.
For sales of coatings products, in which the customers control the equipment being enhanced by the coating application, the Performance Technologies segment recognizes revenue over time based upon its estimated progress toward satisfaction of the performance obligations. The segment measures progress by evaluating the production status toward completion of ordered products or services not yet shipped to its customers.
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.
Disaggregation of Revenue The tables below present revenue for each of the Company’s operating segments, Climate Solutions and Performance Technologies. Each segment’s revenue is disaggregated by product group, by geographic location and based upon the timing of revenue recognition.
Effective April 1, 2022, the Company began managing its operations or financial position.under two operating segments, Climate Solutions and Performance Technologies. The Climate Solutions segment includes the previously-reported Building HVAC Systems (“BHVAC”) and the Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings. The Performance Technologies segment includes the previously-reported Heavy Duty Equipment (“HDE”) and Automotive segments and the CIS Coatings business. See Note 22 for additional information regarding the Company’s operating segments. The disaggregated revenue information presented in the tables below for fiscal 2022 and 2021 has been recast to be comparable with the fiscal 2023 presentation.
| | | Year ended March 31, 2023 | | | | Climate Solutions | | | Performance Technologies | | | Segment Total | | | Product groups: | | | | | | | | | | | Heat transfer | | $ | 521.2 | | | $ | - | | | $ | 521.2 | | | HVAC & refrigeration | | | 336.3 | | | | - | | | | 336.3 | | | Data center cooling | | | 154.0 | | | | - | | | | 154.0 | | | Air-cooled | | | - | | | | 658.6 | | | | 658.6 | | | Liquid-cooled | | | - | | | | 483.9 | | | | 483.9 | | | Advanced solutions | | | - | | | | 143.9 | | | | 143.9 | | | Inter-segment sales | | | 0.4 | | | | 29.8 | | | | 30.2 | | | Net sales | | $ | 1,011.9 | | | $ | 1,316.2 | | | $ | 2,328.1 | | | | | | | | | | | | | | | | | Geographic location: | | | | | | | | | | | | | | Americas | | $ | 580.9 | | | $ | 702.0 | | | $ | 1,282.9 | | | Europe | | | 406.0 | | | | 408.5 | | | | 814.5 | | | Asia | | | 25.0 | | | | 205.7 | | | | 230.7 | | | Net sales | | $ | 1,011.9 | | | $ | 1,316.2 | | | $ | 2,328.1 | | | | | | | | | | | | | | | | | Timing of revenue recognition: | | | | | | | | | | | | | | Products transferred at a point in time | | $ | 959.8 | | | $ | 1,242.3 | | | $ | 2,202.1 | | | Products transferred over time | | | 52.1 | | | | 73.9 | | | | 126.0 | | | Net sales | | $ | 1,011.9 | | | $ | 1,316.2 | | | $ | 2,328.1 | |
| | | Year ended March 31, 2022 | | | | | | | | | | Segment Total | | | Product groups: | | | | | | | | | | | Heat transfer | | $ | 488.3 | | | $ | - | | | $ | 488.3 | | | HVAC & refrigeration | | | 325.5 | | | | - | | | | 325.5 | | | Data center cooling | | | 96.3 | | | | - | | | | 96.3 | | | Air-cooled | | | - | | | | 572.3 | | | | 572.3 | | | Liquid-cooled | | | - | | | | 448.3 | | | | 448.3 | | | Advanced solutions | | | - | | | | 119.4 | | | | 119.4 | | | Inter-segment sales | | | 0.4 | | | | 32.4 | | | | 32.8 | | | Net sales | | $ | 910.5 | | | $ | 1,172.4 | | | $ | 2,082.9 | | | | | | | | | | | | | | | | | Geographic location: | | | | | | | | | | | | | | Americas | | $ | 485.9 | | | $ | 585.6 | | | $ | 1,071.5 | | | Europe | | | 396.7 | | | | 375.7 | | | | 772.4 | | | Asia | | | 27.9 | | | | 211.1 | | | | 239.0 | | | Net sales | | $ | 910.5 | | | $ | 1,172.4 | | | $ | 2,082.9 | | | | | | | | | | | | | | | | | Timing of revenue recognition: | | | | | | | | | | | | | | Products transferred at a point in time | | $ | 889.3 | | | $ | 1,093.7 | | | $ | 1,983.0 | | | Products transferred over time | | | 21.2 | | | | 78.7 | | | | 99.9 | | | Net sales | | $ | 910.5 | | | $ | 1,172.4 | | | $ | 2,082.9 | |
| | | Year ended March 31, 2021 | | | | | | | | | | Segment Total | | | Product groups: | | | | | | | | | | | Heat transfer | | $ | 386.9 | | | $ | - | | | $ | 386.9 | | | HVAC & refrigeration | | | 279.7 | | | | - | | | | 279.7 | | | Data center cooling | | | 64.5 | | | | - | | | | 64.5 | | | Air-cooled | | | - | | | | 520.3 | | | | 520.3 | | | Liquid-cooled | | | - | | | | 458.9 | | | | 458.9 | | | Advanced solutions | | | - | | | | 98.1 | | | | 98.1 | | | Inter-segment sales | | | 0.1 | | | | 31.5 | | | | 31.6 | | | Net sales | | $ | 731.2 | | | $ | 1,108.8 | | | $ | 1,840.0 | | | | | | | | | | | | | | | | | Geographic location: | | | | | | | | | | | | | | Americas | | $ | 379.7 | | | $ | 472.0 | | | $ | 851.7 | | | Europe | | | 307.0 | | | | 411.1 | | | | 718.1 | | | Asia | | | 44.5 | | | | 225.7 | | | | 270.2 | | | Net sales | | $ | 731.2 | | | $ | 1,108.8 | | | $ | 1,840.0 | | | | | | | | | | | | | | | | | Timing of revenue recognition: | | | | | | | | | | | | | | Products transferred at a point in time | | $ | 722.7 | | | $ | 1,044.7 | | | $ | 1,767.4 | | | Products transferred over time | | | 8.5 | | | | 64.1 | | | | 72.6 | | | Net sales | | $ | 731.2 | | | $ | 1,108.8 | | | $ | 1,840.0 | |
Contract Balances Contract assets and contract liabilities from contracts with customers were as follows:
| | March 31, 2023 | | | March 31, 2022 | | | Contract assets | | $ | 19.3 | | | $ | 26.8 | | | Contract liabilities | | | 21.5 | | | | 11.8 | |
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 $7.5 million decrease in contract assets during fiscal 2023 primarily resulted from a decrease in contract assets for revenue recognized over time.
Contract liabilities, included within other current liabilities in the consolidated balance sheets, consist of payments received in advance of satisfying performance obligations under customer contracts, including contracts for customer-owned tooling. The $9.7 million increase in contract liabilities during fiscal 2023 primarily resulted from payments received in advance of the Company’s satisfaction of performance obligations.
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. |
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 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, 2023 and 2022, the fair values of the investments and obligations for the Company’s trading securities and deferred compensation obligationsplans each totaled $3.2$2.3 million and $3.0$2.9 million, at March 31, 2016 and 2015, respectively. The fair value of the Company’s long-term debt is disclosed in Note 16.
Plan assets related to the Company’s pension plans were classified as follows:
| | | March 31, 2016 | | | | | Level 1 | | | Level 2 | | | Total | | | | | | | | | | | | | | Money market investments | | $ | - | | | $ | 5.8 | | | $ | 5.8 | | | Common stocks | | | 23.7 | | | | 1.3 | | | | 25.0 | | | Corporate bonds | | | - | | | | 8.4 | | | | 8.4 | | | Pooled equity funds | | | 48.7 | | | | 7.3 | | | | 56.0 | | | Pooled fixed-income funds | | | 26.3 | | | | - | | | | 26.3 | | | U.S. government and agency securities | | | - | | | | 18.4 | | | | 18.4 | | | Other | | | 0.4 | | | | 1.2 | | | | 1.6 | | | Total | | $ | 99.1 | | | $ | 42.4 | | | $ | 141.5 | |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Plan assets related to the Company’s pension plans were classified as follows:
| | | 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 | |
| | March 31, 2023 | | | | | Level 1 | | | Level 2 | | | Total | | | | | | | | | | | | | | Money market investments | | $ | - | | | $ | 1.9 | | | $ | 1.9 | | | Pooled equity funds | | | 34.9 | | | | - | | | | 34.9 | | | Other | | | - | | | | 0.4 | | | | 0.4 | | | Fair value excluding investments measured at net asset value | | | 34.9 | | | | 2.3 | | | | 37.2 | | | Investments measured at net asset value | | | | | | | | | | | 116.1 | | | Total fair value | | | | | | | | | | $ | 153.3 | |
| | March 31, 2022 | | | | | Level 1 | | | Level 2 | | | Total | | | | | | | | | | | | | | Money market investments | | $ | - | | | $ | 2.2 | | | $ | 2.2 | | | Fixed income securities | | | - | | | | 9.1 | | | | 9.1 | | | Pooled equity funds | | | 40.4 | | | | - | | | | 40.4 | | | U.S. government and agency securities | | | - | | | | 11.8 | | | | 11.8 | | | Other | | | 0.1 | | | | 1.4 | | | | 1.5 | | | Fair value excluding investment measured at net asset value | | | 40.5 | | | | 24.5 | | | | 65.0 | | | Investments measured at net asset value | | | | | | | | | | | 114.9 | | | Total fair value | | | | | | | | | | $ | 179.9 | |
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, 20162023 and 2015,2022, the Company held no Level 3 assets within its pension plans.
Assets heldAs a practical expedient, the Company valued certain investments, including pooled equity, fixed income and real estate funds, 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 investment fund may be redeemed quarterly with a 90-day notice period. 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 Note 6 for additional information.prices different than the NAV per unit.
Note 5: | 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 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 2023 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 2023, 2022, and 2021. At present, the Company accomplishes the fulfillment of equity-based grants through the issuance of new common shares. As of March 31, 2016,2023, approximately 3.32.2 million shares authorized under the Amended and Restated 2020 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$6.6 million $4.0, $5.7 million, and $3.6$6.3 million in fiscal 2016, 2015,2023, 2022, and 2014,2021, respectively.
Stock Options:Options The Company recorded $0.9$1.2 million $0.9, $1.1 million, and $0.8$0.9 million of compensation expense related to stock options in fiscal 2016, 2015,2023, 2022, and 2014,2021, respectively. The grant date fair value of stock options that vested during fiscal 2016, 2015,2023, 2022, and 20142021, was $0.9$1.0 million $0.9, $0.9 million, and $0.8$1.3 million, respectively. As of March 31, 2016,2023, the total compensation expense not yet recognized related to non-vested stock options was $2.0$2.3 million and the weighted-average period in which the remaining expense is expected to be recognized was 2.52.1 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, | | | | | 2023 | | | 2022 | | | 2021 | | | Fair value of options | | $ | 6.99 | | | $ | 8.79 | | | $ | 3.46 | | | Expected life of awards in years | | | 6.0 | | | | 6.1 | | | | 6.1 | | | Risk-free interest rate | | | 3.0 | % | | | 1.1 | % | | | 0.4 | % | | Expected volatility of the Company’s stock | | | 57.8 | % | | | 56.5 | % | | | 54.1 | % | | 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. OutstandingBased upon the terms of the fiscal 2023 annual awards, stock options grantedvest 33 percent, 33 percent, and 34 percent per year for three years, respectively. Stock option grants preceding the fiscal 2023 grant vest 25 percent annuallyper year for four years. The Company used a pre-vesting forfeiture rate of 2.5 percent as an estimate of expected forfeitures prior to completing the required service period.
A summary of stock option activity for fiscal 20162023 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 | | | | | | | | | | Outstanding, beginning of year | | | | 1.0 | | | $ | 12.12 | | | | | | | | | Granted | | | 0.2 | | | | 11.39 | | | | | | | | | | 0.2 | | | | 12.40 | | | | | | | | | Exercised | | | (0.1 | ) | | | 5.82 | | | | | | | | | | (0.2 | ) | | | 11.77 | | | | | | | | | Forfeited or expired | | | (0.1 | ) | | | 27.33 | | | | | | | | | | (0.1 | ) | | | 12.26 | | | | | | | | | Outstanding, ending | | | 1.5 | | | $ | 10.82 | | | | 5.3 | | | $ | 3.0 | | | | Outstanding, end of year | | | | 0.9 | | | $ | 12.28 | | | | 7.1 | | | $ | 9.6 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Exercisable, March 31, 2016 | | | 1.1 | | | $ | 10.41 | | | | 4.3 | | | $ | 3.0 | | | Exercisable, March 31, 2023 | | | | 0.4 | | | $ | 12.46 | | | | 5.5 | | | $ | 4.3 | |
The aggregate intrinsic value represents the difference between the closing price of Modine’s common shares on the last trading day of fiscal 20162023 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 | | | 2023 | | | 2022 | | | 2021 | | | Intrinsic value of stock options exercised | | $ | 0.4 | | | $ | 0.4 | | | $ | 1.1 | | | $ | 1.5 | | | $ | 0.1 | | | $ | 1.4 | | | Proceeds from stock options exercised | | $ | 0.5 | | | $ | 0.6 | | | $ | 1.1 | | | | 2.9 | | | | 1.4 | | | | 4.1 | |
Restricted Stock:Stock The Company recorded $3.5$5.4 million, $2.8$5.0 million, and $2.2$4.3 million of compensation expense related to restricted stock in fiscal 2016, 2015,2023, 2022, and 2014,2021, respectively. The grant date fair value of restricted stock awards that vested during fiscal 2016, 2015,2023, 2022, and 20142021 was $3.4$4.7 million, $2.3$4.4 million, and $1.6$4.5 million, respectively. At March 31, 2016,2023, the Company had $4.7$6.4 million of unrecognized compensation expense related to non-vested restricted stock, which it expects to recognize over a weighted-average period of 2.41.8 years. The Company values restricted stock awards using the closing market valueprice of its common shares on the date of grant. TheBased upon the terms of the fiscal 2023 annual awards, restricted stock awards vest 33 percent, 33 percent, and 34 percent per year for three years, respectively. Restricted stock award grants preceding the fiscal 2023 grant vest 25 percent annuallyper year for four years, with the exception ofyears. Restricted stock awards granted to non-employee directors which fullyin fiscal 2023 vest uponone year from the time of grant.
A summary of restricted stock activity for fiscal 20162023 was as follows:
| | | Shares | | Weighted- average price | | Shares | | | Weighted-average price | | | Non-vested balance, beginning | | | 0.7 | | | $ | 10.68 | | | | Non-vested balance, beginning of year | | | | 0.7 | | | $ | 11.61 | | | Granted | | | 0.3 | | | | 11.18 | | | | 0.5 | | | | 13.60 | | | Vested | | | (0.4 | ) | | | 10.01 | | | | (0.3 | ) | | | 11.85 | | | Non-vested balance, ending | | | 0.6 | | | $ | 11.29 | | | | Forfeited | | | | (0.1 | ) | | | 10.58 | | | Non-vested balance, end of year | | | | 0.8 | | | $ | 12.95 | |
Restricted Stock – Performance-Based Shares:Shares The Company recorded $0.5 million, $0.3 milliongranted performance-based cash awards in fiscal 2023, 2022, and $0.6 million2021 in lieu of compensation expense related toperformance-based stock awards. For performance-based stock awards, in fiscal 2016, 2015, and 2014, respectively. At March 31, 2016, the Company had $1.2 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. The Company values performance-based stockthe awards using the closing market valueprice of its common shares on the date of grant. During fiscal 2023 all performance-based awards were cash-based, therefore, the Company did not recognize compensation expense related to performance-based stock awards. In fiscal 2022, the Company recorded a $0.4 million benefit related to the performance-based stock awards granted in fiscal 2020. The payout earned for the fiscal 2020 awards was less than previously estimated. In fiscal 2021, the Company recorded $1.1million of compensation expense related to performance-based stock awards.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Shares areThe payouts earned under the performance portion of the restricted stock award program are based upon the attainment of certain financial goalstargets over a three-yearperiod and are awardedpaid after the end of that three-yearperformance period, if the performance targets have been achieved. A new The performance metrics for the performance-based cash awards granted in fiscal 2021 are based upon both a target three-yearaverage consolidated cash flow return on invested capital and a target three-yearaverage annual revenue growth at the end of the three-yearperformance period, may begin eachcommencing with the fiscal year; therefore, multiple performance periods, with distinct goals, may operate simultaneously.
year of grant. The performance components ofmetrics for the programs initiatedperformance-based cash awards granted in fiscal 20162022 and fiscal 2015 were2023 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 in consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”) at the end of athe three-year performance period, commencing with the fiscal year of grant. For the program initiated in fiscal 2014, the performance award was based upon a target three-year average ROACE, three-year average annual revenue growth, and Asia segment operating income at the end of the three-year performance period.
Note 6: | Note 6: Restructuring Activities |
During fiscal 2016,2023, restructuring and repositioning expenses primarily consisted of severance-related expenses for targeted headcount reductions in each the Company offered a voluntary retirement program to certain U.S. salaried employees. The program was offered as part ofClimate Solutions and Performance Technologies segments and supported the Company’s Strengthen, Diversify and Grow transformational initiative and supports the objective of reducing operational and SG&A cost structures. In addition, the Performance Technologies and Climate Solutions segments incurred equipment transfer costs in Europe and closure costs related to a previously-leased facility in the U.S., respectively.
Also duringDuring fiscal 2016,2022, the Company announced a plancommitted to close its Washington, Iowa manufacturing facilityrestructuring actions intended to reduce SG&A and isoperational expenses, particularly within the Performance Technologies segment. During fiscal 2022, the Company recorded $22.1 million of severance expenses, of which $20.3 million were recorded in the process of transferring the facility’s productionPerformance Technologies segment and primarily related to other Americas segment manufacturing facilities, which it expects to complete by the end of fiscal 2017.targeted headcount reductions in Europe. In addition, the Company completedimplemented targeted headcount reductions in 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.
DuringClimate Solutions segment. Also in fiscal 2015,2022, 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 ofincurred equipment transfer and plant consolidation costs.costs within the Performance Technologies segment.
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)
During fiscal 2021, restructuring actions consisted primarily of targeted headcount reductions and plant consolidation activities. The headcount reductions were primarily in Europe and in the Americas within the Performance Technologies segment and supported the Company’s objective of reducing operational and SG&A cost structures. During fiscal 2021, the Company transferred production from its manufacturing facility in Zhongshan, China to another Climate Solutions segment manufacturing facility in China. As a result of this plant consolidation, the Company recorded $3.7 million of severance expenses during fiscal 2021. Other plant consolidation activities in fiscal 2021 included transferring product lines to the Company’s Climate Solutions manufacturing facility in Mexico.
Restructuring and repositioning expenses were as follows:
| | Years ended March 31, | | | | | 2023 | | | 2022 | | | 2021 | | Employee severance and related benefits
| | $ | 3.5 | | | $ | 22.1 | | | $ | 11.7 | | | Other restructuring and repositioning expenses | | | 1.5 | | | | 2.0 | | | | 1.7 | | Total
| | $ | 5.0 | | | $ | 24.1 | | | $ | 13.4 | |
Other restructuring and repositioning expenses primarily consist of equipment transfer and plant consolidation costs.
The Company accrues severance in accordance with its written plans, procedures, and relevant statutory requirements. Changes in accrued severance were as follows:
| | | Years ended March 31, | | Years ended March 31, | | | | | 2016 | | 2015 | | 2023 | | | 2022 | | | Beginning balance | | $ | 9.9 | | | $ | 19.4 | | | $ | 20.2 | | | $ | 4.0 | | | Additions | | | 12.8 | | | | 1.2 | | | | 3.5 | | | | 22.1 | | | Payments | | | (8.5 | ) | | | (7.3 | ) | | | (12.4 | ) | | | (5.7 | ) | | Reclassified from held for sale | | | | - | | | | 0.4 | | | Effect of exchange rate changes | | | 0.5 | | | | (3.4 | ) | | | (0.7 | ) | | | (0.6 | ) | | Ending balance | | $ | 14.7 | | | $ | 9.9 | | | $ | 10.6 | | | $ | 20.2 | |
During fiscal 2016,2022 and 2021, the Company identified potentialrecorded $56.0 million of a net asset impairment indicators related to a manufacturing facility in Germany, including pre-tax lossesreversal and $166.8 million of impairment charges, respectively, within its strategic decision to exit a certain product line in the future. In response,Performance Technologies segment. See Note 2 for additional information.
Also during fiscal 2022, the Company performed an impairment evaluation and recorded an asset impairment charge of $9.9$0.3 million withinto reduce the carrying value of a previously closed Climate Solutions facility to its Europe segment to write down the manufacturing facility’s long-lived assets to fair value. The Company determinedestimated fair value, using Level 3 inputs, primarily consisting of a facility appraisal, which considered the market rental value,less costs to sell.
Note 7: Other Income and estimated scrap values, which considered the specialized nature of the machinery and equipment.Expense
During fiscal 2014, the Company recorded asset impairment charges totaling $3.2 million, including $2.0 million within its Europe segment, primarily due to a manufacturing facility in Germany that the Company has closed, and $1.2 million within its Americas segment, related to the closure of its McHenry, Illinois manufacturing facility.
During fiscal 2015, the Company sold a wind tunnel within its Europe segment for cash proceeds of $5.8 million and recognized a gain of $3.2 million. At March 31, 2016 and 2015, assets held for sale of $8.5 million and $3.2 million, respectively, were included in other noncurrent assets and consisted of facilities that the Company is marketing for sale.
Note 7: | Other Income and Expense |
Other income and expense consisted of the following:
| | | Years ended March 31, | | | | 2016 | | 2015 | | 2014 | | Equity in earnings of non-consolidated affiliate | | $ | 0.1 | | | $ | 0.6 | | | $ | 0.7 | | | Interest income | | | 0.4 | | | | 0.5 | | | | 0.5 | | | Foreign currency transactions (a) | | | (1.3 | ) | | | (0.9 | ) | | | (2.0 | ) | | Gain from insurance recovery (b) | | | 9.5 | | | | - | | | | - | | | Total other income (expense) - net | | $ | 8.7 | | | $ | 0.2 | | | $ | (0.8 | ) |
| | Years ended March 31, | | | | | 2023 | | | 2022 | | | 2021 | | | Interest income | | $ | 1.3 | | | $ | 0.4 | | | $ | 0.5 | | | Foreign currency transactions (a) | | | (3.7 | ) | | | (1.4 | ) | | | 0.6 | | | Net periodic benefit cost (b) | | | (2.0 | ) | | | (1.1 | ) | | | (3.3 | ) | | Total other expense - net | | $ | (4.4 | ) | | $ | (2.1 | ) | | $ | (2.2 | ) |
| (a) | Foreign currency transactions primarily consist of foreign currency transaction gains and losses on the re-measurement or settlement of foreign currency-denominated assets and liabilities, including intercompany loans and transactions denominated in a foreign currencyand intercompany loans, along with gains and losses on foreign currency exchange contracts. |
| (b) | During fiscal 2016,Net periodic benefit cost for the Company settled an insurance claim related to machineryCompany’s pension and equipment destroyed in a fire at its Airedale facility and recorded a gainpostretirement plans is exclusive of $9.5 million. See Note 2 for additional information.service cost. |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Note 8: Income Taxes
The U.S. and foreign components of earnings from continuing operationsor loss before income taxes and the provisionbenefit or benefitprovision for income taxes consisted of the following:
| | | Years ended March 31, | | | | 2016 | | 2015 | | 2014 | | Components of (loss) earnings from continuing operations before income taxes: | | | | | | | | | | | United States | | $ | (15.4 | ) | | $ | 31.1 | | | $ | 14.1 | | | Foreign | | | 5.5 | | | | 10.1 | | | | 9.9 | | | Total (loss) earnings from continuing operations before income taxes | | $ | (9.9 | ) | | $ | 41.2 | | | $ | 24.0 | | | | | | | | | | | | | | | | | Income tax (benefit) expense: | | | | | | | | | | | | | | Federal: | | | | | | | | | | | | | | Current | | $ | 0.1 | | | $ | 0.4 | | | $ | (2.0 | ) | | Deferred | | | (13.0 | ) | | | 7.1 | | | | (95.8 | ) | | State: | | | | | | | | | | | | | | Current | | | 0.2 | | | | - | | | | 0.2 | | | Deferred | | | (2.5 | ) | | | 1.1 | | | | (21.4 | ) | | Foreign: | | | | | | | | | | | | | | Current | | | 9.6 | | | | 12.7 | | | | 10.0 | | | Deferred | | | (3.3 | ) | | | (2.3 | ) | | | 1.1 | | | Total income tax (benefit) expense | | $ | (8.9 | ) | | $ | 19.0 | | | $ | (107.9 | ) |
| | Years ended March 31, | | | | | 2023 | | | 2022 | | | 2021 | | | Components of earnings (loss) before income taxes: | | | | | | | | | | | United States | | $ | 12.5 | | | $ | 0.4 | | | $ | (48.7 | ) | | Foreign | | | 112.8 | | | | 101.1 | | | | (70.6 | ) | | Total earnings (loss) before income taxes | | $ | 125.3 | | | $ | 101.5 | | | $ | (119.3 | ) |
| Income tax (benefit) provision: | | | | | | | | | | | Federal: | | | | | | | | | | | Current | | $ | 1.5 | | | $ | 0.1 | | | $ | (0.1 | ) | | Deferred | | | (47.5 | ) | | | - | | | | 58.3 | | | State: | | | | | | | | | | | | | | Current | | | 2.3 | | | | 1.1 | | | | 0.4 | | | Deferred | | | (11.4 | ) | | | - | | | | 9.2 | | | Foreign: | | | | | | | | | | | | | | Current | | | 27.5 | | | | 17.8 | | | | 22.0 | | | Deferred | | | (0.7 | ) | | | (3.8 | ) | | | 0.4 | | | Total income tax (benefit) provision | | $ | (28.3 | ) | | $ | 15.2 | | | $ | 90.2 | |
The Company allocatesreconciliation between the U.S. federal statutory rate and the Company’s effective tax rate was as follows:
| | Years ended March 31, | | | | | 2023 | | | 2022 | | | 2021 | | | Statutory federal tax | | | 21.0 | % | | | 21.0 | % | | | 21.0 | % | | State taxes, net of federal benefit | | | (0.1 | ) | | | 1.4 | | | | 0.9 | | | Taxes on non-U.S. earnings and losses | | | 5.8 | | | | 3.5 | | | | (9.1 | ) | | Valuation allowances | | | (42.9 | ) | | | (8.8 | ) | | | (92.9 | ) | | Tax credits | | | (4.5 | ) | | | (3.4 | ) | | | 2.2 | | | Compensation | | | 0.7 | | | | 0.6 | | | | (1.3 | ) | | Tax rate or law changes | | | (0.2 | ) | | | 0.6 | | | | (0.2 | ) | | Uncertain tax positions, net of settlements | | | 0.4 | | | | (0.2 | ) | | | 0.1 | | | Notional interest deductions | | | (1.7 | ) | | | (2.7 | ) | | | 1.3 | | | Dividends and taxable foreign inclusions | | | 0.9 | | | | 1.6 | | | | 3.0 | | | Other | | | (2.0 | ) | | | 1.4 | | | | (0.6 | ) | | Effective tax rate | | | (22.6 | %) | | | 15.0 | % | | | (75.6 | %) |
The Company’s fiscal 2023 effective tax rate was favorably impacted by an income tax expense among continuing operations, discontinued operations, and other comprehensive income. The Company applies accounting for income taxes by tax jurisdiction, and in periods in which there is a loss from continuing operations before income taxes and pre-tax income in other categories (e.g., discontinued operations or other comprehensive income), it first allocates income tax expensebenefit related to the other sources of income, and records a related tax benefit in continuing operations.
Income tax expense attributable to earnings from continuing operations before income taxes differed from the amounts computed by applying the statutory U.S. federal income tax rate as a result of the following:
| | | Years ended March 31, | | | | 2016 | | 2015 | | 2014 | | Statutory federal tax | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % | | State taxes, net of federal benefit | | | 11.5 | | | | 2.4 | | | | 2.1 | | | Taxes on non-U.S. earnings and losses | | | 26.4 | | | | (4.9 | ) | | | (3.8 | ) | | Valuation allowance | | | (20.9 | ) | | | 8.3 | | | | (471.7 | ) | | Tax credits | | | 20.5 | | | | (6.1 | ) | | | (7.1 | ) | | Compensation | | | (3.7 | ) | | | 1.0 | | | | 0.4 | | | Tax rate or law changes | | | 1.3 | | | | 1.2 | | | | (9.2 | ) | | Uncertain tax positions, net of settlements | | | (4.3 | ) | | | 2.2 | | | | 0.4 | | | Dividend repatriation | | | 16.0 | | | | 2.4 | | | | 5.8 | | | Other | | | 8.1 | | | | 4.6 | | | | (1.5 | ) | | Effective tax rate | | | 89.9 | % | | | 46.1 | % | | | (449.6 | %) |
The Company recorded an additional valuation allowance of $5.0 million, $2.6 million and $12.3 million in fiscal 2016, 2015, and 2014, respectively, against neton deferred tax assets in certain jurisdictions after determining it was more likely than not that the net deferredU.S. The effective tax assetsrates in these jurisdictions will not be realized. The Company will continueboth fiscal 2022 and 2021 were significantly impacted by impairment charges or reversals, largely related to provide a valuation allowance against its net deferred tax assets in each of the applicable jurisdictions going forward until the need for a valuation allowance is eliminated. The need for a valuation allowance is eliminated when the Company determines it is more likely than not the deferred tax assets will be realized.
During fiscal 2016liquid-cooled automotive business, and 2014, the Company concluded it no longer needed a valuation allowance on certain deferred tax assets after determining it was more likely than not they would be realized. As a result, the Company recorded reversals of its deferred tax asset valuation allowance of $3.0 million and $119.2 million in fiscal 2016 and 2014, respectively. Also during fiscal 2014, the Company recorded income tax charges or benefits totaling $2.2 million related to foreignvaluation allowances. See Note 2 for information regarding the impairment charges and reversals. The income tax law changes.charges or benefits related to valuation allowances are described below.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The Company records valuation allowances against its net deferred tax assets to the extent it determines it is more likely than not that such assets will not be realized in the future. Each quarter, the Company evaluates the probability that its deferred tax assets will be realized and determines whether valuation allowances or adjustments thereto are needed. This determination involves judgement and the use of significant estimates and assumptions, including expectations of future taxable income and tax planning strategies. In addition, the Company considers the duration of statutory carryforward periods and historical financial results.
Since the third quarter of fiscal 2021, the Company has maintained a full valuation allowance against net deferred tax assets in the U.S. since the Company determined, at that time, it was more likely than not that the net deferred tax assets would not be realized. In the fourth quarter of fiscal 2023, based on the Company’s recent history of earnings, coupled with its forecasted profitability, the Company determined it was more likely than not that certain deferred tax assets in the U.S. will be realized. As a result, the Company reversed the valuation allowance related to these deferred tax assets and recorded an income tax benefit of $57.3 million. The Company evaluated both positive and negative objectively verifiable evidence and placed substantial weight on its fiscal 2022 and 2023 earnings, which resulted in a significant cumulative three-year income position. The Company also considered its forecasts for future earnings in certain key businesses. The Company has determined it is more likely than not that a portion of the deferred tax assets in the U.S. related to certain federal and state tax attributes will not be realized prior to expiration and, as such, has maintained a valuation allowance against these assets. In addition, the Company recorded a net increase of other deferred tax asset valuation allowances totaling $3.6 million.
Based upon its analyses during fiscal 2022, the Company determined it was more likely than not that the deferred tax assets in certain foreign jurisdictions would be realized. As a result, the Company reversed the valuation allowances related to these deferred tax assets and recorded income tax benefits totaling $13.0 million. The Company’s analyses included consideration of the transaction perimeter modification and the termination of the sale agreement for the liquid-cooled automotive business and the related impairment reversals. Separately, the Company determined it was more likely than not that the deferred tax assets in a foreign jurisdiction would not be realized. As a result, the Company recorded an income tax charge of $1.6 million. Together, these fiscal 2022 valuation allowance adjustments resulted in a net income tax benefit of $11.4 million during fiscal 2022. In addition, the Company recorded a net increase of other deferred tax asset valuation allowances totaling $2.5 million.
Based upon its analyses during fiscal 2021, the Company determined it was more likely than not that its deferred tax assets in the U.S. and in certain foreign jurisdictions would not be realized. As a result, the Company recorded income tax charges totaling $116.5 million to increase the valuation allowances on deferred tax assets in the U.S. ($103.3 million) and in certain foreign jurisdictions ($13.2 million). The Company’s analyses during fiscal 2021 included consideration of the impairment charges recorded for the liquid-cooled automotive business, which contributed to the Company entering into a three-year cumulative loss position in the U.S. and in certain foreign jurisdictions as of December 31, 2020. Also during fiscal 2021, the Company recorded a net increase of other deferred tax asset valuation allowances totaling $22.0 million and recorded a $9.3 million income tax benefit resulting from allocation of the income tax provision between net earnings and other comprehensive income.
At March 31, 2023, valuation allowances against deferred tax assets in the U.S. and in certain foreign jurisdictions totaled $33.9 million and $27.7 million, respectively. The Company will maintain the valuation allowances in each applicable tax jurisdiction until it determines it is more likely than not the deferred tax assets will be realized, thereby eliminating the need for a valuation allowance. Future events or circumstances, such as lower taxable income or unfavorable changes in the financial outlook of the Company’s operations in certain jurisdictions, could necessitate the establishment of further valuation allowances.
The tax effects of temporary differences that gave rise to deferred tax assets and liabilities were as follows:
| | | March 31, | | March 31, | | | | | 2016 | | 2015 | | 2023 | | | 2022 | | | Deferred tax assets: | | | | | | | | | | | | | | Accounts receivable | | $ | 0.1 | | | $ | 0.3 | | | $ | 0.9 | | | $ | 0.8 | | | Inventories | | | 3.6 | | | | 3.8 | | | | 6.0 | | | | 6.5 | | | Plant and equipment | | | 4.3 | | | | 0.8 | | | | 17.2 | | | | 19.9 | | | Lease liabilities | | | | 15.9 | | | | 13.5 | | | Pension and employee benefits | | | 52.6 | | | | 50.5 | | | | 24.1 | | | | 27.5 | | | Net operating loss, capital loss, and credit carryforwards | | | 109.4 | | | | 105.0 | | | | Net operating and capital losses | | | | 55.4 | | | | 53.9 | | | Credit carryforwards | | | | 49.0 | | | | 48.5 | | | Research and experimental expenditures | | | | 8.0 | | | | - | | | Other, principally accrued liabilities | | | 6.9 | | | | 6.8 | | | | 13.2 | | | | 13.5 | | | Total gross deferred tax assets | | | 176.9 | | | | 167.2 | | | | 189.7 | | | | 184.1 | | | Less: valuation allowance | | | (50.8 | ) | | | (48.0 | ) | | | Less: valuation allowances | | | | (61.6 | ) | | | (112.2 | ) | | Net deferred tax assets | | | 126.1 | | | | 119.2 | | | | 128.1 | | | | 71.9 | | | | | | | | | | | | | | | | | | | | | Deferred tax liabilities: | | | | | | | | | | | | | | | | | | Plant and equipment | | | 5.5 | | | | 5.3 | | | | 7.5 | | | | 8.6 | | | Lease assets | | | | 15.7 | | | | 13.2 | | | Goodwill | | | 0.6 | | | | 0.6 | | | | 4.8 | | | | 4.9 | | | Intangible assets | | | | 20.1 | | | | 22.4 | | | Other | | | 1.1 | | | | 1.0 | | | | 1.1 | | | | 1.5 | | | Total gross deferred tax liabilities | | | 7.2 | | | | 6.9 | | | | 49.2 | | | | 50.6 | | | Net deferred tax asset | | $ | 118.9 | | | $ | 112.3 | | | | Net deferred tax assets | | | $ | 78.9 | | | $ | 21.3 | |
As of March 31, 2016, the Company adopted new accounting guidance, which requires that all deferred taxes be presented as non-current on the consolidated balance sheets. See Note 1 for additional information.
Unrecognized tax benefits were as follows:
| | | Years ended March 31, | | Years ended March 31, | | | | | 2016 | | 2015 | | 2023 | | | 2022 | | | Beginning balance | | $ | 5.6 | | | $ | 2.1 | | | $ | 9.3 | | | $ | 9.6 | | | Gross increases - tax positions in prior period | | | - | | | | 3.1 | | | | 0.2 | | | | 0.1 | | | Gross decreases - tax positions in prior period | | | (0.1 | ) | | | - | | | | (0.1 | ) | | | (0.2 | ) | | Gross increases - tax positions in current period | | | 0.4 | | | | 0.4 | | | | 0.9 | | | | 1.0 | | | Lapse of statute of limitations | | | | (0.6 | ) | | | (1.2 | ) | | Ending balance | | $ | 5.9 | | | $ | 5.6 | | | $ | 9.7 | | | $ | 9.3 | |
The Company’s liability for unrecognized tax benefits as of March 31, 20162023 was $5.9$9.7 million and, if recognized, $3.5$7.8 million would have an effective tax rate impact. The Company estimates a $2.0 million net decrease in unrecognized tax benefits during fiscal 2024 mainly due to lapses in statutes of limitations. If recognized, these reductions would have an impact on the Company’s effective tax rate.
The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense. During fiscal 2023, 2022 and 2021, interest and penalties included within income tax expense in the consolidated statements of operations were not significant. At March 31, 20162023 and 2015,2022, accrued interest and penalties were not significant.totaled $0.8 million and $0.7 million, respectively.
The Company files income tax returns in multiple jurisdictions and is subject to examination by taxing authorities throughout the world. At March 31, 2016,2023, the Company was under income tax examination in a number of foreign jurisdictions. The Company does not anticipate a significant change in unrecognized tax benefits during the next twelve months.
The following tax years remain subject to examination for the Company’s major tax jurisdictions:
Austria | Fiscal 2012 - 2015 | Brazil | Calendar 2011 - 2015 | | Germany | Fiscal 20122017 - 2015Fiscal 2022 | | Italy | Fiscal 2018 - Fiscal 2022 | | United States | Fiscal 20132020 - 2015Fiscal 2022 |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
At March 31, 2016,2023, the Company had federal and state research and development tax credits of $23.3$60.4 million that, if not utilized against domesticU.S. taxes, will expire between fiscal 20182024 and 2036.2043. The Company also had various state and local tax loss carry forwards of $190.8 million that, ifcarryforwards totaling $136.7 million. If not utilized against state apportioned taxable income, certain state and local carryforwards will expire at various times duringbetween fiscal 2017 through 2036.2024 and 2042, while some will not expire due to an unlimited carryforward period. In addition, the Company had tax loss carry forwards of $330.7and foreign attribute carryforwards totaling $285.0 million in various tax jurisdictions throughout the world. Certain of the carry forwards in the U.S. and manycarryforwards in foreign jurisdictions are offset by a valuation allowance.allowances. If not utilized against taxable income, $156.9$54.9 million of these tax lossescarryforwards will expire at various times duringbetween fiscal 2017 through 2035,2024 and $173.82034, and $230.1 million, mainly related to Germany Austria and India,Italy, will not expire due to an unlimited carry-forwardcarryforward period.
At March 31, 2016,The Company’s practice and intention is to reinvest, with certain insignificant exceptions, the earnings of its non-U.S. subsidiaries outside of the U.S., and therefore, the Company provided $1.1 million of tax on undistributed earningshas not recorded foreign withholding taxes or deferred income taxes for certain subsidiaries not considered permanently reinvested. Undistributed earnings totaling $491.0 million are considered permanently reinvested inthese earnings. The Company has estimated the Company’s remaining foreign operations, and no provision has been made for taxes that would be payable upon the distribution of such earnings. It is not practicable to estimate thenet amount of unrecognized foreign withholding taxestax and deferred tax liabilityliabilities would total approximately $12.0 million if the accumulated foreign earnings were distributed; however, the actual tax cost would be dependent on such earnings.circumstances existing when remittance occurs.
Note 9: | Note 9: Earnings Per Share |
The components of basic and diluted earnings per share were as follows:
| | | Years ended March 31, | | | | 2016 | | 2015 | | 2014 | | Basic: | | | | | | | | | | | (Loss) earnings from continuing operations | | $ | (1.0 | ) | | $ | 22.2 | | | $ | 131.9 | | | Less: Net earnings attributable to noncontrolling interest | | | (0.6 | ) | | | (1.0 | ) | | | (1.5 | ) | | Less: Undistributed earnings attributable to unvested shares | | | - | | | | (0.2 | ) | | | (1.7 | ) | | (Loss) earnings from continuing operations available to Modine shareholders | | | (1.6 | ) | | | 21.0 | | | | 128.7 | | | Earnings from discontinued operations, net of income taxes | | | - | | | | 0.6 | | | | - | | | Net (loss) earnings available to Modine shareholders | | $ | (1.6 | ) | | $ | 21.6 | | | $ | 128.7 | | | | | | | | | | | | | | | | | Weighted-average shares outstanding - basic | | | 47.3 | | | | 47.2 | | | | 46.9 | | | | | | | | | | | | | | | | | Basic Earnings Per Share: | | | | | | | | | | | | | | (Loss) earnings per share - continuing operations | | $ | (0.03 | ) | | $ | 0.45 | | | $ | 2.75 | | | Earnings per share - discontinued operations | | | - | | | | 0.01 | | | | - | | | Net (loss) earnings per share - basic | | $ | (0.03 | ) | | $ | 0.46 | | | $ | 2.75 | | | | | | | | | | | | | | | | | Diluted: | | | | | | | | | | | | | | (Loss) earnings from continuing operations | | $ | (1.0 | ) | | $ | 22.2 | | | $ | 131.9 | | | Less: Net earnings attributable to noncontrolling interest | | | (0.6 | ) | | | (1.0 | ) | | | (1.5 | ) | | Less: Undistributed earnings attributable to unvested shares | | | - | | | | (0.2 | ) | | | (0.9 | ) | | (Loss) earnings from continuing operations available to Modine shareholders | | | (1.6 | ) | | | 21.0 | | | | 129.5 | | | Earnings from discontinued operations, net of income taxes | | | - | | | | 0.6 | | | | - | | | Net (loss) earnings available to Modine shareholders | | $ | (1.6 | ) | | $ | 21.6 | | | $ | 129.5 | | | | | | | | | | | | | | | | | Weighted-average shares outstanding - basic | | | 47.3 | | | | 47.2 | | | | 46.9 | | | Effect of dilutive securities | | | - | | | | 0.6 | | | | 0.7 | | | Weighted-average shares outstanding - diluted | | | 47.3 | | | | 47.8 | | | | 47.6 | | | | | | | | | | | | | | | | | Diluted Earnings Per Share: | | | | | | | | | | | | | | (Loss) earnings per share - continuing operations | | $ | (0.03 | ) | | $ | 0.44 | | | $ | 2.72 | | | Earnings per share - discontinued operations | | | - | | | | 0.01 | | | | - | | | Net (loss) earnings per share - diluted | | $ | (0.03 | ) | | $ | 0.45 | | | $ | 2.72 | |
| | Years ended March 31, | | | | | 2023 | | | 2022 | | | 2021 | | | Basic Earnings Per Share: | | | | | | | | | | | Net earnings (loss) attributable to Modine | | $ | 153.1 | | | $ | 85.2 | | | $ | (210.7 | ) | | | | | | | | | | | | | | | | Weighted-average shares outstanding – basic | | | 52.3 | | | | 52.0 | | | | 51.3 | | | | | | | | | | | | | | | | | Net earnings (loss) per share – basic | | $ | 2.93 | | | $ | 1.64 | | | $ | (4.11 | ) | | | | | | | | | | | | | | | | Diluted Earnings Per Share: | | | | | | | | | | | | | | Net earnings (loss) attributable to Modine | | $ | 153.1 | | | $ | 85.2 | | | $ | (210.7 | ) | | | | | | | | | | | | | | | | Weighted-average shares outstanding – basic | | | 52.3 | | | | 52.0 | | | | 51.3 | | | Effect of dilutive securities | | | 0.5 | | | | 0.5 | | | | - | | | Weighted-average shares outstanding – diluted | | | 52.8 | | | | 52.5 | | | | 51.3 | | | | | | | | | | | | | | | | | Net earnings (loss) per share – diluted | | $ | 2.90 | | | $ | 1.62 | | | $ | (4.11 | ) |
For the years ended March 31, 2016, 2015,fiscal 2023, 2022 and 2014,2021, the calculation of diluted earnings per share excluded 0.80.5 million, 0.60.5 million, and 0.81.0 million, stock options, respectively, because they were anti-dilutive. For fiscal 2023, 2022 and 2021, the year ended March 31, 2016,calculation of diluted earnings per share excluded 0.2 million, 0.2 million, and 0.4 million restricted stock awards, respectively, because they were anti-dilutive. For fiscal 2021 the total number of potential dilutivepotentially-dilutive securities was 0.40.2 million. However, these securities were not included in the computation of diluted net loss per share since to do so would decreasehave decreased the loss per share.
54Note 10: Cash, Cash Equivalents and Restricted Cash
Cash, cash equivalents and restricted cash consisted of the following:
| | March 31, | | | | | 2023 | | | 2022 | | | Cash and cash equivalents | | $ | 67.1 | | | $ | 45.2 | | | Restricted cash | | | 0.1 | | | | 0.2 | | Total cash, cash equivalents and restricted cash
| | $ | 67.2 | | | $ | 45.4 | |
Restricted cash, which is reported within other current assets and other noncurrent assets in the consolidated balance sheets, consists primarily of deposits for contractual guarantees or commitments required for rents, import and export duties, and commercial agreements.
Note 11: Inventories
Inventories consisted of the following:
| | | March 31, | | March 31, | | | | | 2016 | | 2015 | | 2023 | | | 2022 | | | Raw materials and work in process | | $ | 79.5 | | | $ | 80.7 | | | | Raw materials | | | $ | 218.3 | | | $ | 186.7 | | | Work in process | | | | 49.9 | | | | 55.1 | | | Finished goods | | | 31.5 | | | | 27.0 | | | | 56.7 | | | | 39.4 | | | Total inventories | | $ | 111.0 | | | $ | 107.7 | | | $ | 324.9 | | | $ | 281.2 | |
Note11: | Note 12: Property, Plant and Equipment |
Property, plant and equipment, including depreciable lives, consisted of the following:
| | | March 31, | | March 31, | | | | | 2016 | | 2015 | | 2023 | | | 2022 | | | Land | | $ | 7.2 | | | $ | 8.2 | | | $ | 16.4 | | | $ | 16.8 | | | Buildings and improvements (10-40 years) | | | 221.3 | | | | 221.0 | | | | Machinery and equipment (3-12 years) | | | 694.3 | | | | 652.0 | | | | Office equipment (3-10 years) | | | 84.1 | | | | 81.9 | | | Buildings and improvements (10-40 years) | | | | 264.0 | | | | 264.6 | | Machinery and equipment (3-15 years) | | | | 853.3 | | | | 869.4 | | Office equipment (3-10 years) | | | | 93.6 | | | | 96.2 | | | Construction in progress | | | 36.7 | | | | 31.7 | | | | 47.5 | | | | 31.2 | | | | | | 1,043.6 | | | | 994.8 | | | | 1,274.8 | | | | 1,278.2 | | | Less: accumulated depreciation | | | (705.0 | ) | | | (672.7 | ) | | | (960.3 | ) | | | (962.8 | ) | | Net property, plant and equipment | | $ | 338.6 | | | $ | 322.1 | | | $ | 314.5 | | | $ | 315.4 | |
Depreciation expense totaled $48.6$46.5 million, $50.0$46.4 million, and $57.3$60.1 million for the years ended March 31, 2016, 2015,fiscal 2023, 2022, and 2014,2021, respectively.
Gains and losses related to the disposal of property, plant and equipment are recorded inwithin SG&A expenses. TotalFor fiscal 2023 and 2021, losses related to the disposal of property, plant and equipment were $0.4 million, $1.1 million and $2.6 million for the years ended March 31, 2016, 2015, and 2014, respectively.
Note 12: | Investment in Affiliate |
The Company’s investment in its non-consolidated affiliate is accounted for under the equity method. The Company has a 50 percent ownership of Nikkei Heat Exchanger Company, Ltd. (“NEX”). At both March 31, 2016 and 2015, the Company included the investment in NEX of $3.2 million in other noncurrent assets. At March 31, 2016, the investment in NEX is equal to the Company's investment in the underlying assets.
The Company reports the results of operations for NEX in the consolidated financial statements using a one-month reporting delay. The Company reports equity in earnings from non-consolidated affiliates within other income and expense in the consolidated statements of operations. The Company’s share of NEX’s earnings for the years ended March 31, 2016, 2015, and 2014 wastotaled $0.1 million, $0.6 million and $0.7 million, respectively. For fiscal 2022, gains related to the disposal of property, plant and equipment totaled $0.1 million.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note13: | Note 13: Intangible Assets |
Intangible assets consisted of the following:
| | | March 31, 2016 | | | March 31, 2015 | | | March 31, 2023 | | | March 31, 2022 | | | | | | | | | | | | | | | | | | | | | | | Gross Carrying Value | | | Accumulated Amortization | | | Net Intangible Assets | | | Gross Carrying Value | | | Accumulated Amortization | | | Net Intangible Assets | | | Customer relationships | | | $ | 60.3 | | | $ | (23.4 | ) | | $ | 36.9 | | | $ | 61.2 | | | $ | (20.1 | ) | | $ | 41.1 | | | Trade names | | $ | 8.9 | | | $ | (6.3 | ) | | $ | 2.6 | | | $ | 9.1 | | | $ | (5.8 | ) | | $ | 3.3 | | | | 50.1 | | | | (15.9 | ) | | | 34.2 | | | | 50.8 | | | | (13.8 | ) | | | 37.0 | | | Acquired technology | | | 5.5 | | | | (1.5 | ) | | | 4.0 | | | | 5.6 | | | | (0.9 | ) | | | 4.7 | | | | 22.6 | | | | (12.6 | ) | | | 10.0 | | | | 23.1 | | | | (10.9 | ) | | | 12.2 | | | Customer relationships | | | 2.0 | | | | (0.4 | ) | | | 1.6 | | | | 2.1 | | | | (0.2 | ) | | | 1.9 | | | | Total intangible assets | | $ | 16.4 | | | $ | (8.2 | ) | | $ | 8.2 | | | $ | 16.8 | | | $ | (6.9 | ) | | $ | 9.9 | | | $ | 133.0 | | | $ | (51.9 | ) | | $ | 81.1 | | | $ | 135.1 | | | $ | (44.8 | ) | | $ | 90.3 | |
The Company recorded $1.6$8.0 million, $1.6$8.4 million, and $0.8$8.5 million of amortization expense during fiscal 2016, 20152023, 2022, and 2014,2021, respectively. Estimated futureThe Company estimates that it will record approximately $8.0 million of annual amortization expense is as follows:in fiscal 2024 through 2028.
| Fiscal Year | | Estimated Amortization Expense | | | 2017 | | $ | 1.6 | | | 2018 | | | 1.6 | | | 2019 | | | 1.5 | | | 2020 | | | 1.3 | | | 2021 | | | 0.8 | | | 2022 & Beyond | | | 1.4 | |
Note 14: Goodwill
Changes in
The following table presents a roll forward of the carrying amountvalue of goodwill byfrom March 31, 2021 to March 31, 2023. The Company has recast the March 31, 2022 and 2021 goodwill balances to be comparable with the current segment and instructure. There was no impact to the aggregate, wereunderlying reporting units as follows:a result of the segment realignment during fiscal 2023.
| | | Americas | | Asia | | Building HVAC | | Total | | Balance, March 31, 2014 | | $ | 10.9 | | | $ | 0.5 | | | $ | 17.3 | | | $ | 28.7 | | | Impairment charge | | | (7.8 | ) | | | - | | | | - | | | | (7.8 | ) | | Effect of exchange rate changes | | | (3.1 | ) | | | - | | | | (1.6 | ) | | | (4.7 | ) | | Balance, March 31, 2015 | | | - | | | | 0.5 | | | | 15.7 | | | | 16.2 | | | Effect of exchange rate changes | | | - | | | | - | | | | (0.4 | ) | | | (0.4 | ) | | Balance, March 31, 2016 | | $ | - | | | $ | 0.5 | | | $ | 15.3 | | | $ | 15.8 | |
| | Climate Solutions
| | | Performance Technologies
| | | Total | | Balance, March 31, 2021 | | $ | 110.5 | | | $ | 60.2 | | | $ | 170.7 | | | Effect of exchange rate changes | | | (2.4 | ) | | | (0.2 | ) | | | (2.6 | ) | Balance, March 31, 2022 | | | 108.1 | | | | 60.0 | | | | 168.1 | | | Effect of exchange rate changes | | | (2.4 | ) | | | (0.1 | ) | | | (2.5 | ) | Balance, March 31, 2023 | | $ | 105.7 | | | $ | 59.9 | | | $ | 165.6 | |
The Company assessestests goodwill for impairment annually, as of March 31, or more frequently if events or circumstances change that would, more likely than not, reduce the fair value of a reporting unit below its carrying value. To test goodwill for impairment, the Company determines the fair value of each reporting unit based upon the present value of estimated future cash flows and compares the fair value of each reporting unit with its carrying value. The Company conductedCompany’s determination of fair value involves judgment and the use of estimates and assumptions, including assumptions regarding the revenue growth rates and operating profit margins used to calculate estimated future cash flows and risk-adjusted discount rates.
As a result of its annual assessment for goodwill impairment duringtests performed as of March 31, 2023, the fourth quarter of fiscal 2016 by applying a fair value-based test andCompany determined that the fair value of itseach of the reporting units within its Climate Solutions and Performance Technologies segments exceeded their respective book values. In fiscal 2015, the Company recorded a $7.8 million goodwill impairment charge within the Americas segment in connection with its annual assessment. The impairment charge was primarily caused by a decline in the financial outlook for Brazil.
At both March 31, 20162023 and 2015,2022, accumulated goodwill impairment losses totaled $31.6 million and $8.7$40.8 million within the AmericasPerformance Technologies segment.
Note 15: Product Warranties and Europe segments, respectively.Other Commitments
Note 15: | Product Warranties Operating Leases, and Other Commitments |
Product warranties: MostMany of the Company’s products are covered under a warranty period ranging from one to five years. The Company records a liability for product warranty obligations at the time of sale to a customer based upon historical warranty experience. In addition, the Companyand adjusts its warranty accruals if it becomes probable that expected claims will differ from initialprevious estimates.
Changes in accrued warranty costs were as follows:
| | Years ended March 31, | | | | | 2023 | | | 2022 | | | Beginning balance | | $ | 6.3 | | | $ | 5.2 | | | Warranties recorded at time of sale | | | 5.4 | | | | 5.5 | | | Adjustments to pre-existing warranties | | | 0.9 | | | | (1.3 | ) | | Settlements | | | (5.6 | ) | | | (4.4 | ) | | Reclassified from held for sale | | | - | | | | 1.3 | | | Effect of exchange rate changes | | | (0.1 | ) | | | - | | | Ending balance | | $ | 6.9 | | | $ | 6.3 | |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Changes in accrued warranty costs were as follows:Indemnification Agreements
| | | Years ended March 31, | | | | 2016 | | 2015 | | Beginning balance | | $ | 10.4 | | | $ | 14.0 | | | Warranties recorded at time of sale | | | 5.7 | | | | 5.8 | | | Adjustments to pre-existing warranties | | | (1.1 | ) | | | 1.5 | | | Settlements | | | (6.7 | ) | | | (9.2 | ) | | Effect of exchange rate changes | | | - | | | | (1.7 | ) | | Ending balance | | $ | 8.3 | | | $ | 10.4 | |
Operating leases: The Company leases various facilities and equipment under operating leases. Rental expense for these leases totaled $11.9 million in fiscal 2016, and $11.5 million in both fiscal 2015 and 2014.
Future minimum rental commitments at March 31, 2016 under non-cancelable operating leases were as follows:
| Fiscal Year | | | | | 2017 | | $ | 8.1 | | | 2018 | | | 5.6 | | | 2019 | | | 4.8 | | | 2020 | | | 4.6 | | | 2021 | | | 4.1 | | | 2022 and beyond | | | 26.3 | | | Total | | $ | 53.5 | |
Indemnification agreements: From time to time, the Company provides indemnification agreements related to the sale or purchase of an entity or facility. These indemnification agreements cover customary representations and warranties typically provided in conjunction with such transactions, including income, sales, excise or other tax matters, environmental matters and other third-party claims. The indemnification periods provided generally range from less than one year to fifteen years. In addition, standard indemnification provisions reside in many commercial agreements to which the Company is a party and relate to responsibility in the event of potential third-party claims. The fair value of the Company’s outstanding indemnification obligations at March 31, 2016 is2023 was not material.
Commitments: Commitments
At March 31, 2016,2023, the Company had capital expenditure commitments of $20.5 million.$25.3 million. Significant commitments include equipment expenditures to support expanding manufacturing capacity in the Climate Solutions segment and tooling and equipment expenditures for new and renewal programs with vehicular customers in the Americas and Europe segments.Performance Technologies segment. The Company utilizes inventory arrangements with certain vendors in the normal course of business under which the vendors maintain inventory stock at the Company’s facilities or at outside facilities. Title passes to the Company at the time goods are withdrawn for use in production. The Company has agreements with the vendors to use the material within a specific period of time. In some cases, the Company bears the risk of loss for the inventory because Modine is required to insure the inventory against damage and/or theft. This inventory is included within the Company’s consolidated balance sheets as raw materials inventory.
57
Note 16: Leases
The Company determines if an arrangement is a lease at contract inception. The lease term begins upon lease commencement, which is when the Company takes possession of the asset, and may include options to extend or terminate the lease when it is reasonably certain that such options will be exercised. The Company uses the lease term within its determination of the appropriate lease classification, either as an operating lease or as a finance lease, and to calculate straight-line lease expense for its operating leases.
ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. The Company recognizes ROU assets and lease liabilities at the lease commencement date, based upon the present value of lease payments over the lease term. As its lease agreements typically do not provide an implicit interest rate, the Company primarily uses an incremental borrowing rate to calculate the ROU asset and lease liability. In determining the incremental borrowing rate, the Company considers its current collateralized borrowing rate, the term of the lease, and the economic environment where the lease activity is concentrated. The Company believes this method effectively estimates a borrowing rate that it could obtain for a debt instrument with similar terms as the lease agreement.
Based upon its accounting policy, the Company does not separate lease and non-lease components for any asset class. In addition, the Company does not record short-term leases (i.e. leases with an initial term of 12 months or less) on its consolidated balance sheets.
Certain leases require the Company to pay taxes, insurance, maintenance, and other operating expenses associated with the leased asset. Such amounts are not included in the measurement of the lease liability to the extent they are variable in nature. These variable lease costs are recognized as variable lease expense when incurred. The depreciable life of the ROU assets and related leasehold improvements are limited by the expected lease term, unless the lease contains a provision to transfer title to the Company or a purchase option that the Company expects to execute.
The Company’s most significant leases represent leases of real estate, such as manufacturing facilities, warehouses, and offices. In addition, the Company leases manufacturing and IT equipment and vehicles. The Company’s most significant leases have remaining lease terms of 1 to 11 years. Certain leases contain renewal options for varying periods, which are at the Company’s discretion. If reasonably certain of exercise, the Company includes the renewal periods within the calculation of ROU assets and lease liabilities. The Company’s lease agreements do not contain material residual value guarantees or material restrictive covenants.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts) Lease Assets and Liabilities The following table provides a summary of leases recorded on the consolidated balance sheets.
| | Balance Sheet Location | | March 31, 2023 | | | March 31, 2022 | | | Lease Assets | | | | | | | | | | Operating lease ROU assets | | Other noncurrent assets | | $ | 59.1 | | | $ | 52.1 | | | Finance lease ROU assets (a) | | Property, plant and equipment - net | | | 7.1 | | | | 7.7 | | | | | | | | | | | | | | | Lease Liabilities | | | | | | | | | | | | Operating lease liabilities | | Other current liabilities
| | $ | 11.8 | | | $ | 12.7 | | | Operating lease liabilities | | Other noncurrent liabilities | | | 48.9 | | | | 41.2 | | | Finance lease liabilities | | Long-term debt - current portion | | | 0.4 | | | | 0.4 | | | Finance lease liabilities | | Long-term debt | | | 2.3 | | | | 2.8 | |
Note 16:(a) | IndebtednessFinance lease ROU assets were recorded net of accumulated amortization of $3.2 million and $2.8 million as of March 31, 2023 and 2022, respectively. |
Components of Lease Expense The Company records operating lease expense as either cost of sales or SG&A expenses within its consolidated statements of operations, depending upon the nature and use of the ROU assets. The Company records finance lease expense as depreciation expense within cost of sales or SG&A expenses, depending upon the nature and use of the ROU assets, and as interest expense in its consolidated statements of operations.
The components of lease expense were as follows:
| | Years ended March 31, | | | | | 2023 | | | 2022 | | | 2021
| | | Operating lease expense (a) | | $ | 21.9 | | | $ | 20.0 | | | $ | 19.5 | | | Finance lease expense: | | | | | | | | | | | | | | Depreciation of ROU assets | | | 0.5 | | | | 0.5 | | | | 0.5 | | | Interest on lease liabilities | | | 0.1 | | | | 0.2 | | | | 0.2 | | | Total lease expense | | $ | 22.5 | | | $ | 20.7 | | | $ | 20.2 | |
| (a) | In fiscal 2023, 2022, and 2021 operating lease expense included short-term lease expense of $5.7 million, $4.2 million, and $3.5 million respectively. Variable lease expense was not significant. |
Supplemental Cash Flow Information
| | Years ended March 31, | | | | | 2023 | | | 2022 | | | 2021
| | | Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | | | | | Operating cash flows for operating leases | | $ | 14.6 | | | $ | 15.7 | | | $ | 14.2 | | | Financing cash flows for finance leases | | | 0.5 | | | | 0.6 | | | | 0.6 | | | | | | | | | | | | | | | | | ROU assets obtained in exchange for lease liabilities: | | | | | | | | | | | | | | Operating leases | | $ | 21.2 | | | $ | 7.8 | | | $ | 9.8 | | | Finance leases | | | - | | | | 0.1 | | | | 0.1 | |
Lease Term and Discount Rates
| | March 31, 2023 | | | March 31, 2022 | | | Weighted-average remaining lease term: | | | | | | | | Operating leases | | 8.3 years | | | 8.5 years | | | Finance leases | | 5.8 years | | | 6.8 years | | | | | | | | | | | Weighted-average discount rate: | | | | | | | | Operating leases | | | 3.7 | % | | | 3.4 | % | | Finance leases | | | 4.6 | % | | | 4.6 | % |
Maturity of Lease Liabilities Future minimum rental payments for leases with initial non-cancellable lease terms in excess of one year were as follows at March 31, 2023:
| Fiscal Year | | Operating Leases | | | Finance Leases | | | 2024 | | $ | 13.8 | | | $ | 0.5 | | | 2025 | | | 11.5 | | | | 0.5 | | | 2026 | | | 10.1 | | | | 0.5 | | | 2027 | | | 8.4 | | | | 0.5 | | | 2028 | | | 7.3 | | | | 0.5 | | 2029 and beyond | | | 19.2 | | | | 0.6 | | | Total lease payments | | | 70.3 | | | | 3.1 | | | Less: Interest | | | (9.6 | ) | | | (0.4 | ) | | Present value of lease liabilities | | $ | 60.7 | | | $ | 2.7 | |
Note 17: Indebtedness
In October 2022, the Company executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and U.S. dollar- and euro-denominated term loan facilities maturing in October 2027. In addition, the credit agreement provides for shorter-duration swingline loans. This credit agreement modified the Company’s then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.
In connection with the credit agreement modification during fiscal 2023, the Company incurred $2.2 million of debt issuance costs. Of these costs, the Company deferred $1.5 million, which will be amortized as interest expense over the term of the debt, and recorded $0.7 million as interest expense on the consolidated statement of operations. The Company paid $0.6 million for debt issuance costs during fiscal 2023 and the remaining issuance costs were added to the new term loan principal at the time of the modification.
Long-term debt was comprisedconsisted of the following:
| | | Fiscal year of maturity | | | March 31, 2016 | | March 31, 2015 | | | | | | | | | | | | | Foreign credit agreements | | | 2018-2020 | | | $ | 0.4 | | | $ | 0.2 | | | 6.8% Senior Notes | | | 2017-2021 | | | | 125.0 | | | | 125.0 | | | Revolving credit facility | | | 2019 | | | | - | | | | - | | | | | | | | | | 125.4 | | | | 125.2 | | | Other (a) | | | 2017-2030 | | | | 8.6 | | | | 4.9 | | | | | | | | | | 134.0 | | | | 130.1 | | | Less: current portion | | | | | | | (8.5 | ) | | | (0.5 | ) | | Total long-term debt | | | | | | $ | 125.5 | | | $ | 129.6 | |
| Fiscal year of maturity | | March 31, 2023 | | | March 31, 2022 | | | | | | | | | | | | Term loans | 2028 | | $ | 215.7 | | | $ | 163.7 | | 5.9% Senior Notes | 2029 | | | 100.0 | | | | 100.0 | | 5.8% Senior Notes | 2027 | | | 33.3 | | | | 41.7 | | | Revolving credit facility | 2028 | | | - | | | | 64.9 | | | Other (a) | | | | 2.7 | | | | 3.2 | | | | | | | 351.7 | | | | 373.5 | | | Less: current portion | | | | (19.7 | ) | | | (21.7 | ) | | Less: unamortized debt issuance costs | | | | (2.7 | ) | | | (3.4 | ) | | Total long-term debt | | | $ | 329.3 | | | $ | 348.4 | |
| (a) | Other long-term debt primarily includes capitalfinance lease obligations and other financing-type obligations. |
The Company maintains a $175.0 million domestic revolving credit facility, which expires in August 2018. Long-term debt, including the current portion of long-term debt, matures as follows:
| Fiscal Year | | | | | 2024 | | $ | 19.7 | | | 2025 | | | 19.7 | | | 2026 | | | 44.7 | | | 2027 | | | 44.7 | | | 2028 | | | 197.4 | | 2029 and beyond | | | 25.5 | | | Total | | $ | 351.7 | |
Borrowings under the revolving credit, agreementswingline and term loan facilities bear interest at a variable rate, based onupon the London Interbank Offered Rate (“LIBOR”) plus 125 to 225 basis points (1.8 percent at March 31, 2016) dependingapplicable reference rate and including a margin percentage dependent upon the Company’s leverage ratio, as defineddescribed below. At March 31, 20162023, the weighted-average interest rate for the term loans was 6.0 percent. Based upon the terms of the credit agreement, the Company classifies borrowings under its revolving credit and 2015,swingline facilities as long-term and short-term debt, respectively, on its consolidated balance sheets.
At March 31, 2023, the Company had no outstanding borrowings were outstanding underrelated to the revolving credit facility.and swingling facilities and domestic letters of credit totaled $5.4 million. As a result, available borrowing capacity under the Company’s revolving credit facility was $269.6 million as of March 31, 2023. At March 31, 2022, the Company’s borrowings under its revolving credit and swingline facilities totaled $64.9 million and $7.0 million, respectively.
The Company also maintains credit agreements for its foreign subsidiaries, withsubsidiaries. The outstanding short-term borrowings at March 31, 2016 and 2015 of $28.6related to these foreign credit agreements totaled $3.7 million and $18.6 million, respectively. At March 31, 2016, the Company’s foreign unused lines of credit totaled $32.0 million. In aggregate, the Company had total available lines of credit of $207.0$0.7 million at March 31, 2016.2023 and March 31, 2022, respectively.
Provisions in
Indebtedness under the Company’s revolving credit facility,agreement and Senior Note agreements and various foreign credit agreements require the Company to maintain compliance with various covenants and include certain cross-default clauses. Under its primary debt agreements in the U.S., the Company has providedis secured by liens on substantially all domestic assets. The Company is also subjectThese agreements further require compliance with various covenants that may limit the Company’s ability to a leverage ratio covenant, which requiresincur additional indebtedness; grant liens; make investments, loans, or guarantees; engage in certain transactions with affiliates; and make restricted payments including dividends. In addition, the agreements may require prepayment in the event of certain asset sales.
Financial covenants within its credit agreements require the Company to limit its consolidated indebtedness, less a portion of the Company’sits cash balance,balances, 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”.), and an interest expense coverage The Company must also maintain a ratio which requires the Company to maintainof Adjusted EBITDA of at least three times consolidated interest expense. TheAs of March 31, 2023, the Company was in compliance with its debt covenants as of March 31, 2016.covenants.
Long-term debt matures as follows:
| Fiscal Year | | | | | 2017 | | $ | 8.5 | | | 2018 | | | 16.5 | | | 2019 | | | 16.5 | | | 2020 | | | 16.6 | | | 2021 | | | 69.4 | | | 2022 & beyond | | | 6.5 | | | Total | | $ | 134.0 | |
The Company estimates the fair value of long-term debt using discounted future cash flows at rates offered to the Company for similar debt instruments of comparable maturities. AtAs of March 31, 20162023 and 2015,2022, the carrying value of Modine’sthe Company’s long-term debt approximated fair value, with the exception of the Senior Notes, which had aan aggregate fair value of approximately $139.0$125.9 million and $141.0$138.9 million, respectively. The fair value of the Senior NotesCompany’s long-term debt is categorized as Level 2 within the fair value hierarchy. Refer to Note 4 for the definition of a Level 2 fair value measurement. MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 17: | Note 18: Pension and Employee Benefit Plans |
Defined Contribution Employee Benefit Plans:
Plans
The Company maintains a domestic 401(k) plansplan that allowallows employees to contribute a portion of their salary to help them save for retirement. The Company matched 50 percent ofcurrently matches employee contributions up to 54.5 percent of their compensation. During fiscal 2021, as part of its response to the negative impacts of the COVID-19 pandemic, the Company suspended matching employee compensation, during fiscal 2016, 2015, and 2014. The Company also makes annual employer contributions into active employee accounts based upon a percentagefor part of employee compensation. Employees can choose among various investment alternatives, including (subject to restrictions) Modine stock. The Company’s matching contributions and annual employer contributions are discretionary.the year. The Company’s expense for defined contribution employee benefit plans during fiscal 2016, 2015,2023, 2022, and 20142021 was $4.6 $6.9 million, $5.9$6.4 million, and $8.3$3.0 million, respectively. The decreasing trend in expense from fiscal 2014 was primarily due to lower discretionary employer contributions.
In addition, the Company maintains a non-qualified deferred compensation planplans for eligible employees, and various non-U.S. subsidiaries have government-required defined contribution plans in place, under which they contribute a percentage of employee earnings into accounts, consistent with local laws.
Statutory Termination Plans:
Plans
Certain non-U.S. subsidiaries have statutory termination indemnity plans covering eligible employees. The benefits under these plans are based upon years of service and final average compensation levels or a monthly retirement benefit amount. These programs are all substantially unfunded in accordance with local laws, but are often covered by national obligatory umbrella insurance programs that protect employees from losses in the event that an employer defaults on its obligations.laws.
Defined Benefit Employee Benefit Plans:Pension Plans
Pension plans:The Company maintains non-contributory defined benefit pension plans that cover eligible domestic employees. These plans are closed to new participants. The primary domestic plans cover most of its domestic employees hired on or before December 31, 2003. The2003 and provide benefits provided are based primarily onupon years of service and average compensation for salaried and some hourly employees. Benefits for other hourly employees are based onupon a monthly retirement benefit amount. Domestic salaried employees hired after December 31, 2003 are not covered under a defined benefit plan. Currently, the Company’s domestic pension plans do not include increases in annual earnings or future service in calculating the average annual earnings and years of credited service under the pension plan benefit formula. Certain non-U.S. subsidiaries of the Company also have legacy defined benefit plans which cover a smaller number of active employees and are substantially unfunded. The primary non-U.S. plans are maintained in Germany and AustriaItaly and are closed to new participants.
The Company contributed $6.7 million, $5.9 million, and $8.0 millionpreviously maintained a pension plan in Austria that conveyed to the buyer of the air-cooled automotive business during fiscal 2022; see Note 1 for additional information.
In connection with funding relief provisions within the American Rescue Plan Act of 2021, the Company did not make cash contributions to its U.S. pension plans during fiscal 2016, 2015,2023. The Company contributed $3.5 million and 2014,$19.3 million to its U.S. pension plans during fiscal 2022 and 2021, respectively. In addition, the Company contributed $1.5 million, $1.5 million, and $2.2 million to its non-U.S. pension plans during fiscal 2023, 2022, and 2021, respectively. These contributions are reported in the change in other liabilities in the consolidated statements of cash flows.
During fiscal 2016, in an effort to reduce the size, volatility, mortality risk, and costs associated with its U.S. pension plans, the Company completed a voluntary lump-sum payout program offered to certain eligible former employees. Approximately 2,000 participants accepted the lump-sum settlement offer. During fiscal 2016, a total of $65.3 million was paid from pension plan assets for lump-sum payouts, which reduced the Company’s pension obligation by the same amount. In connection with these lump-sum payouts, the Company recorded $42.1 million of non-cash settlement losses related to the accelerated recognition of unamortized actuarial losses previously recorded on the consolidated balance sheets within accumulated other comprehensive loss. During fiscal 2016, the Company recorded $33.3 million and $8.8 million of settlement losses as SG&A expenses and cost of sales, respectively, within the consolidated statements of operations.Postretirement Plans
Postretirement plans: The Company provides selected healthcare and life insurance benefits for eligible retired domestic employees. The Company periodically amends these unfunded plans to change the contribution rate of retirees and the amounts and forms of coverage. An annual limit on the Company’s cost is defined for the majority of these plans. The Company’s net periodic income for its postretirement plans duringin each of fiscal 2016, 2015,2023, 2022, and 20142021 was $0.3 million, $0.1 million, and $1.0 million, respectively.million.
Measurement Date: The Company uses March 31 as the measurement date for its pension and postretirement plans.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Measurement Date
The Company uses March 31 as the measurement date for its pension and postretirement plans.
Changes in benefit obligations and plan assets, as well as the funded status of the Company’s global pension plans, for the fiscal years ended March 31, 2016 and 2015 were as follows:
| | | Years ended March 31, | | | | | 2016 | | 2015 | | 2023 | | | 2022 | | | Change in benefit obligation: | | | | | | | | | | | | | | Benefit obligation at beginning of year | | $ | 328.2 | | | $ | 295.7 | | | $ | 228.6 | | | $ | 260.6 | | | Service cost | | | 0.6 | | | | 0.5 | | | | 0.2 | | | | 0.3 | | | Interest cost | | | 11.2 | | | | 13.0 | | | | 8.1 | | | | 7.3 | | | Actuarial (gain) loss | | | (2.8 | ) | | | 40.6 | | | | Benefits paid (a) | | | (78.1 | ) | | | (14.6 | ) | | Actuarial gain
| | | | (25.8 | ) | | | (16.5 | ) | | Benefits paid | | | | (16.1 | ) | | | (16.0 | ) | | Disposition of air-cooled automotive business | | | | - | | | | (5.5 | ) | | Effect of exchange rate changes | | | 1.9 | | | | (7.0 | ) | | | (0.1 | ) | | | (1.6 | ) | | Benefit obligation at end of year | | $ | 261.0 | | | $ | 328.2 | | | $ | 194.9 | | | $ | 228.6 | | | | | | | | | | | | | | | | | | | | | Change in plan assets: | | | | | | | | | | | | | | | | | | Fair value of plan assets at beginning of year | | $ | 217.0 | | | $ | 213.7 | | | $ | 179.9 | | | $ | 183.3 | | | Actual return on plan assets | | | (5.3 | ) | | | 10.8 | | | | (12.0 | ) | | | 7.6 | | | Benefits paid (a) | | | (78.1 | ) | | | (14.6 | ) | | | Benefits paid | | | | (16.1 | ) | | | (16.0 | ) | | Employer contributions | | | 7.9 | | | | 7.1 | | | | 1.5 | | | | 5.0 | | | Fair value of plan assets at end of year | | $ | 141.5 | | | $ | 217.0 | | | $ | 153.3 | | | $ | 179.9 | | | Funded status at end of year | | $ | (119.5 | ) | | $ | (111.2 | ) | | $ | (41.6 | ) | | $ | (48.7 | ) | | | | | | | | | | | | | | | | | | | | Amounts recognized in the consolidated balance sheets: | | | | | | | | | | | | | | | | | | Current liability | | $ | (0.9 | ) | | $ | (0.8 | ) | | $ | (1.4 | ) | | $ | (1.5 | ) | | Noncurrent liability | | | (118.6 | ) | | | (110.4 | ) | | | (40.2 | ) | | | (47.2 | ) | | | | $ | (119.5 | ) | | $ | (111.2 | ) | | $ | (41.6 | ) | | $ | (48.7 | ) |
| (a) | In fiscal 2016, $65.3 million was paid from plan assets in connection with lump-sum payouts. |
As of March 31, 2023, 2022, and 2021, the benefit obligation associated with the Company’s non-U.S. pension plans totaled $21.2 million, $26.5 million, and $36.4 million, respectively. The $5.3 million decrease in the benefit obligation associated with non-U.S. pension plans as of March 31, 2023, compared with the prior year, was primarily due to net actuarial gains during the year from an increase in discount rates and employer contributions for benefits paid to plan participants which decreased the obligation by $4.4 million and $1.5 million, respectively, and to a lesser extent, the impact of foreign currency exchange rates. The decreases were partially offset by service and interest cost totaling $0.7 million. In fiscal 2022, the $9.9 million decrease was primarily due to the sale of the air-cooled automotive business in Austria, which resulted in a $5.5 million decrease. In addition, net actuarial gains during the year, the impact of foreign currency exchange rate changes, and employer contributions for benefits paid to plan participants decreased the obligation by $1.9 million, $1.6 million, and $1.5 million, respectively. The decreases were partially offset by service and interest cost totaling $0.6 million.
The accumulated benefit obligation for pension plans was $257.9$194.4 million and $325.5$228.1 million as of March 31, 20162023 and 2015,2022, respectively. The net actuarial loss related to the pension plans recognized in accumulated other comprehensive loss was $162.0$123.5 million and $192.3$131.5 million as of March 31, 20162023 and 2015,2022, respectively.
Costs for the Company’s pension plans included the following components for the fiscal years ended March 31, 2016, 2015, and 2014:
| | | 2016 | | 2015 | | 2014 | | Components of net periodic benefit cost: | | | | | | | | | | | Service cost | | $ | 0.6 | | | $ | 0.5 | | | $ | 0.6 | | | Interest cost | | | 11.2 | | | | 13.0 | | | | 13.0 | | | Expected return on plan assets | | | (14.9 | ) | | | (16.7 | ) | | | (15.7 | ) | | Amortization of net actuarial loss | | | 6.4 | | | | 5.5 | | | | 6.3 | | | Settlements (a) | | | 42.1 | | | | - | | | | - | | | Net periodic benefit cost | | $ | 45.4 | | | $ | 2.3 | | | $ | 4.2 | | | | | | | | | | | | | | | | | Other changes in benefit obligation recognized in other comprehensive loss (income): | | | | | | | | | | | | | | Net actuarial loss (gain) | | $ | 17.5 | | | $ | 46.4 | | | $ | (17.3 | ) | | Amortization of net actuarial loss (a) | | | (48.5 | ) | | | (5.5 | ) | | | (6.3 | ) | | Total recognized in other comprehensive (income) loss | | $ | (31.0 | ) | | $ | 40.9 | | | $ | (23.6 | ) |
| (a) | During fiscal 2016, in connection with lump-sum payouts to pension plan participants, the Company recorded $42.1 million of settlement losses, which were previously recorded in accumulated other comprehensive loss. |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Costs for the Company’s global pension plans included the following components:
| | Years ended March 31, | | | | | 2023 | | | 2022 | | | 2021 | | | Components of net periodic benefit cost: | | | | | | | | | | | Service cost | | $ | 0.2 | | | $ | 0.3 | | | $ | 0.4 | | | Interest cost | | | 8.1 | | | | 7.3 | | | | 7.9 | | | Expected return on plan assets | | | (11.6 | ) | | | (12.9 | ) | | | (11.5 | ) | | Amortization of net actuarial loss | | | 5.7 | | | | 6.9 | | | | 6.9 | | | Settlements (a) | | | - | | | | - | | | | 0.2 | | | Net periodic benefit cost | | $ | 2.4 | | | $ | 1.6 | | | $ | 3.9 | | | | | | | | | | | | | | | | Other changes in benefit obligation recognized in other comprehensive income: | | | | | | | | | | | | | Net actuarial gain
| | $ | 2.1 | | | $ | 11.4 | | | $ | 33.8 | | | Amortization of net actuarial loss (b) | | | 5.7 | | | | 8.6 | | | | 7.1 | | Total recognized in other comprehensive income
| | $ | 7.8 | | | $ | 20.0 | | | $ | 40.9 | |
| (a) | The settlement charges resulted from activity associated with the Company’s non-U.S. pension plans. |
| (b) | The fiscal 2022 amount includes $1.7 million of net actuarial losses written-off as a result of the sale of the Austrian air-cooled automotive business. See Note 1 for additional information. |
The Company estimates $5.6 amortized $5.7 million, $8.6 million, and $7.1million of net actuarial loss for itsin fiscal 2023, 2022, and 2021, respectively. Exclusive of the $1.7 million written-off in fiscal 2022 upon the sale of the Austrian air-cooled automotive business referenced above, less than $1.0 million of the amortization was attributable to the Company’s non-U.S. pension plans will be amortized from accumulated other comprehensive loss into net periodic benefit cost during fiscal 2017.in each of these years.
The Company used a discount rate of 4.1%5.2% and 4.0%3.9% as of March 31, 20162023 and 2015,2022, respectively, infor determining its benefit obligations under its U.S. pension plans. The Company used a weighted-average discount rate of 1.8%3.8% and 1.3%1.8% as of March 31, 20162023 and 2015,2022, respectively, infor determining its benefit obligations under its non-U.S. pension plans. The Company used a discount rate of 4.3%3.9%, 4.7%3.2%, and 4.4%3.4% to determine its costs under its U.S. pension plans for the fiscal years ended March 31, 2016, 2015,2023, 2022, and 2014,2021, respectively. The Company used a weighted-average discount rate of 1.3%2.9%, 3.0%1.6%, and 3.5%1.4% to determine its costs under its non-U.S. pension plans for the fiscal years ended March 31, 2016, 2015,2023, 2022, and 2014,2021, respectively. The Company determined the discount rates used for its U.S. pension plans by modeling a portfolio of high-quality corporate bonds, with appropriate consideration given to expected defined benefit payment terms and duration of the respective pension obligations. The Company used a similar process to determine the discount rate for its non-U.S. pension obligations.
Plan assets in the Company’s U.S. defined benefitpension plans comprise 100 percent of the Company’s world-wide pension plan assets. The Company’s U.S. pension plan weighted-average asset allocations at the measurement dates of March 31, 20162023 and 20152022 were as follows:
| | | Target allocation | | Plan assets | | Target allocation | | | Plan assets | | | | | | | | 2016 | | 2015 | | | | | 2023 | | | 2022 | | | Equity securities | | | 55 | % | | | 56 | % | | | 55 | % | | | 76 | % | | | 76 | % | | | 74 | % | | Debt securities | | | 38 | % | | | 36 | % | | | 36 | % | | | 18 | % | | | 15 | % | | | 17 | % | | Alternative assets | | | 5 | % | | | 4 | % | | | 5 | % | | | Cash | | | 2 | % | | | 4 | % | | | 4 | % | | | Real estate investments | | | | 5 | % | | | 8 | % | | | 8 | % | | Cash and cash equivalents | | | | 1 | % | | | 1 | % | | | 1 | % | | | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % |
Due to market conditions and other factors, including timing of benefit payments and other transactions, actual asset allocation may vary from the target allocation outlined above. The Company periodically rebalances the assets to the target allocations. As of March 31, 20162023 and 2015,2022, the Company’s pension plans did not directly own shares of Modine common stock.
The Company employs a total return investment approach, whereby a mix of equities and fixed-income investments are used to maximize the long-term returngrowth of plan assets,principal, while avoiding excessive risk. The Company has established pension plan guidelines based upon an evaluation of market conditions, tolerance for risk and cash requirements for benefit payments. The Company measures and monitors investment risk on an ongoing basis through quarterly investment portfolio reviews, annual liability measurements and periodic asset/liability studies.
The expected rate of return on U.S. plan assets is based upon historical return experience and forward-looking return expectations for major asset class categories. For fiscal 2016, 2015, and 20142023, U.S. pension plan expense, the expected rate of return on plan assets was 8.07.0 percent. For fiscal 20172022, and 2021 U.S. pension plan expense, the expected rate of return on plan assets was 7.5 percent. For fiscal 2024 U.S. pension plan expense, the Company has assumed a rate of return on plan assets of 8.06.5 percent.
The Company’s funding policy for its U.S. pension plans is to contribute annually, at a minimum, the amount necessary on an actuarial basis to provide for benefits in accordance with applicable laws and regulations. TheAs a result of funding relief provisions within the American Rescue Plan Act of 2021, the Company expectsdoes not expect to make cash contributions of $8.1 million to theseits U.S. plans during fiscal 2017.2024.
Estimated pension benefit payments for the next ten fiscal years are as follows:
| Fiscal Year | | Estimated Pension Benefit Payments | | | 2017 | | $ | 14.5 | | | 2018 | | | 15.2 | | | 2019 | | | 15.3 | | | 2020 | | | 15.8 | | | 2021 | | | 16.1 | | | 2022-2026 | | | 79.3 | |
| Fiscal Year | | Estimated Pension Benefit Payments | | | 2024 | | $ | 15.5 | | | 2025 | | | 15.7 | | | 2026 | | | 15.6 | | | 2027 | | | 15.5 | | | 2028 | | | 15.4 | | 2029-2033 | | | 72.4 | |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 18: | Note 19: Derivative Instruments |
The Company uses derivative financial instruments from time to time as a tool to manage certain financial risks. The Company’s policy prohibits the use of leveraged derivatives. Accounting for derivatives and hedging activities requires derivative financial instruments to be measured at fair value and recognized as assets or liabilities in the consolidated balance sheets. All of the Company’s derivative financial instruments are categorized within Level 2 of the fair value hierarchy. Refer to Note 4 for the definition of a Level 2 fair value measurement. Accounting for the gain or loss resulting from the change in fair value of the derivative financial instruments depends on whether it has been designated and is effective, as a hedge, and, if so, on the nature of the hedging activity.
Commodity Derivatives:Derivatives The Company periodically enters into futuresover-the-counter forward contracts related to certain forecasted purchases of aluminum and copper. The Company’s strategy in entering into these contracts is to reduce its exposure to changing market prices for future purchases of these commodities. The Company has notdesignates certain commodity forward contracts as cash flow hedges for accounting purposes. Accordingly, for these designated commodity contracts entered into in fiscal 2014, 2015, and 2016 for hedge accounting. Accordingly,hedges, the Company records unrealized gains and losses on theserelated to the change in the fair value of the contracts are recordedin accumulated other comprehensive income (loss) (“AOCI”) within shareholders’ equity and subsequently recognizes the gains and losses within cost of sales.sales as the underlying inventory is sold.
Foreign exchange contracts:Exchange Contracts The Company’s foreign exchange risk management strategy uses derivative financial instruments to mitigate foreign currency exchange risk. The Company periodically enters into foreign currency exchangeforward contracts to hedge specific foreign currency-denominated assets and liabilities.liabilities as well as forecasted transactions. The Company designates certain hedges of forecasted transactions as cash flow hedges for accounting purposes. Accordingly, for these designated hedges, the Company records unrealized gains and losses related to the change in the fair value of the contracts in AOCI within shareholders’ equity and subsequently recognizes 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. The Company has not designated forward contracts related to foreign currency-denominated assets and liabilities as hedges. Accordingly, for these non-designated contracts, for hedge accounting. Accordingly,the Company records unrealized gains and losses related to changes in fair value are recorded in other income and expense. Gains and losses on these foreign currency contracts are offset by foreign currency gains and losses associated with the related assets and liabilities.
The fair value of the Company’s derivative financial instruments recorded in the consolidated balance sheets were as follows:
| _ | | Balance Sheet Location | | March 31, 2023 | | | March 31, 2022 | | | Derivatives designated as hedges: | | | | | | | | | | Commodity derivatives | | Other current assets | | $ | - | | | $ | 0.5 | | | Foreign exchange contracts | | Other current assets | | | 1.3 | | | | 0.3 | | | | Balance Sheet Location | | March 31, 2016 | | | March 31, 2015 | | | | | | | | | | | | Derivatives not designated as hedges: | | | | | | | | | | | | Foreign exchange contracts | Other current assets | | $ | 0.1 | | | $ | - | | Other current liabilities | | $ | 0.2 | | | $ | 0.3 | | | Foreign exchange contracts | Other current liabilities | | | - | | | | 0.3 | | | | Commodity derivatives | Other current liabilities | | | 0.1 | | | | 0.1 | | |
The amounts recorded in the consolidated statements of operations for the Company’sassociated with derivative financial instruments that the Company designated for hedge accounting during the years ended March 31 were as follows:
| | Statement of Operations | | Years ended March 31, | | Gain (loss) recognized in other comprehensive income | | Statement of Operations | | Gain (loss) reclassified from AOCI | | | Location | | 2016 | | 2015 | | 2014 | | 2023 | | | 2022 | | | 2021 | | Location | | 2023 | | | 2022 | | | 2021 | | | Commodity derivatives | Cost of sales | | $ | (0.7 | ) | | $ | (0.2 | ) | | $ | (0.5 | ) | | $ | (1.6 | ) | | $ | 1.1 | | | $ | 2.2 | | Cost of sales
| | $ | (1.0 | ) | | $ | 1.2 | | | $ | - | | | Foreign exchange contracts | Other income (expense) - net | | | 0.6 | | | | (1.1 | ) | | | - | | | | 1.6 | | | | - | | | | - | | Net sales | | | 0.6 | | | | - | | | | - | | | Total loss | | | $ | (0.1 | ) | | $ | (1.3 | ) | | $ | (0.5 | ) | | | Foreign exchange contracts | | | | 0.4 | | | | 0.6 | | | | (0.1 | ) | Cost of sales | | | 0.7 | | | | 0.4 | | | | (0.1 | ) | | Total gains (losses) | | | $ | 0.4 | | | $ | 1.7 | | | $ | 2.1 | | | | $ | 0.3 | | | $ | 1.6 | | | $ | (0.1 | ) |
Note 19: | Contingencies and Litigation |
The amounts associated with derivative financial instruments that the Company did not designate for hedge accounting were as follows:
| Statement of Operations | | Years ended March 31, | | | _ | Location | | 2023 | | 2022 | | 2021 | | | Foreign exchange contracts | Net sales | | | $ | (0.5 | ) | | $ | (0.6 | ) | | $ | - | | | Foreign exchange contracts | Other income (expense) - net | | | | (2.6 | ) | | | (0.8 | ) | | | 0.6 | | | Total gains (losses) | | | | $ | (3.1 | ) | | $ | (1.4 | ) | | $ | 0.6 | |
Note 20: Risks, Uncertainties, Contingencies and Litigation
Supply Chain Disruptions and Inflationary Market risk: Conditions Market and economic dynamics, including the impacts of the COVID-19 pandemic, have contributed to global supply chain challenges and inflationary market conditions. Since the fourth quarter of fiscal 2022, the military conflict between Russia and Ukraine and the related sanctions imposed by governments in the U.S. and abroad have also impacted these market conditions. The Company sells a broad rangeis focused on mitigating the negative impacts of productslabor shortages, supply chain challenges and inflationary market conditions, including changing raw material, energy and logistic costs, as well as delays and shortages in certain purchased commodities and components. At this time, the Company cannot reasonably estimate the full impact that provide thermal solutions to customers operating primarilythe supply chain challenges and other related economic and market dynamics will have on the Company’s business, results of operations and cash flows in the commercial vehicle, off-highway, automotive, and commercial heating and air conditioning markets. The Company operates in diversified markets as a strategy for offsetting the risk associated with a downturn in any one or morefuture.
Credit risk: Risk The Company invests excess cash primarily in investment quality, short-term liquid debt instruments. Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of accounts receivable. The Company sells a broad range of products that provide thermal solutions to customers operating throughout the world. In fiscal 20162023 and 2015, two2022, no customers each accounted for more than ten percent or more of the Company’s total sales. In fiscal 2014,2021, one vehicular customer accounted for more than ten percent or more of the Company’s total sales. Sales to the Company’s top ten customers represented 63were 39 percent, 39 percent, and 43 percent of total sales in both fiscal 20162023, 2022, and 2015 and 56 percent in fiscal 2014.2021, respectively. At March 31, 20162023 and 2015, 452022, 37 percent and 4729 percent, respectively, of the Company'sCompany’s trade accounts receivable were due from the Company'sCompany’s top ten customers. These customers operate primarily in the commercial vehicle, off-highway, automotive truck, and heavy equipment marketslight vehicle, data center cooling, and are influenced by similar marketcommercial air conditioning and general economic factors. Collateralrefrigeration markets. The Company generally does not require collateral or advanced payments are generally not required.from its customers. The Company has not experienced significant credit losses to customers in the markets served. MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The Company manages credit risk through its focus on the following:
| ● | Cash and investments – reviewing cash deposits and short-term investments to ensure banks have credit ratings acceptable to the Company and that short-term investments are maintained in secured or guaranteed instruments; |
| ● | Accounts receivable – performing periodic customer credit evaluations and actively monitoring their financial condition and applicable business news; |
| ● | Pension assets – ensuring that investments within pension plans provide appropriate diversification, monitoring of investment teams, ensuring that portfolio managers adhere to the Company’s investment policies and directives, and ensuring that exposure to high risk investments is limited; and |
| ● | Insurance – ensuring that insurance providers maintain acceptable financial ratings. |
Insurance – ensuring that insurance providers maintain financial ratings that are acceptable to the Company.
Counterparty risks: Risk The Company manages counterparty risksrisk through its focus on the following:
| ● | Customers – performing thorough reviews of customer credit reports and accounts receivable aging reports by internal credit committees; |
| ● | Suppliers – maintaining a supplier risk management program and utilizing industry sources to identify and mitigate high risk situations; and |
| ● | Derivatives – ensuring that counterparties to derivative instruments maintain credit ratings that are acceptable to the Company. |
Environmental: The United States Environmental Protection Agency has designated the Company as a potentially responsible party for remediation of three sites. These sites are: Auburn Incinerator, Inc./Lake Calumet Cluster (Illinois), Cam-Or (Indiana) and a scrap metal site known as Chemetco (Illinois). In addition, Modine is voluntarily participating in the care of an inactive landfill owned by the City of Trenton (Missouri). These sites are not Company-owned; however, they allegedly contain materials attributable to Modine from past operations. The percentage of material allegedly attributable to Modine is relatively low. Remediation of these sites is in various stages of administrative or judicial proceedings and includes recovery of past governmental costs and the costs of future investigations and remedial actions. The Company accrues for costs anticipated for the remedial settlement of the sites listed above if they are probable and can be reasonably determined. Costs anticipated for the remedial settlement of the sites listed above that are not probable or cannot be reasonably determined at this time have not been accrued; however, the Company does not believe any potential costs would be materialacceptable to the Company’s financial position due to its relatively small portion of contributed materials.Company.
Environmental The Company has recorded environmental investigation and remediation accruals for subsurface contaminationrelated to manufacturing facilities in the U.S., one of which the Company currently owns and operates, and at its former manufacturing facility in the NetherlandsNetherlands. These accruals primarily relate to soil and groundwater contamination at its manufacturing facility in Brazil. During fiscal 2016, the Company recorded charges totaling $1.6 million, within cost of sales, to establish an environmental accrual for investigative work related to a previously-owned manufacturing facility in the United States. In addition, the Company has recorded accruals for other lesser environmental matters at certain facilities located in the United States. These accruals generally relate to facilities where past operations followed practices and procedures that were considered acceptable under then-existing regulations, or where the Company is a successor to the obligations of prior owners, and current laws and regulations require investigative and/or remedial work to ensure sufficient environmental compliance. In instances where a range of loss can be reasonably estimated for a probable environmental liability, but no amount within the range is a better estimate than any other amount, the Company accrues the minimum of the range. The Company’s accruals for these environmental matters totaled $5.1$17.6 million and $3.8$18.2 million at March 31, 20162023 and 2015,2022, respectively. During fiscal 2023 and 2022, the Company increased its remediation accrual related to a former manufacturing facility in the U.S. by $1.0 million and $3.4 million, respectively. As additional information becomes available regarding environmental matters, the Company will re-assess the liability related to these mattersliabilities and revise the estimated accrual, accruals, if necessary. Based onWhile it is possible that the ultimate environmental remediation costs may be in excess of amounts accrued, the Company believes, based upon currently available information, the Company believesthat the ultimate outcome of these matters, individually and in the aggregate, will not have a material adverse effect on its financial position. However, these matters are subject to inherent uncertainties, and unfavorable outcomes could occur, including significant monetary damages. During fiscal 2011, one
Other litigation:Litigation In the normal course of business, the Company and its subsidiaries are named as defendants in various other lawsuits and enforcement proceedings by private parties, governmental agencies and/or others in which claims are asserted against Modine. The Company believes that any additional loss in excess of amounts already accrued would not have a material effect on the Company’s consolidated balance sheet, results of operations, and cash flows. In the opinion ofaddition, management expects that the liabilities if any, which may ultimately result from such lawsuits or proceedings, areif any, would not expected to have a material adverse effect on the Company’s consolidated financial statements.position.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 20: | Note 21: Accumulated Other Comprehensive Loss |
Changes in accumulated other comprehensive loss were as follows:
| | | Foreign Currency Translation | | Defined Benefit Plans | | Total | | Balance, March 31, 2015 | | $ | (40.7 | ) | | $ | (157.9 | ) | | $ | (198.6 | ) | | | | | | | | | | | | | | | | Other comprehensive loss before reclassifications | | | 4.7 | | | | (16.6 | ) | | | (11.9 | ) | | Reclassifications: | | | | | | | | | | | | | | Amortization of unrecognized net loss (a) | | | - | | | | 48.3 | | | | 48.3 | | | Amortization of unrecognized prior service credit (a) | | | - | | | | (0.2 | ) | | | (0.2 | ) | | Income taxes | | | - | | | | (11.8 | ) | | | (11.8 | ) | | Total other comprehensive loss | | | 4.7 | | | | 19.7 | | | | 24.4 | | | | | | | | | | | | | | | | | Balance, March 31, 2016 | | $ | (36.0 | ) | | $ | (138.2 | ) | | $ | (174.2 | ) |
| | Foreign Currency Translation | | | Defined Benefit Plans | | | Cash Flow Hedges | | | Total | | Balance, March 31, 2022 | | $ | (39.1 | ) | | $ | (111.1 | ) | | $ | 0.7 | | | $ | (149.5 | ) | | | | | | | | | | | | | | | | | | | | Other comprehensive income (loss) before reclassifications | | | (18.4 | ) | | | 2.5 | | | | 0.4 | | | | (15.5 | ) | | Reclassifications: | | | | | | | | | | | | | | | | | | Amortization of unrecognized net loss (a) | | | - | | | | 5.3 | | | | - | | | | 5.3 | | | Realized gains - net (b) | | | - | | | | - | | | | (0.3 | ) | | | (0.3 | ) | | Income taxes | | | - | | | | (1.1 | ) | | | - | | | | (1.1 | ) | | Total other comprehensive income (loss) | | | (18.4 | ) | | | 6.7 | | | | 0.1 | | | | (11.6 | ) | | | | | | | | | | | | | | | | | | | Balance, March 31, 2023 | | $ | (57.5 | ) | | $ | (104.4 | ) | | $ | 0.8 | | | $ | (161.1 | ) |
| | | Foreign Currency Translation | | Defined Benefit Plans | | Total | | Balance, March 31, 2014 | | $ | 27.3 | | | $ | (131.2 | ) | | $ | (103.9 | ) | | | | | | | | | | | | | | | | Other comprehensive loss before reclassifications | | | (68.0 | ) | | | (45.2 | ) | | | (113.2 | ) | | Reclassifications: | | | | | | | | | | | | | | Amortization of unrecognized net loss (a) | | | - | | | | 5.4 | | | | 5.4 | | | Amortization of unrecognized prior service credit (a) | | | - | | | | (0.1 | ) | | | (0.1 | ) | | Income taxes | | | - | | | | 13.2 | | | | 13.2 | | | Total other comprehensive loss | | | (68.0 | ) | | | (26.7 | ) | | | (94.7 | ) | | | | | | | | | | | | | | | | Balance, March 31, 2015 | | $ | (40.7 | ) | | $ | (157.9 | ) | | $ | (198.6 | ) |
| | Foreign Currency Translation | | | Defined Benefit Plans | | | Cash Flow Hedges | | | Total | | Balance, March 31, 2021 | | $ | (31.0 | ) | | $ | (130.8 | ) | | $ | 0.6 | | | $ | (161.2 | ) | | | | | | | | | | | | | | | | | | | | Other comprehensive income (loss) before reclassifications | | | (8.1 | ) | | | 11.5 | | | | 1.7 | | | | 5.1 | | | Reclassifications: | | | | | | | | | | | | | | | | | | Amortization of unrecognized net loss (a) | | | - | | | | 6.5 | | | | - | | | | 6.5 | | | Unrecognized net pension loss in disposed business (c) | | | - | | | | 1.7 | | | | - | | | | 1.7 | | | Realized gains - net (b) | | | - | | | | - | | | | (1.6 | ) | | | (1.6 | ) | | Income taxes | | | - | | | | - | | | | - | | | | - | | Total other comprehensive income (loss) | | | (8.1 | ) | | | 19.7 | | | | 0.1 | | | | 11.7 | | | | | | | | | | | | | | | | | | | | Balance, March 31, 2022 | | $ | (39.1 | ) | | $ | (111.1 | ) | | $ | 0.7 | | | $ | (149.5 | ) |
| (a) | Amounts are included in the calculation of net periodic benefit cost for the Company’s defined benefit plans, which include pension and other postretirement plans. See Note 1718 for additional information about the Company’s pension plans. |
| (b) | Amounts represent net gains and losses associated with cash flow hedges that were reclassified to net earnings. See Note 19 for additional information regarding derivative instruments. |
| (c) | As a result of the sale of the Austrian air-cooled automotive business, the Company wrote-off $1.7 million of net actuarial losses related to its pension plan as a component of the loss on sale recorded during fiscal 2022. See Note 1 for additional information. |
Note 21: | Note 22: Segment and Geographic Information |
The Company’s product lines consist of heat-transfer componentssystems and systems.components. The Company serves the vehicular,commercial, industrial, and building HVAC&R markets and vehicular markets.
The Company’s Climate Solutions segment provides heat transfer products, heating, ventilating, and air conditioning markets. During fiscal 2016, the Company combined its North America and South America segments into the Americasrefrigeration products and data center cooling solutions to global customers. The Company’s Performance Technologies segment to streamline operations, gain synergiesdesigns and improve its cost structure. As a result, the Company recast the prior-period segment financial information to conform to the current-period presentation. There was no impact to the Company’s consolidated financial statements as a result. Throughout fiscal 2016, the Company’s four operating segments were as follows:
Americas:
Comprised ofmanufactures air-and liquid-cooled technology for vehicular, stationary power, and industrial original equipmentapplications. In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coatings products in North America and South America, as well as aftermarket products in South America.application services.
Europe:
Comprised of vehicular and industrial original equipment products in Europe.
Asia:
Comprised of vehicular and industrial original equipment products in Asia.
Building HVAC:
Comprised of building heating, ventilating and air conditioning products throughout the world.
Each operating segment is managed by a vice president and has separate financial results reviewed by the Company’s chief operating decision maker. TheseFinancial results, including net sales, gross profit, gross margin and operating income, together with other considerations, are used by managementthe chief operating decision maker in evaluating the performance of each segment and in making decisions on the allocation of resources among the Company’s various businesses.
Effective April 1, 2022, the Company began managing its operations under two operating segments, Climate Solutions and Performance Technologies. The Climate Solutions segment includes the previously-reported BHVAC and CIS segments, with the exception of CIS Coatings. The Performance Technologies segment includes the previously-reported HDE and Automotive segments and the CIS Coatings business. See Note 3 for information regarding the primary operating activities of each segment. The Company’s new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management. The Company believes this simplified segment structure allows it to better focus resources on targeted growth opportunities and allows for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow. The segment realignment had no impact on the Company’s consolidated financial position, results of operations, and cash flows. Segment financial information for the prior periods has been recast to conform to the current presentation.
The following is a summary of net sales, gross profit, and operating income by segment:segment. See Note 3 for additional information regarding net sales by product groups within each segment.
| | Year ended March 31, 2023 | | | | | External Sales | | | Inter-segment Sales | | | Total | | | Net sales: | | | | | | | | | | | | $ | 1,011.5 | | | $ | 0.4 | | | $ | 1,011.9 | | | | | 1,286.4 | | | | 29.8 | | | | 1,316.2 | | | Segment total | | | 2,297.9 | | | | 30.2 | | | | 2,328.1 | | | Corporate and eliminations | | | - | | | | (30.2 | ) | | | (30.2 | ) | | Net sales | | $ | 2,297.9 | | | $ | - | | | $ | 2,297.9 | |
| | Years ended March 31, | | Net sales: | | 2016 | | 2015 | | 2014 | | Americas | | $ | 585.5 | | | $ | 666.9 | | | $ | 688.3 | | | Europe | | | 524.1 | | | | 578.2 | | | | 584.4 | | | Asia | | | 79.0 | | | | 81.2 | | | | 71.5 | | | Building HVAC | | | 181.4 | | | | 186.3 | | | | 146.5 | | | Segment total | | | 1,370.0 | | | | 1,512.6 | | | | 1,490.7 | | | Corporate and eliminations | | | (17.5 | ) | | | (16.2 | ) | | | (13.1 | ) | | Net sales | | $ | 1,352.5 | | | $ | 1,496.4 | | | $ | 1,477.6 | |
| | | Years ended March 31, | | | | 2016 | | 2015 | | 2014 | | Gross profit: | | $'s | | | % of sales | | $'s | | | % of sales | | $'s | | | % of sales | | Americas | | $ | 100.1 | | | | 17.1 | % | | $ | 109.1 | | | | 16.3 | % | | $ | 114.3 | | | | 16.6 | % | | Europe | | | 68.1 | | | | 13.0 | % | | | 68.7 | | | | 11.9 | % | | | 70.8 | | | | 12.1 | % | | Asia | | | 12.2 | | | | 15.5 | % | | | 11.5 | | | | 14.2 | % | | | 8.9 | | | | 12.5 | % | | Building HVAC | | | 54.2 | | | | 29.9 | % | | | 55.9 | | | | 30.0 | % | | | 43.4 | | | | 29.6 | % | | Segment total | | | 234.6 | | | | 17.1 | % | | | 245.2 | | | | 16.2 | % | | | 237.4 | | | | 15.9 | % | | Corporate and eliminations (a) | | | (11.1 | ) | | | - | | | | 1.3 | | | | - | | | | 0.8 | | | | - | | | Gross profit | | $ | 223.5 | | | | 16.5 | % | | $ | 246.5 | | | | 16.5 | % | | $ | 238.2 | | | | 16.1 | % |
| | | Years ended March 31, | | Operating income: | | 2016 | | 2015 | | 2014 | | Americas | | $ | 36.2 | | | $ | 33.4 | | | $ | 49.6 | | | Europe | | | 13.3 | | | | 25.7 | | | | 9.6 | | | Asia | | | 0.8 | | | | 0.3 | | | | (3.3 | ) | | Building HVAC | | | 13.9 | | | | 19.1 | | | | 9.4 | | | Segment total | | | 64.2 | | | | 78.5 | | | | 65.3 | | | Corporate and eliminations (a) | | | (71.7 | ) | | | (25.8 | ) | | | (28.1 | ) | | Operating (loss) income | | $ | (7.5 | ) | | $ | 52.7 | | | $ | 37.2 | |
| (a) | During fiscal 2016, the Company recorded pension settlement losses of $42.1 million at Corporate, within SG&A expenses ($33.3 million) and cost of sales ($8.8 million). See Note 17 for additional information. |
Inter-segment sales are accounted for based on an established markup over production costs. Net sales for corporate and eliminations primarily represent the elimination of inter-segment sales. The operating loss for corporate includes certain research and development costs, legal, finance and other general corporate and central services expenses, and other costs that are either not directly attributable to an operating segment or not considered when management evaluates segment performance.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts) | | Year ended March 31, 2022 | | | | | External Sales | | | Inter-segment Sales | | | Total | | | Net sales: | | | | | | | | | | | | $ | 910.1 | | | $ | 0.4 | | | $ | 910.5 | | | | | 1,140.0 | | | | 32.4 | | | | 1,172.4 | | | Segment total | | | 2,050.1 | | | | 32.8 | | | | 2,082.9 | | | Corporate and eliminations | | | - | | | | (32.8 | ) | | | (32.8 | ) | | Net sales | | $ | 2,050.1 | | | $ | - | | | $ | 2,050.1 | |
| | Year ended March 31, 2021 | | | | | External Sales | | | Inter-segment Sales | | | Total | | | Net sales: | | | | | | | | | | | | $ | 731.1 | | | $ | 0.1 | | | $ | 731.2 | | | | | 1,077.3 | | | | 31.5 | | | | 1,108.8 | | | Segment total | | | 1,808.4 | | | | 31.6 | | | | 1,840.0 | | | Corporate and eliminations | | | - | | | | (31.6 | ) | | | (31.6 | ) | | Net sales | | $ | 1,808.4 | | | $ | - | | | $ | 1,808.4 | |
Inter-segment sales are accounted for based upon an established markup over production costs. Net sales for Corporate and eliminations primarily represent the elimination of inter-segment sales.
| | Years ended March 31, | | | | | 2023 | | | 2022 | | | 2021 | | | Gross profit: | | _$’s | | | % of sales | | | _$’s | | | % of sales | | | | | | % of sales | | | Climate Solutions | | $ | 223.6 | | | | 22.1 | % | | $ | 166.3 | | | | 18.3 | % | | $ | 136.6 | | | | 18.7 | % | | Performance Technologies | | | 166.1 | | | | 12.6 | % | | | 142.2 | | | | 12.1 | % | | | 157.1 | | | | 14.2 | % | | Segment total | | | 389.7 | | | | 16.7 | % | | | 308.5 | | | | 14.8 | % | | | 293.7 | | | | 16.0 | % | | Corporate and eliminations | | | (0.3 | ) | | | - | | | | 0.8 | | | | - | | | | (0.3 | ) | | | - | | | Gross profit | | $ | 389.4 | | | | 16.9 | % | | $ | 309.3 | | | | 15.1 | % | | $ | 293.4 | | | | 16.2 | % |
| | Years ended March 31, | | | Operating income: | | 2023 | | | 2022 | | | 2021 | | | | $
| 124.1 | | | $
| 73.4 | | | $
| 49.9 | | | Performance Technologies | | | 65.6 | | | | 77.4 | | | | (109.1 | ) | | Segment total | | | 189.7 | | | | 150.8 | | | | (59.2 | ) | | Corporate and eliminations (a) | | | (39.3 | ) | | | (31.6 | ) | | | (38.5 | ) | | Operating income (loss) | | $
| 150.4 | | | $
| 119.2 | | | $
| (97.7 | ) |
| (a) | The operating loss for Corporate includes certain research and development costs, legal, finance and other general corporate and central services expenses, and other costs that are either not directly attributable to an operating segment or not considered when management evaluates segment performance. |
The following is a summary of totalsegment assets, by segment:comprised entirely of trade accounts receivable and inventories, and other assets:
| | March 31, | | | Assets: | | 2023 | | | 2022 | | | | $ | 334.8 | | | $ | 291.7 | | | | | 388.1 | | | | 357.0 | | | | | 843.0 |
| | | 778.3 |
| | Total assets | | $ | 1,565.9 | | | $ | 1,427.0 | |
| | | March 31, | | | | | 2016 | | | 2015 | | | Americas | | $ | 267.2 | | | $ | 277.7 | | | Europe | | | 301.9 | | | | 282.7 | | | Asia | | | 104.0 | | | | 92.2 | | | Building HVAC (a) | | | 99.0 | | | | 131.3 | | | Corporate and eliminations | | | 148.8 | | | | 147.0 | | | Total assets | | $ | 920.9 | | | $ | 930.9 | |
| (a) | As of March 31, 2015, totalRepresents cash and cash equivalents, other current assets, within the Building HVAC segment included $48.0 million of insurance-relatedproperty plant and equipment, intangible assets, goodwill, deferred income taxes, and other noncurrent assets for the rebuild of the facility damaged by the Airedale fire. See Note 2 for additional information.Climate Solutions and Performance Technologies segments and Corporate. |
The following is a summary of capital expenditures and depreciation and amortization expense by segment:
| | Years ended March 31, | | | Capital expenditures: | | 2023 | | | 2022 | | | 2021 | | | | $ | 24.2 | | | $ | 9.9 | | | $ | 7.2 | | | | | 25.2 | | | | 29.2 | | | | 25.0 | | | | | 1.3 | | | | 1.2 | | | | 0.5 | | | Total capital expenditures | | $ | 50.7 | | | $ | 40.3 | | | $ | 32.7 | |
| | Years ended March 31, | | | Depreciation and amortization expense: | | 2023 | | | 2022 | | | 2021 | | | | $ | 21.7 | | | $ | 23.6 | | | $ | 24.9 | | Performance Technologies (a)
| | | 31.8 | | | | 29.9 | | | | 42.1 | | | Corporate | | | 1.0 | | | | 1.3 | | | | 1.6 | | | Total depreciation and amortization expense | | $ | 54.5 | | | $ | 54.8 | | | $ | 68.6 | |
| | | Years ended March 31, | | | Capital expenditures: | | 2016 | | | 2015 | | | 2014 | | | Americas | | $ | 26.7 | | | $ | 30.2 | | | $ | 24.6 | | | Europe | | | 24.8 | | | | 21.5 | | | | 22.9 | | | Asia | | | 6.2 | | | | 3.8 | | | | 4.6 | | | Building HVAC | | | 5.1 | | | | 2.8 | | | | 1.0 | | | Total capital expenditures | | $ | 62.8 | | | $ | 58.3 | | | $ | 53.1 | |
| (a) | During fiscal 2021, upon classifying the liquid- and air-cooled automotive businesses as held for sale, the Company ceased depreciating the long-lived assets within the disposal groups. In fiscal 2022, the Company resumed depreciating the long-lived assets within the liquid-cooled automotive business when it no longer met the requirements to be classified as held for sale. See Note 2 for additional information. |
| | | Years ended March 31, | | | Depreciation and amortization expense: | | 2016 | | | 2015 | | | 2014 | | | Americas | | $ | 22.1 | | | $ | 21.3 | | | $ | 22.6 | | | Europe | | | 18.0 | | | | 19.8 | | | | 26.6 | | | Asia | | | 6.5 | | | | 7.2 | | | | 6.7 | | | Building HVAC | | | 3.6 | | | | 3.3 | | | | 2.2 | | | Total depreciation and amortization expense | | $ | 50.2 | | | $ | 51.6 | | | $ | 58.1 | |
The following is a summary of net sales by geographicalgeographic area, based upon the location of the selling unit:
| | Years ended March 31, | | | | | 2023 | | | 2022 | | | 2021 | | | United States | | $ | 1,139.3 | | | $ | 949.6 | | | $ | 765.7 | | | Italy | | | 249.5 | | | | 232.0 | | | | 188.6 | | | Hungary | | | 210.7 | | | | 185.2 | | | | 153.7 | | | China | | | 151.6 | | | | 166.0 | | | | 217.6 | | | Brazil | | | 103.6 | | | | 81.2 | | | | 48.5 | | | United Kingdom | | | 93.6 | | | | 118.6 | | | | 96.4 | | | Other | | | 349.6 | | | | 317.5 | | | | 337.9 | | | Net sales | | $ | 2,297.9 | | | $ | 2,050.1 | | | $ | 1,808.4 | |
| | | Years ended March 31, | | | | | 2016 | | | 2015 | | | 2014 | | | United States | | $ | 627.6 | | | $ | 669.3 | | | $ | 645.7 | | | Germany | | | 155.3 | | | | 193.8 | | | | 229.5 | | | Hungary | | | 145.9 | | | | 161.0 | | | | 150.3 | | | Austria | | | 113.1 | | | | 118.7 | | | | 109.8 | | | Other | | | 310.6 | | | | 353.6 | | | | 342.3 | | | Net sales | | $ | 1,352.5 | | | $ | 1,496.4 | | | $ | 1,477.6 | |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The following is a summary of property, plant and equipment by geographicalgeographic area:
| | March 31, | | | | | 2023 | | | 2022 | | | United States | | $ | 96.4 | | | $ | 83.6 | | Hungary
| | | 40.8 | | | | 44.0 | | | China | | | 40.2 | | | | 45.6 | | | Mexico | | | 34.0 | | | | 38.5 | | | Italy | | | 32.8 | | | | 33.2 | | | Other | | | 70.3 | | | | 70.5 | | Total property, plant and equipment
| | $ | 314.5 | | | $ | 315.4 | |
| | | March 31, | | | | | 2016 | | | 2015 | | | United States | | $ | 92.5 | | | $ | 92.7 | | | Austria | | | 44.2 | | | | 41.5 | | | China | | | 33.6 | | | | 31.8 | | | Germany | | | 32.1 | | | | 47.2 | | | Hungary | | | 31.4 | | | | 28.9 | | | Other | | | 104.8 | | | | 80.0 | | | Total property, plant and equipment | | $ | 338.6 | | | $ | 322.1 | |
The following is a summary of net sales by end market:
| | | Years ended March 31, | | | | | 2016 | | | 2015 | | | 2014 | | | Commercial vehicle | | $ | 459.8 | | | $ | 512.5 | | | $ | 477.0 | | | Automotive | | | 396.8 | | | | 401.8 | | | | 395.6 | | | Off-highway | | | 206.2 | | | | 274.6 | | | | 320.8 | | | Building HVAC | | | 181.4 | | | | 186.3 | | | | 146.5 | | | Other | | | 108.3 | | | | 121.2 | | | | 137.7 | | | Net sales | | $ | 1,352.5 | | | $ | 1,496.4 | | | $ | 1,477.6 | |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 22: | Quarterly Financial Data (Unaudited) |
Quarterly financial data is summarized below for the years ended March 31, 2016 and 2015:
| | | Fiscal 2016 quarters ended | | | | | | | June | | Sept. | | Dec. | | March | | Fiscal 2016 | | | | | | | | | | | | | | | | | | | Net sales | | $ | 346.1 | | | $ | 334.0 | | | $ | 328.7 | | | $ | 343.7 | | | $ | 1,352.5 | | | Gross profit | | | 57.0 | | | | 45.7 | | | | 58.6 | | | | 62.2 | | | | 223.5 | | | Earnings (loss) from continuing operations (a) | | | 5.5 | | | | (22.5 | ) | | | 8.2 | | | | 7.8 | | | | (1.0 | ) | | Net earnings (loss) attributable to Modine (a) | | | 5.1 | | | | (22.5 | ) | | | 8.2 | | | | 7.6 | | | | (1.6 | ) | | Net earnings (loss) per share attributable to Modine shareholders: | | | | | | | | | | | | | | | | | | | | | | Basic | | $ | 0.11 | | | $ | (0.47 | ) | | $ | 0.17 | | | $ | 0.16 | | | $ | (0.03 | ) | | Diluted | | | 0.11 | | | | (0.47 | ) | | | 0.17 | | | | 0.16 | | | | (0.03 | ) |
| | | Fiscal 2015 quarters ended | | | | | | | June | | Sept. | | Dec. | | March | | Fiscal 2015 | | | | | | | | | | | | | | | | | | | Net sales | | $ | 392.5 | | | $ | 377.3 | | | $ | 363.6 | | | $ | 363.0 | | | $ | 1,496.4 | | | Gross profit | | | 67.7 | | | | 56.7 | | | | 59.4 | | | | 62.7 | | | | 246.5 | | | Earnings (loss) from continuing operations (b) | | | 14.1 | | | | 2.0 | | | | 9.1 | | | | (3.0 | ) | | | 22.2 | | | Net earnings (loss) attributable to Modine (b) | | | 13.7 | | | | 1.7 | | | | 9.6 | | | | (3.2 | ) | | | 21.8 | | | Net earnings (loss) per share attributable to Modine shareholders: | | | | | | | | | | | | | | | | | | | | | | Basic | | $ | 0.29 | | | $ | 0.04 | | | $ | 0.20 | | | $ | (0.07 | ) | | $ | 0.46 | | | Diluted | | | 0.28 | | | | 0.04 | | | | 0.20 | | | | (0.07 | ) | | | 0.45 | |
| (a) | During fiscal 2016, restructuring expenses totaled $2.6 million, $1.0 million, $1.6 million, and $11.4 million for the quarters ended June 30, 2015, September 30, 2015, December 31, 2015, and March 31, 2016, respectively (see Note 6). During the fourth quarter of fiscal 2016, the Company recorded a $9.9 million asset impairment charge related to a manufacturing facility in Germany (see Note 6). During fiscal 2016, non-cash pension settlement losses totaled $39.2 million, $1.1 million, and $1.8 million for the quarters ended September 30, 2015, December 31, 2015, and March 31, 2016, respectively (see Note 17). During the fourth quarter of fiscal 2016, the Company recorded a $9.5 million gain related to an insurance settlement for equipment losses resulting from the Airedale fire (see Note 2). Also during the fourth quarter of fiscal 2016, the Company reversed a deferred tax asset valuation allowance, and, as a result, recorded an income tax benefit of $3.0 million (see Note 8). |
| (b) | During fiscal 2015, restructuring expenses totaled $0.8 million, $1.0 million, $1.9 million, and $1.0 million for the quarters ended June 30, 2014, September 30, 2014, December 31, 2014, and March 31, 2015, respectively (see Note 6). During the third quarter of fiscal 2015, the Company sold a wind tunnel and recognized a gain of $3.2 million (see Note 6). During the fourth quarter of fiscal 2015, the Company recorded a $7.8 million goodwill impairment charge (see Note 14) and a $3.2 million charge associated with a legal matter in Brazil (see Note 19). |
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of
Modine Manufacturing Company:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheet of Modine Manufacturing Company and subsidiaries (the Company) as of March 31, 2023, the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for the year ended March 31, 2023, and the related notes and financial statement schedule II - Valuation and Qualifying Accounts (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of March 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the accompanying consolidated financial statements listed in the index appearing under Item 15(a)(1),referred to above present fairly, in all material respects, the financial position of Modine Manufacturingthe Company and its subsidiaries atas of March 31, 2016 and 2015,2023, and the results of theirits operations and theirits cash flows for each of the three years in the periodyear ended March 31, 20162023, in conformity with accounting principlesU.S. generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2016,2023 based on criteria established in Internal Control -– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Commission.
Basis for Opinions
The Company'sCompany’s management is responsible for these consolidated financial statements, and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting,, included in the accompanying Management’s Report on Internal Control overOver Financial Reporting appearing under Item 9A.Reporting. Our responsibility is to express opinionsan opinion on thesethe Company’s consolidated financial statements and an opinion on the financial statement schedule, and on the Company'sCompany’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordanceare a public accounting firm registered with the standards of the Public Company Accounting Oversight Board (United States). (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our auditsaudit of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements, assessingstatements. Our audit also included evaluating the accounting principles used and significant estimates made by management, andas well as evaluating the overall presentation of the consolidated financial statement presentation.statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it classifies deferred taxes in fiscal 2016.Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i)(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii)(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii)(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Realizability of certain domestic deferred tax assets
As discussed in Notes 1 and 8 to the consolidated financial statements, 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. In making this assessment, the Company considers expectations of future taxable income and tax planning strategies. In addition, the Company considers the duration of statutory carryforward periods and historical financial results. Valuation allowances as of March 31, 2023 were $61.6 million, a portion of which are related to certain domestic deferred tax assets. The Company recorded a reduction in its valuation allowance on its deferred tax assets during the year ended March 31, 2023.
We identified the evaluation of the realizability of certain domestic deferred tax assets, specifically certain federal carryforward assets, as a critical audit matter. Subjective and challenging auditor judgment was required to: (i) evaluate the realizability of certain federal carryforward assets based on the projected future taxable income over the periods in which those federal carryforward assets will be utilized, and (ii) assess the application of tax laws to utilize the federal carryforward assets.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s evaluation of the realizability of the federal carryforward assets, including controls related to the projections of future taxable income and the application of tax laws to utilize the federal carryforward assets. We evaluated the reasonableness of management’s projections of future taxable income, including positive and negative evidence used, by comparing the projections to:
recent financial profitability trends of the Company industry data and economic trends, and evidence obtained in other areas of the audit.
We assessed the Company’s ability to project future earnings based on comparisons of the Company’s previous annual projections to actual results. We performed a sensitivity analysis over the amount and timing of future taxable income to assess the impact on utilization of the federal carryforward assets. We involved tax professionals with specialized skills and knowledge, who assisted in assessing the Company’s application of tax laws to utilize the federal carryforward assets and evaluating the recognition and realizability of the carryforward assets.
/s/PricewaterhouseCoopers KPMG LLP
We have served as the Company’s auditor since 2022. Milwaukee, Wisconsin May 26, 201625, 2023
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Modine Manufacturing Company
Opinion on the Financial Statements
We have audited the consolidated balance sheet of Modine Manufacturing Company and its subsidiaries (the “Company”) as of March 31, 2022, and the related consolidated statements of operations, comprehensive income, cash flows and shareholders’ equity for each of the two years in the period ended March 31, 2022, including the related notes and schedule of valuation and qualifying accounts as of and for each of the two years in the period ended March 31, 2022 listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2022, and the results of its operations and its cash flows for each of the two years in the period ended March 31, 2022 in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
May 26, 2022, except for the change in composition of reportable segments discussed in Note 22 to the consolidated financial statements, as to which the date is May 25, 2023
We served as the Company’s auditor from 1935to 2022.
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. |
Not applicable.Applicable
| ITEM 9A. | CONTROLS AND PROCEDURES. |
Conclusion Regarding Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report on Form 10-K, management of the Company, at the direction of the General Counsel and under the supervision, and with the participation, of the Company'sCompany’s President and Chief Executive Officer and Executive Vice President, Finance and Chief Financial Officer, evaluated the effectiveness of the Company'sCompany’s disclosure controls and procedures, at a reasonable assurance level, as defined in the Securities Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Finance and Chief Financial Officer have concluded that the design and operation of the Company'sCompany’s disclosure controls and procedures were effective, at a reasonable assurance level, as of March 31, 2016.2023.
Management’s Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. The Company’s internal control over financial reporting is a process designed by, or under the supervision of, the Company’s President and Chief Executive Officer and Executive Vice President, Finance and Chief Financial Officer, and effected by the Company'sCompany’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of its financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management, with the participation of the Company’s President and Chief Executive Officer and Executive Vice President, Finance and Chief Financial Officer, has assessed the effectiveness of the Company’s internal control over financial reporting as of March 31, 2016.2023. In making its assessment, of internal control over financial reporting, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in “Internal Control—Integrated Framework (2013).” Based onupon this assessment, management concluded that, as of March 31, 2016,2023, the Company’s internal control over financial reporting was effective.
The effectiveness of the Company’s internal control over financial reporting as of March 31, 20162023 has been audited by PricewaterhouseCoopersKPMG LLP, an independent registered public accounting firm, as stated in their report which appears herein.
Changes in Internal Control Over Financial Reporting
There have been no changes in internal control over financial reporting during the fourth quarter of fiscal 20162023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
| ITEM 9B. | OTHER INFORMATION. |
None.
| ITEM 9C. | DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS. |
Not Applicable.
PART III
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. |
Directors. The Company incorporates by reference the information appearing in the Company'sCompany’s Proxy Statement for the 20162023 Annual Meeting of Shareholders to be held on July 21, 2016August 17, 2023 (the “2016“2023 Annual Meeting Proxy Statement”) under the caption “Election of Directors.”
Executive Officers. The information in response to this Item appears under the caption "Executive Officers of the Registrant"“Information about our Executive Officers” in this Form 10-K.
Compliance with Section 16(a)Code of the Exchange Act. Conduct
The Company incorporates by reference the information appearing in the 2016 Annual Meeting Proxy Statement under the caption “Section 16(a) Beneficial Ownership Reporting Compliance.”
Code of Ethics. The Company incorporates by reference the information appearing in the 20162023 Annual Meeting Proxy Statement under the caption “Corporate Governance – Code of Ethics.Conduct.” The Company'sCompany’s Code of Ethics (labeled as the Code of Conduct)Conduct is included on its website, www.modine.com (About Modine link). We intend to satisfy our disclosure requirements under Item 5.05 of Form 8-K regarding amendments to, or waivers of, any provision of our Code of Conduct that applies to our principal executive, financial and accounting officers and our directors by posting such information on our website.
Board Committee Charters. Charters The Board of Directors has approved charters for its Audit Committee, Officer NominationHuman Capital and Compensation Committee, Corporate Governance and Nominating Committee and Technology Committee. These charters are included on the Company’s website, www.modine.com (Investors link).
Audit Committee Financial Expert. The Company incorporates by reference the information appearing in the 20162023 Annual Meeting Proxy Statement under the caption “Committees of the Board of Directors – Audit Committee.”
Audit Committee Disclosure. The Company incorporates by reference the information appearing in the 20162023 Annual Meeting Proxy Statement under the captions “Committees of the Board of Directors – Audit Committee” and “Board Meetings and Committees.”
Guidelines on Corporate Governance. The Board of Directors has adopted Guidelines on Corporate Governance. The Company’s Guidelines on Corporate Governance are included on its website, www.modine.com (Investors link).
Security Holder Recommendation of Board Nominees. The Company incorporates by reference the information appearing in the 20162023 Annual Meeting Proxy Statement under the caption “Shareholder Nominations and Recommendations of Director Candidates.”
Delinquent Section 16(a) Reports The Company incorporates by reference the information appearing in the 2023 Annual Meeting Proxy Statement under the caption “Delinquent Section 16(a) Reports.”
We do not intend to incorporate our internet website and the information contained therein or incorporated therein into this annual report on Form 10-K.
| ITEM 11. | EXECUTIVE COMPENSATION. |
The information appearing in the 20162023 Annual Meeting Proxy Statement under the captions “Compensation Discussion and Analysis,” “Compensation of Directors,” “Committees of the Board of Directors – Officer NominationHuman Capital and Compensation Committee: CompensationHCC Committee Interlocks and Insider Participation,” and “Compensation Committee Report” is incorporated herein by reference.
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. |
The Company incorporatesOther than the information below, the information required by this Item 12 is incorporated by reference to the information relating to stock ownershipsection under the caption “Security Ownership of Certain Beneficial Owners and Management,” and under the caption “Equity Compensation Plan Information,”Management” in the 20162023 Annual Meeting Proxy Statement.
Each of the Company’s equity compensation plans, listed below, has been approved by its shareholders:
Amended and Restated 2008 Incentive Compensation Plan; 2017 Incentive Compensation Plan; and Amended and Restated 2020 Incentive Compensation Plan.
The following table sets forth required information about equity compensation plans as of March 31, 2023:
| Plan Category | | Number of shares to be issued upon exercise of outstanding options, warrants or rights (a) | | Weighted-average exercise price of outstanding options, warrants and rights (b) | | Number of shares remaining available for future issuance (excluding securities reflected in 1st column) (c) | | Equity Compensation Plans approved by security holders | | 1,889,799 | | $12.28 | | 2,159,658 | | Equity Compensation Plans not approved by security holders | | - | | - | | - | | Total | | 1,889,799 | | $12.28 | | 2,159,658 |
| (a) | Includes shares issuable under the following type of awards: options – 890,687 shares and restricted stock units –999,112 shares. The number of shares subject to options were granted under the following plans: 2008 Incentive Plan – 136,735 shares, 2017 Incentive Plan – 142,972 shares, 2020 Incentive Plan –610,980 shares. Shares issuable under restricted stock unit awards were granted under the following plans: 2017 Incentive Plan – 83,350 shares, 2020 Incentive Plan – 915,762 shares. |
| (b) | The weighted average exercise price does not take into account awards of restricted stock units or performance stock which do not have an exercise price. |
| (c) | Includes the number of shares remaining available for future issuance under the Amended and Restated 2020 Incentive Compensation Plan. |
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. |
The Company incorporates by reference the information contained in the 20162023 Annual Meeting Proxy Statement under the captions “Certain Relationships and Related Party Transactions” and “Director Independence.”
| ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES. |
The Company incorporates by reference the information contained in the 20162023 Annual Meeting Proxy Statement under the caption “Independent Auditors’ Fees for Fiscal 20162023 and 2015.2022.”
PART IV
| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. |
(a) Documents Filed. The following documents are filed as part of this Report:
(a) | Documents Filed. The following documents are filed as part of this Report: |
| | Page in Form 10-K | | | | 1. The consolidated financial statements of Modine Manufacturing Company and its subsidiaries filed under Item 8: | | | | | Consolidated Statements of Operations for the years ended March 31, 2016, 20152023, 2022 and 20142021 | 3842 | Consolidated Statements of Comprehensive Income for the years ended March 31, 2016, 20152023, 2022 and 20142021 | 3943 | Consolidated Balance Sheets at March 31, 20162023 and 20152022 | 4044 | Consolidated Statements of Cash Flows for the years ended March 31, 2016, 20152023, 2022 and 20142021 | 4145 | Consolidated Statements of Shareholders'Shareholders’ Equity for the years ended March 31, 2016, 20152023, 2022 and 20142021 | 4246 | | Notes to Consolidated Financial Statements | 43-6847-81 | Report of Independent Registered Public Accounting Firm (KPMG PCAOB ID 185) | 6982
| Report of Independent Registered Public Accounting Firm (PricewaterhouseCoopers PCAOB ID 238) | 83
| | | | 2. Financial Statement Schedules | | | | | The following financial statement schedule should be read in conjunction with the consolidated financial statements set forth in Item 8: | | | Schedule II -- Valuation and Qualifying Accounts for the years ended March 31, 2023, 2022 and 2021 | 7487 | | | | Schedules other than those listed above are omitted because they are not applicable, not required, or because the required information is included in the consolidated financial statements and the notes thereto. | | | | | | 3. Exhibits and Exhibit Index. | 75-7788-91 | | | | See the Exhibit Index included as the last part of this report, which is incorporated herein by reference. Each management contract and compensatory plan or arrangement required to be filed as an exhibit to this report is identified in the Exhibit Index by an asterisktwo asterisks following its exhibit number. | |
ITEM 16. | FORM 10-K SUMMARY. |
None.
MODINE MANUFACTURING COMPANY AND SUBSIDIARIES (A Wisconsin Corporation)
SIGNATURESSCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the years ended March 31, 2023, 2022 and 2021
(In millions)
| | | | | Additions | | | | | | | | | Description | | Balance at Beginning of Period | | | Charged (Benefit) to Costs and Expenses | | | Charged to Other Accounts | | | Reclassified from (to) Held for Sale | | | Balance at End of Period | | | | | | | | | | | | | | | | | | | | 2023: Valuation Allowance for Deferred Tax Assets | | $ | 112.2 | | | $ | (49.7 | ) | | $ | (0.9 | )(a) | | $ | - | | | $ | 61.6 | | | | | | | | | | | | | | | | | | | | | | | | | 2022: Valuation Allowance for Deferred Tax Assets | | $ | 90.7 | | | $ | (4.6 | ) | | $ | (1.0 | )(a) | | $ | 27.1 | | | $ | 112.2 | | | | | | | | | | | | | | | | | | | | | | | | | 2021: Valuation Allowance for Deferred Tax Assets | | $ | 46.9 | | | $ | 86.2 |
| | $ | 2.8 | (a) | | $ | (45.2 | ) | | $ | 90.7 | |
| (a) | Foreign currency translation and other adjustments. |
MODINE MANUFACTURING COMPANY (THE “REGISTRANT”) (COMMISSION FILE NO. 1-1373)
TO 2023 ANNUAL REPORT ON FORM 10-K
Exhibit No. | | Description | | Incorporated Herein By Referenced To | | Filed Herewith | | | | | | | | | | Amended and Restated Articles of Incorporation, as amended. | | Exhibit 3.1 to Form 10-K for the fiscal year ended March 31, 2018 | | | | | | | | | | | | Bylaws, as amended. | | Exhibit 3.1 to Registrant’s Current Report on Form 8-K dated January 19, 2023 | | | | | | | | | | | | Form of Stock Certificate of the Registrant. | | Exhibit 4(a) to Form 10-K for the fiscal year ended March 31, 2003 (“2003 10-K”) | | | | | | | | | | | | Amended and Restated Articles of Incorporation, as amended. | | See Exhibit 3.1 hereto | | | | | | | | | | | | Amended and Restated Collateral Agency Intercreditor Agreement (the “Original Intercreditor Agreement”) dated as of August 12, 2010 among the Lenders (as defined therein), the Noteholders (as defined therein) and JPMorgan Chase Bank, N.A. as Collateral Agent. | | Exhibit 4.3 to Registrant’s Current Report on Form 8-K dated August 12, 2010 | | | | | | | | | | | | First Amendment to the Original Intercreditor Agreement, among the Lenders, the Note Holders and JPMorgan as Collateral Agent, pursuant to which the Lenders, the Note Holders and JPMorgan amended the Original Intercreditor Agreement. | | Exhibit 4.3 to Registrant’s Current Report on Form 8-K dated August 30, 2013 | | | | | | | | | | | | Credit Facility Agreement among Modine Holding GmbH, Modine Europe GmbH and Deutsche Bank AG dated as of April 27, 2012. | | Exhibit 4.10 to Registrant’s Form 10-K for the fiscal year ended March 31, 2012 | | | | | | | | | | | | Description of Registrant’s securities. | | | | X | | | | | | | | | | Fourth Amended and Restated Credit Agreement dated as of June 28, 2019. | | Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated June 28, 2019 | | | | | | | | | | | | Second Amended and Restated Note Purchase and Private Shelf Agreement dated as of August 6, 2019. | | Exhibit 4.1 to Registrant’s Form 10-Q for the third quarter ended December 31, 2019 (“December 31, 2019 10-Q”) | | | | | | | | | | | | First Amendment to Second Amended and Restated Note Purchase and Private Shelf Agreement dated as of January 31, 2020. | | Exhibit 4.2 to December 31, 2019 10-Q | | | | | | | | | | | | First Amendment to Fourth Amended and Restated Credit Agreement dated as of May 19, 2020. | | Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated May 19, 2020 (“May 19, 2020 8-K”) | | | | | | | | | | | | Second Amendment to Second Amended and Restated Note Purchase and Private Shelf Agreement dated as of May 19, 2020. | | Exhibit 4.2 to May 19, 2020 8-K | | |
| | Amendment No. 2 to Fourth Amended and Restated Credit Agreement dated as of May 18, 2021. | | Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated May 18, 2021 (“May 18, 2021 8-K”) | | | | | | | | | | | | Third Amendment to Second Amended and Restated Note Purchase and Private Shelf Agreement dated as of May 18, 2021. | | Exhibit 4.2 to May 18, 2021 8-K | | | | | | | | | | | | Fifth Amended and Restated Credit Agreement dated as of October 12, 2022. | | Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated October 12, 2022 | | | | | | | | | | | | Fourth Amendment to Second Amended and Restated Note Purchase and Private Shelf Agreement dated as of November 21, 2022. | | Exhibit 4.1 to Registrant’s Form 10-Q for the third quarter ended December 31, 2022 | | | | | | | | | | | | Director Emeritus Retirement Plan effective April 1, 1992 (and frozen as of July 1, 2000). | | Exhibit 10(a) to Registrant’s Form 10-K for the fiscal year ended March 31, 2002 | | | | | | | | | | | | Form of Change in Control and Termination Agreement (amended and restated) between the Registrant and officers other than Neil Brinker. | | Exhibit 10(f) to Registrant’s Form 10-K for the fiscal year ended March 31, 2004 | | | | | | | | | | | | Executive Supplemental Retirement Plan (as amended). | | Exhibit 10(f) to Registrant’s Form 10-K for the fiscal year ended March 31, 2000 | | | | | | | | | | | | Deferred Compensation Plan (as amended). | | Exhibit 10(y) to 2003 10-K | | | | | | | | | | | | 2008 Incentive Compensation Plan (Amended and Restated effective May 7, 2014). | | Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated July 17, 2014 | | | | | | | | | | | | Form of Fiscal 2023 Performance Cash Award Agreement. | | Exhibit 10.1 to the Registrant’s Form 10-Q for the first quarter ended June 30, 2022 (“June 30, 2022 10-Q”) | | | | | | | | | | | | Form of Fiscal 2023 Incentive Stock Option Award Agreement. | | Exhibit 10.2 to June 30, 2022 10-Q | | | | | | | | | | | | Form of Fiscal 2023 Non-Qualified Stock Option Award Agreement.. | | Exhibit 10.3 to June 30, 2022 10-Q | | | | | | | | | | | | Form of Fiscal 2023 Restricted Stock Unit Award Agreement.. | | Exhibit 10.4 to June 30, 2022 10-Q | | | | | | | | | | | | Form of Fiscal 2023 Modine Non-Employee Director Restricted Stock Unit Award Agreement with Deferral. | | Exhibit 10.6 to June 30, 2022 10-Q | | | | | | | | | | | | Form of Fiscal 2023 Modine Non-Employee Director Restricted Stock Unit Award Agreement without Deferral. | | Exhibit 10.7 to June 30, 2022 10-Q | | | | | | | | | | | | Change in Control Agreement dated as of June 4, 2021, by and between Modine Manufacturing Company and Neil D. Brinker. | | Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated June 4, 2021 | | | | | | | | | | | | Amendment No. 1 to Form of Change in Control and Termination Agreement (amended and restated) between the Registrant and Officers other than Neil Brinker. | | Exhibit 10.17 to Registrant’s Form 10-K for the fiscal year ended March 31, 2011 | | | | | | | | | | | | Supplemental Severance Policy. | | Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated October 17, 2011 | | |
| | 2017 Incentive Compensation Plan. | | Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated July 20, 2017 | | | | | | | | | | | | Transition and Separation Agreement between Thomas A. Burke and Modine Manufacturing Company effective as of August 4, 2020. | | Exhibit 10.6 to the Registrant’s Form 10-Q for the second quarter ended September 30, 2020 | | | | | | | | | | | | [Corrected] Offer Letter dated as of November 10, 2020, by and between the Company and Neil Brinker. | | Exhibit 10.1 to the Registrant’s Form 10-Q for the third quarter ended December 31, 2020 | | | | | | | | | | | | 2020 Incentive Compensation Plan (Amended and Restated effective July 21, 2022). | | Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated July 21, 2022 | | | | | | | | | | | | Form of Retention Letter, effective August 31, 2020, between the Company and each of Michael B. Lucareli, Scott L. Bowser and Sylvia A. Stein. | | Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated August 31, 2020 | | | | | | | | | | | | Offer Letter dated as of July 2, 2021, by and between the Company and Adrian Peace. | | Exhibit 10.1 to the Registrant’s Form 10-Q for the second quarter ended September 30, 2021 10-Q (“September 30, 2021 10-Q”) | | | | | | | | | | | | Offer Letter dated as of July 16, 2021, by and between the Company and Eric S. McGinnis. | | Exhibit 10.2 to September 30, 2021 10-Q | | | | | | | | | | | | First Amendment to Eric S. McGinnis Offer Letter. | | Exhibit 10.3 to September 30, 2021 10-Q | | | | | | | | | | | | Form of Retention Restricted Stock Award Agreement, effective October 19, 2022, between the Company and each of Brian J. Agen, Michael B. Lucareli, Eric S. McGinnis and Sylvia A. Stein. | | Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated October 19, 2022 | | | | | | | | | | | | List of subsidiaries of the Registrant. | | | | X | | | | | | | | | | Consent of PricewaterhouseCoopers LLP. | | | | X | | | | | | | | | | Consent of KPMG LLP. | | | | X | | | | | | | | | | Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer. | | | | X | | | | | | | | | | Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. | | | | X | | | | | | | | | | Section 1350 Certification of Neil D. Brinker, President and Chief Executive Officer. | | | | X | | | | | | | | | | Section 1350 Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. | | | | X | | | | | | | | 101.INS | | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). | | | | X | | | | | | | | 101.SCH | | Inline XBRL Taxonomy Extension Schema. | | | | X | | | | | | | | 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | | | | X | | | | | | | | 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document. | | | | X |
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document. | | | | X | | | | | | | | 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | | | | X | | | | | | | | 104 | | Cover page interactive data file (formatted as inline XBRL and contained in Exhibits 101). | | | | |
* | Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, the Registrant has omitted certain agreements with respect to long-term debt not exceeding 10% of consolidated total assets. The Registrant agrees to furnish a copy of any such agreements to the Securities and Exchange Commission upon request. |
** | Denotes management contract or executive compensation plan or arrangement required to be filed as an exhibit pursuant to Item 15 of Form 10-K. |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: May 26, 201625, 2023 | Modine Manufacturing Company | | | | | | By: | /s/ Thomas A. BurkeNeil D. Brinker | | | Neil D. Brinker, President | | | | Thomas A. Burke, President and Chief Executive Officer | | | | and Chief (Principal Executive Officer | | | (Principal Executive Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated.
/s/ Thomas A. BurkeNeil D. Brinker | | Neil D. Brinker | Thomas A. BurkeMay 25, 2023
| President, Chief Executive Officer and Director | | (Principal Executive Officer) | May 26, 2016
| | | | /s/ Michael B. Lucareli | | Michael B. Lucareli | May 25, 2023 | Executive Vice President, Finance and Chief Financial Officer | | (Principal Financial and Accounting Officer) | May 26, 2016
| | | | /s/ Marsha C. Williams | | Marsha C. Williams | DirectorMay 25, 2023
| Chairperson, Board of Directors | May 26, 2016
| | | | /s/ David J. AndersonEric D. Ashleman | | Eric D. Ashleman | David J. AndersonMay 25, 2023
| Director | |
| | | /s/ Suresh V. Garimella |
| Suresh V. Garimella | May 26, 201625, 2023 | Director | | | | | /s/ Charles P. CooleyKatherine C. Harper | | Katherine C. Harper | Charles P. CooleyMay 25, 2023 | Director | May 26, 2016
| | | | /s/ Suresh V. Garimella
Suresh V. Garimella
Director
| May 26, 2016
|
/s/ Larry O. Moore |
| Larry O. Moore | May 25, 2023 | Director | May 26, 2016
| | | | /s/ Christopher W. Patterson |
| Christopher W. Patterson | May 25, 2023 | Director | May 26, 2016
| | | | /s/ Christine Y. YanDavid J. Wilson | | David J. Wilson | Christine Y. YanMay 25, 2023
| Director | May 26, 2016
| | | | /s/ David G. Bills David G. Bills
Director
William A. Wulfsohn | May 26, 2016
|
MODINE MANUFACTURING COMPANY AND SUBSIDIARIES
(A Wisconsin Corporation)
SCHEDULE II ‑ VALUATION AND QUALIFYING ACCOUNTSFor the years ended March 31, 2016, 2015 and 2014
(In millions)
| | | | | | Additions | | | | | | | Description | | Balance at Beginning of Period | | | Charged (Benefit) to Costs and Expenses | | | Charged to Other Accounts | | | | Balance at End of Period | | | | | | | | | | | | | | | | | | 2016: Valuation Allowance for Deferred Tax Assets | | $ | 48.0 | | | $ | 1.5 | | | $ | 1.3 | | (a) | | $ | 50.8 | | | | | | | | | | | | | | | | | | | | | | 2015: Valuation Allowance for Deferred Tax Assets | | $ | 61.2 | | | $ | (6.8 | ) | | $ | (6.4 | ) | (a) | | $ | 48.0 | | | | | | | | | | | | | | | | | | | | | | 2014: Valuation Allowance for Deferred Tax Assets | | $ | 172.8 | | | $ | (113.1 | ) | | $ | 1.5 | | (a) | | $ | 61.2 | |
Notes:
| (a) | Foreign currency translation and other adjustments |
MODINE MANUFACTURING COMPANY
(THE “REGISTRANT”)
(COMMISSION FILE NO. 1-1373)
TO
2016 ANNUAL REPORT ON FORM 10-K
Exhibit No. | | Description | | Incorporated Herein By
Referenced To
| | Filed
Herewith
| William A. Wulfsohn | | | | | | May 25, 2023 | 3.1 | | Amended and Restated Articles of Incorporation, as amended. | | Exhibit 4.2 to Registrant’s Registration Statement on Form S-3 (333-161030) dated August 4, 2009 | Director | | | | | | /s/ Christine Y. Yan | | | |
| 3.2Christine Y. Yan | | Bylaws, as amended. | | Exhibit 3.1 to Registrant’s Current Report on Form 8-K dated February 10, 2015 | | May 25, 2023 | | | | | | | | 4.1 | | Form of Stock Certificate of the Registrant. | | Exhibit 4(a) to Form 10-K for the fiscal year ended March 31, 2003 ("2003 10-K") | | | | | | | | | | 4.2 | | Amended and Restated Articles of Incorporation, as amended. | | See Exhibit 3.1 hereto. | | | | | | | | | | 4.3** | | Note Purchase and Private Shelf Agreement (the “Original Note Purchase Agreement”) dated as of August 12, 2010 among the Registrant and the Series A Purchasers named therein of $125,000,000 6.83% Secured Senior Notes, Series A, due August 12, 2020 and $25,000,000 Private Shelf Facility and each Prudential Affiliate (as defined therein) that may become bound by certain provisions thereof. | | Exhibit 4.2 to Registrant’s Current Report on Form 8-K dated August 12, 2010 8-K (“August 12, 2010 8-K”) | | | | | | | | | | 4.4** | | Amended and Restated Collateral Agency Intercreditor Agreement (the “Original Intercreditor Agreement”) dated as of August 12, 2010 among the Lenders (as defined therein), the Noteholders (as defined therein) and JPMorgan Chase Bank, N.A. as Collateral Agent. | | Exhibit 4.3 to August 12, 2010 8-K | | | | | | | | | | 4.5** | | First Amendment to Note Purchase and Private Shelf Agreement and Waiver dated as of March 15, 2012, with Prudential Investment Management, Inc., The Prudential Insurance Company of America and Prudential Retirement Insurance and Annuity Company (collectively the “Noteholders”) pursuant to which the Company and the Noteholders amended the Original Note Purchase Agreement. | | Exhibit 4.2 to Registrant’s Current Report on Form 8-K dated March 15, 2012 8-K | | | | | | | | | | 4.6** | | Second Amendment to Note Purchase and Private Shelf Agreement dated as of April 20, 2012, with Prudential Investment Management, Inc., The Prudential Insurance Company of America and Prudential Retirement Insurance and Annuity Company (collectively the “Noteholders”) pursuant to which the Company and the Noteholders amended the Original Note Purchase Agreement, as amended. | | Exhibit 4.2 to Registrant’s Current Report on Form 8-K dated April 20, 2012 8-K | | | | | | | | | | 4.7** | | Third Amendment to Note Purchase and Private Shelf Agreement dated as of August 6, 2012, with Prudential Investment Management, Inc., The Prudential Insurance Company of America and Prudential Retirement Insurance and Annuity Company (collectively the “Noteholders”) pursuant to which the Company and the Noteholders amended the Original Note Purchase Agreement, as amended. | | Exhibit 4.2 to Registrant’s Current Report on Form 8-K dated August 6, 2012 8-K | Director | |
4.8** | | Second Amended and Restated Credit Agreement dated as of August 30, 2013, with JPMorgan Chase Bank, N.A., as Administrative Agent, LC Issuer, Swing Line Lender and as a Lender, and U.S. Bank, N.A. and Wells Fargo Bank, N.A. as Syndication Agents and as Lenders, BMO Harris Bank N.A., as Documentation Agent and as Lender and Associated Bank, N.A., Comerica Bank and Sovereign Bank as Lenders | | Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated August 30, 2013 (“August 30, 2013 8-K”) | | | | | | | | | | 4.9** | | Fourth Amendment to Note Purchase and Private Shelf Agreement (the “Fourth Note Purchase Amendment”) dated as of August 30, 2013, with Prudential Investment Management, Inc., The Prudential Insurance Company of America and Prudential Retirement Insurance and Annuity Company (collectively the “Note Holders”) pursuant to which the Company and the Note Holders amended the Original Note Purchase Agreement, as amended. | | Exhibit 4.2 to August 30, 2013 8-K | | | | | | | | | | 4.10** | | First Amendment to the Original Intercreditor Agreement, among the Lenders, the Note Holders and JPMorgan as Collateral Agent, pursuant to which the Lenders, the Note Holders and JPMorgan amended the Original Intercreditor Agreement. | | Exhibit 4.3 to August 30, 2013 8-K | | | | | | | | | | 4.11 | | Credit Facility Agreement among Modine Holding GmbH, Modine Europe GmbH and Deutsche Bank AG dated as of April 27, 2012. | | Exhibit 4.10 to Registrant’s Form 10-K for the fiscal year ended March 31, 2012 | | | | | | | | | | 10.1* | | Director Emeritus Retirement Plan effective April 1, 1992 (and frozen as of July 1, 2000). | | Exhibit 10(a) to Registrant’s Form 10-K for the fiscal year ended March 31, 2002 | | | | | | | | | | 10.2* | | Employment Agreement between the Registrant and Thomas A. Burke dated as of June 15, 2007. | | Exhibit 10.3 to Registrant’s Current Report on Form 8-K dated June 15, 2007 | | | | | | | | | | 10.3* | | Form of Amendment No. 1 to Employment Agreement entered into as of July 1, 2008 with Thomas A. Burke. | | Exhibit 10.1 to Registrant���s Current Report on Form 8-K dated July 1, 2008 | | | | | | | | | | 10.4* | | Form of Change in Control and Termination Agreement (amended and restated) between the Registrant and officers other than Thomas A. Burke. | | Exhibit 10(f) to Registrant’s Form 10-K for the year ended March 31, 2004 | | | | | | | | | | 10.5* | | Employment Agreement, dated July 1, 2014, between Modine Holding GmbH and Holger Schwab, effective as of July 1, 2015. | | Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated July 1, 2014 | | | | | | | | | | 10.6* | | Executive Supplemental Retirement Plan (as amended). | | Exhibit 10(f) to Registrant's Form 10-K for the fiscal year ended March 31, 2000 | | | | | | | | | | 10.7* | | Deferred Compensation Plan (as amended). | | Exhibit 10(y) to 2003 10-K | | | | | | | | | | 10.8* | | 2007 Incentive Compensation Plan. | | Appendix A to the Registrant's Proxy Statement dated June 18, 2007 | | | | | | | | | | 10.9* | | 2008 Incentive Compensation Plan92
(Amended and Restated effective May 7, 2014).
| | Exhibit 10.1 to Registrant's Current Report on Form 8-K dated July 17, 2014 | | |
10.10* | | Amendment No. 1 to Form of Change in Control and Termination Agreement (amended and restated) between the Registrant and Officers other than Thomas A. Burke. | | Exhibit 10.17 to Registrant's Form 10-K for the fiscal year ended March 31, 2011 | | | | | | | | | | 10.11* | | Supplemental Severance Policy. | | Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated October 17, 2011 | | | | | | | | | | 10.12* | | Form of Fiscal 2016 Modine Performance Stock Award Agreement | | Exhibit 10.1 to Form 10-Q for the first quarter ended June 30, 2015 ("June 30, 2015 10-Q") | | | | | | | | | | 10.13* | | Form of Fiscal 2016 Modine Incentive Stock Options Award Agreement | | Exhibit 10.2 to June 30, 2015 10-Q | | | | | | | | | | 10.14* | | Form of Fiscal 2016 Modine Restricted Stock Award Agreement | | Exhibit 10.3 to June 30, 2015 10-Q | | | | | | | | | | 10.15* | | Form of Fiscal 2016 Modine Non-Qualified Stock Option Award Agreement | | Exhibit 10.4 to June 30, 2015 10-Q | | | | | | | | | | | | List of subsidiaries of the Registrant. | | | | X | | | | | | | | | | Consent of independent registered public accounting firm. | | | | X | | | | | | | | | | Rule 13a-14(a)/15d-14(a) Certification of Thomas A. Burke, President and Chief Executive Officer. | | | | X | | | | | | | | | | Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Vice President, Finance and Chief Financial Officer. | | | | X | | | | | | | | | | Section 1350 Certification of Thomas A. Burke, President and Chief Executive Officer. | | | | X | | | | | | | | | | Section 1350 Certification of Michael B. Lucareli, Vice President, Finance and Chief Financial Officer. | | | | X | | | | | | | | 101.INS | | Instance Document | | | | X | | | | | | | | 101.SCH | | XBRL Taxonomy Extension Schema | | | | X | | | | | | | | 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | | | X | | | | | | | | 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | | | X | | | | | | | | 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | | | X | | | | | | | | 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | | | X |
* Denotes management contract or executive compensation plan or arrangement required to be filed as an exhibit pursuant to Item 15 of Form 10-K.
** Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, the Registrant has omitted certain agreements with respect to long-term debt not exceeding 10% of consolidated total assets. The Registrant agrees to furnish a copy of any such agreements to the Securities and Exchange Commission upon request.
s | | | % of sales | |
Year Ended March 31, 20162023 Compared with Year Ended March 31, 2015:2022
Fiscal 20162023 net sales decreased $143of $2,298 million were $248 million, or 12 percent, higher than the prior year, primarily due to higher sales volume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases. These increases were partially offset by a $111 million unfavorable impact of foreign currency exchange rates. Sales in the Performance Technologies and Climate Solutions segments increased $144 million and $101 million, respectively.
Fiscal 2023 cost of sales of $1,909 million increased $168 million, or 10 percent, primarily due to higher sales volume and higher raw material prices, which increased $34 million. These increases were partially offset by a $95 million favorable impact of foreign currency exchange rates. As a percentage of sales, cost of sales decreased 180 basis points to 83.1 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.
As a result of higher sales and lower cost of sales as a percentage of sales, fiscal 2023 gross profit increased $80 million and gross margin improved 180 basis points to 16.9 percent.
Fiscal 2023 SG&A expenses increased $19 million, yet decreased 30 basis points as a percentage of sales. The higher SG&A expenses were primarily driven by higher compensation-related expenses, which increased $20 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions. These increases were partially offset by an $8 million favorable impact of foreign currency exchange rates. In addition, strategic reorganization costs, costs associated with our review of strategic alternatives for our automotive businesses, and environmental charges related to a previously-closed manufacturing facility in the U.S., which are each recorded at Corporate, decreased $3 million, $2 million, and $2 million, respectively, during fiscal 2023 compared with the prior year.
Restructuring expenses of $5 million in fiscal 2023 decreased $19 million compared with the prior year, primarily due to lower severance-related expenses in the Performance Technologies segment.
The net impairment reversal of $56 million during fiscal 2022 primarily related to the liquid-cooled automotive business. In connection with the termination of the agreement to sell this business in the third quarter of fiscal 2022, we reversed a significant amount of previously-recorded impairment charges within the Performance Technologies segment.
We sold our Austrian air-cooled automotive business on April 30, 2021. As a result of the sale, we recorded a $7 million loss on sale at Corporate during fiscal 2022.
Operating income of $150 million during fiscal 2023 increased $31 million from the prior year, primarily due to loweran $80 million increase in gross profit, a $19 million decrease in restructuring expenses, and the absence of the $7 million loss on the sale of the Austrian air-cooled automotive business in the prior year. These drivers, which favorably impacted operating income in fiscal 2023, were partially offset by the absence of the $56 million net impairment reversal recorded in the prior year and higher SG&A expenses.
Interest expense in fiscal 2023 increased $5 million compared with the prior year, primarily due to unfavorable changes in interest rates. In addition, we amended and extended our U.S. credit agreement that provides for a multi-currency revolving credit facility and U.S. dollar- and euro- denominated term loans maturing in October 2027, along with shorter-duration swingline loans. In connection with this credit agreement modification, we recorded $1 million of costs as interest expense during fiscal 2023.
The benefit for income taxes was $28 million in fiscal 2023, compared with a provision for income taxes of $15 million in fiscal 2022. The $43 million change was primarily due to a $57 million income tax benefit recorded in the current year related to the reversal of the valuation allowance on certain deferred tax assets in the U.S., partially offset by the absence of a net $11 million income tax benefit related to valuation allowances on deferred tax assets in foreign jurisdictions in the prior year.
Year Ended March 31, 2022 Compared with Year Ended March 31, 2021
Fiscal 2022 net sales of $2,050 million were $242 million, or 13 percent, higher than the prior year, primarily due to higher sales volume in each of our segments, and favorable commercial pricing, including adjustments in response to raw material price increases. Sales in the Climate Solutions and Performance Technologies segments increased $180 million and $63 million, respectively.
Fiscal 2022 cost of sales of $1,741 million increased $226 million, or 15 percent, primarily due to higher raw material prices, which increased $148 million, and higher sales volume. In addition, cost of sales in fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic. These factors, which caused an increase in cost of sales compared with the prior year, were partially offset by lower depreciation expense in the Performance Technologies segment and improved operating efficiencies. As a percentage of sales, cost of sales increased 110 basis points to 84.9 percent.
As a result of higher sales and higher cost of sales as a percentage of sales, fiscal 2022 gross profit increased $16 million and gross margin declined 110 basis points to 15.1 percent.
Fiscal 2022 SG&A expenses increased $4 million. The increase in SG&A expenses was primarily due to higher compensation-related expenses, as the prior year was favorably impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19. In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3 million. These increases were partially offset by lower costs related to our Americasreview of strategic alternatives for the automotive businesses and Europe segments. Saleslower strategic reorganization costs, which decreased $4 million and $3 million, respectively. The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.
Restructuring expenses of $24 million in fiscal 2022 increased $11 million compared with the prior year, primarily due to higher severance-related expenses in the Performance Technologies segment, partially offset by lower severance-related expenses in the Climate Solutions segment.
In fiscal 2021, we recorded $167 million of impairment charges to write down the long-lived assets in the liquid-cooled and Austrian air-cooled automotive businesses when they were classified as held for sale. In fiscal 2022, we adjusted the long-lived assets in the liquid-cooled automotive business to the lower of carrying or fair value once they no longer met the held for sale classification criteria and, as a result, recorded a net impairment reversal of $56 million.
We sold our Austrian air-cooled automotive business on April 30, 2021. As a result of the sale, we recorded a $7 million loss on sale at Corporate during fiscal 2022.
Operating income of $119 million during fiscal 2022 represents an improvement of $217 million from the prior-year operating loss of $98 million. The operating income and operating loss during fiscal 2022 and 2021 included the significant impairment reversal and impairment charges within the Performance Technologies segment. In addition, as compared with the prior year, the fiscal 2022 operating income was favorably impacted by higher gross profit. Operating income was negatively impacted by higher restructuring expenses, the loss on sale of the Austrian air-cooled automotive business, and higher SG&A expenses.
The provision for income taxes was $15 million and $90 million in fiscal 2022 and 2021, respectively. The $75 million decrease was primarily due to the absence of $117 million of income tax charges recorded in fiscal 2021 to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11 million income tax benefit recorded in fiscal 2022 related to valuation allowances on deferred tax assets in foreign jurisdictions. These drivers, which decreased the provision for income taxes, were partially offset by the absence of income tax benefits totaling $47 million recorded in the prior year, including $38 million related to the impairment charges recorded for the held for sale automotive businesses and $9 million resulting from the allocation of the income tax provision between net earnings and other comprehensive income.
Segment Results of Operations
Effective April 1, 2022, we began managing the Company under two operating segments, Climate Solutions and Performance Technologies. Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management. This simplified segment structure allows us to better focus resources on targeted growth opportunities and better enables an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.
The Climate Solutions segment includes the previously-reported BHVAC and CIS segments, with the exception of CIS Coatings. The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS Coatings business.
The segment realignment had no impact on our consolidated financial position, results of operations, and cash flows. We have recast the segment financial information for fiscal 2022 and 2021 to conform to the fiscal 2023 presentation.
Climate Solutions
| | | Years ended March 31, | | | | | 2023 | | | 2022 | | | 2021 | | | (in millions) | | $’s | | | % of sales | | | $’s | | | % of sales | | | $’s | | | % of sales | | | Net sales | | $ | 1,012 | | | | 100.0 | % | | $ | 911 | | | | 100.0 | % | | $ | 731 | | | | 100.0 | % | | Cost of sales | | | 788 | | | | 77.9 | % | | | 744 | | | | 81.7 | % | | | 595 | | | | 81.3 | % | | Gross profit | | | 224 | | | | 22.1 | % | | | 166 | | | | 18.3 | % | | | 137 | | | | 18.7 | % | | Selling, general and administrative expenses | | | 97 | | | | 9.6 | % | | | 90 | | | | 9.9 | % | | | 82 | | | | 11.2 | % | | Restructuring expenses | | | 2 | | | | 0.2 | % | | | 2 | | | | 0.2 | % | | | 5 | | | | 0.7 | % | | Operating income | | $ | 124 | | | | 12.3 | % | | $ | 73 | | | | 8.1 | % | | $ | 50 | | | | 6.8 | % |
Year Ended March 31, 2023 Compared with Year Ended March 31, 2022
Climate Solutions net sales increased $101 million, or 11 percent, in fiscal 2023 compared with the prior year, primarily due to higher sales volume and favorable commercial pricing. These increases in our Europe segment were more thanpartially offset by a $76$52 million unfavorable impact of foreign currency exchange rate changes. In total, ourrates. Compared with the prior year, sales of data center cooling, heat transfer, and HVAC & refrigeration products increased $58 million, $33 million, and $11 million, respectively.
Climate Solutions cost of sales increased $44 million, or 6 percent, in fiscal 20162023, primarily due to higher sales were negatively affectedvolume, partially offset by a $110$44 million unfavorablefavorable impact of foreign currency exchange rate changes,rates. As a percentage of sales, cost of sales decreased 380 basis points to 77.9 percent, primarily associated withdue to the strengtheningfavorable impact of the U.S. dollar.higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher labor and inflationary costs.
GrossAs a result of higher sales and lower cost of sales as a percentage of sales, gross profit decreased $23increased $58 million to $224 million in fiscal 2016, yetand gross margin of 16.5 percent was consistentimproved 380 basis points to 22.1 percent.
Climate Solutions SG&A expenses increased $7 million compared with the prior year.year, yet decreased 30 basis points as a percentage of sales. The decreaseincrease in gross profitSG&A expenses was primarily due to a $14$5 million unfavorable impact of foreign currency exchange rate changes, $9 million of pension settlement losses,increase in compensation-related expenses, including commission expenses, and lower sales volumeincreases in the Americas segment,other general and administrative expenses that have been impacted by inflationary market conditions. These increases were 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 initiatives and a $10$4 million favorable impact of foreign currency exchange rate changes.
Restructuring expenses increased $12totaling $2 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 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 profit decreased $9 million, yet gross margin increased 80 basis points to 17.1 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 million favorable impact of foreign currency exchange rate changes. Fiscal 2015 SG&A expenses increased $3 million from the prior year, primarily due to the $3 million charge for the legal matter in fiscal 2015.
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, we recorded $3 million of restructuring expenses, primarily related to severance expenses in Brazil, to better align our cost structure with the market conditions in Brazil, and equipment transfer costs related to the closure of our McHenry, Illinois manufacturing facility, which we completed during fiscal 2016. We also recorded an $8 million goodwill impairment charge during fiscal 2015, primarily due to a decline in the financial outlook for Brazil.
Operating income of $36 million in fiscal 2016 increased $3 million compared with the prior year, primarily due to lower SG&A expenses and the absence of the goodwill impairment charge in the prior year, partially offset by lower gross profit and higher restructuring expenses. Operating income of $33 million in fiscal 2015 decreased $17 million 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 million2023 were consistent with the prior year as higher engineering and development costs were offset by a favorable impactprimarily consisted of foreign currency exchange rate changes.severance-related expenses.
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 $2 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 $132023 increased $51 million compared with the prior year, primarily due to an increase in restructuring expenses and impairment charges and the absence of a $3$124 million, gain on the sale of a wind tunnel in the prior year, partially offset by lower SG&A expenses. Operating income of $26 million 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, primarily due to lower sales volume to off-highway customers in China and Korea and a $4 million unfavorable impact of foreign currency exchange rate changes, partially offset by higher sales volume to automotive customers in China and increased overall sales in India. Sales increased $9 million, or 13 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 2016 compared with the prior year, primarily due to favorable sales mix. Gross profit increased $3 million and gross margin increased 170 basis points to 14.2 percent in fiscal 2015 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 with a joint venture that we formed in fiscal 2016. See Note 3 to the Notes to Consolidated Financial Statements for additional information on this joint venture. Fiscal 2015 SG&A expenses were consistent with the prior year, yet decreased as a percentage of sales.
Operating income of $1 million in fiscal 2016 increased $1 million compared with the prior year, primarily due to lower SG&A expenses. Operating income of less than $1 million in fiscal 2015 represented a $3 million improvement compared with the operating loss in the prior year, and was primarily due to higher gross profit on increased sales volume.
| | | 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 net sales decreased $5 million, or 3 percent, in fiscal 2016 compared with the prior year, primarily due to a $6 million unfavorable impact of foreign currency exchange rate changes and lower sales at our businesses in the U.K., as unfavorable currency conditions resulted in increased competition from other mainland European suppliers, partially offset by increased ventilation product sales in North America. Sales increased $40 million, or 27 percent, in fiscal 2015 compared with fiscal 2014, primarily due to a $23 million increase in sales at our businesses in the U.K. 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 2015 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 million compared with the prior year, primarily due to lower gross profit and higher SG&A expenses. Operating income of $19 million in fiscal 2015 increased $10 million compared with the prior year, primarily due to higher gross profit, partially offset by higher SG&A expenses.
Year Ended March 31, 2022 Compared with Year Ended March 31, 2021
Climate Solutions net sales increased $180 million, or 25 percent, in fiscal 2022 compared with the prior year, primarily due to higher sales volume and, to a lesser extent, favorable commercial pricing, including adjustments in response to raw material price increases. Sales of heat transfer, HVAC & refrigeration, and data center cooling products increased $101 million, $46 million, and $32 million, respectively.
Climate Solutions cost of sales increased $149 million, or 25 percent, in fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased $67 million. As a percentage of sales, cost of sales increased 40 basis points to 81.7 percent, primarily due to higher material costs, partially offset by favorable impacts of higher sales volume and improved operating efficiencies.
As a result of higher sales and higher cost of sales as a percentage of sales, gross profit increased $29 million and gross margin declined 40 basis points to 18.3 percent.
Climate Solutions SG&A expenses increased $8 million compared with the prior year, yet decreased 130 basis points as a percentage of sales. The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased $6 million and included higher commission expenses.
Restructuring expenses during fiscal 2022 decreased $3 million, primarily due to lower severance expenses. The fiscal 2022 severance expenses primarily related to targeted headcount reductions in Europe and China. The fiscal 2021 severance expenses primarily related to plant consolidation activities in China and targeted headcount reductions in North America.
Operating income in fiscal 2022 of $73 million increased $23 million, primarily due to higher gross profit, partially offset by higher SG&A expenses.
Performance Technologies
| | | Years ended March 31, | | | | | 2023 | | | 2022 | | | 2021 | | | (in millions) | | $’s | | | % of sales | | | $’s | | | % of sales | | | $’s | | | % of sales | | | Net sales | | $ | 1,316 | | | | 100.0 | % | | $ | 1,172 | | | | 100.0 | % | | $ | 1,109 | | | | 100.0 | % | | Cost of sales | | | 1,150 | | | | 87.4 | % | | | 1,030 | | | | 87.9 | % | | | 952 | | | | 85.8 | % | | Gross profit | | | 166 | | | | 12.6 | % | | | 142 | | | | 12.1 | % | | | 157 | | | | 14.2 | % | | Selling, general and administrative expenses | | | 98 | | | | 7.4 | % | | | 99 | | | | 8.4 | % | | | 93 | | | | 8.4 | % | | Restructuring expenses | | | 3 | | | | 0.2 | % | | | 22 | | | | 1.9 | % | | | 7 | | | | 0.6 | % | | Impairment charges (reversals) - net | | | - | | | | - | | | | (56 | ) | | | -4.8 | % | | | 167 | | | | 15.0 | % | | Operating income (loss) | | $ | 66 | | | | 5.0 | % | | $ | 77 | | | | 6.6 | % | | $ | (109 | ) | | | -9.8 | % |
Year Ended March 31, 2023 Compared with Year Ended March 31, 2022
Performance Technologies net sales increased $144 million, or 12 percent, in fiscal 2023 compared with the prior year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases. These increases were partially offset by a $59 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, the absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021. Sales of air-cooled, liquid-cooled, and advanced solutions products increased $86 million, $36 million, and $25 million, respectively.
Performance Technologies cost of sales increased $120 million, or 12 percent, primarily due to higher sales volume and higher raw material prices, which increased $29 million. In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales. During fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business until they reverted back to held and used classification during the third quarter of fiscal 2022. These increases were partially offset by a $52 million favorable impact of foreign currency exchange rates. As a percentage of sales, cost of sales decreased 50 basis points to 87.4 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher material, labor and inflationary costs.
As a result of higher sales and lower cost of sales as a percentage of sales, gross profit increased $24 million and gross margin improved 50 basis points to 12.6 percent.
Performance Technologies SG&A expenses decreased $1 million compared with the prior year. As a percentage of sales, SG&A expenses decreased by 100 basis points. The decrease in SG&A expenses was primarily due to a $4 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, partially offset by higher general and administrative expenses that have been impacted by inflationary market conditions.
Restructuring expenses during fiscal 2023 totaled $3 million, a decrease of $19 million compared with the prior year. This decrease was primarily driven by lower severance expenses in Europe for targeted headcount reductions.
The net impairment reversal of $56 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business. See Note 2 of the Notes to Consolidated Financial Statements for further information.
Operating income in fiscal 2023 decreased $11 million to $66 million, primarily due to the absence of the significant net impairment reversal recorded in the prior year, partially offset by higher gross profit and lower restructuring expenses.
Year Ended March 31, 2022 Compared with Year Ended March 31, 2021
Performance Technologies net sales increased $63 million, or 6 percent, in fiscal 2022 compared with the prior year, primarily due to favorable commercial pricing, including adjustments in response to raw material price increases, and to a lesser extent, higher sales volume. In regard to the higher sales volume, sales in the prior year were negatively impacted by the COVID-19 pandemic in fiscal 2021. Sales increased in fiscal 2022 to off-highway and commercial vehicle customers, as those underlying markets recovered. Sales to automotive customers, however, decreased in fiscal 2022, primarily due to $58 million of lower sales from our Austrian air-cooled automotive business, which we sold in the first quarter of fiscal 2022, and the negative impacts of the semiconductor chip shortage on the global automotive market. Compared with the prior year, sales of air-cooled and advanced solutions products increased $52 million and $21 million, respectively. Sales of liquid-cooled products decreased $11 million.
Performance Technologies cost of sales increased $78 million, or 8 percent, primarily due to higher raw material prices, which increased $81 million, and to a lesser extent, higher sales volume. These drivers, which increased cost of sales, were partially offset by lower depreciation expenses in the segment’s automotive businesses, which decreased $9 million. We ceased depreciating the property, plant and equipment assets within the liquid-cooled and Austrian air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021. Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business. As a percentage of sales, cost of sales increased 210 basis points to 87.9 percent, primarily due to the higher material prices.
As a result of higher sales and higher cost of sales as a percentage of sales, gross profit decreased $15 million and gross margin declined 210 basis points to 12.1 percent.
Performance Technologies SG&A expenses increased $6 million compared with the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $7 million, partially offset by lower development and other administrative costs.
Restructuring expenses during fiscal 2022 totaled $22 million, an increase of $15 million compared with the prior year. The increase was primarily driven by higher severance expenses in Europe related to targeted headcount reductions.
The fiscal 2022 net impairment reversal of $56 million primarily related to assets in our liquid-cooled automotive business. We remeasured the previously impaired long-lived assets within the liquid-cooled automotive business to the lower of their carrying or fair value once they were no longer held for sale. The fiscal 2021 impairment charges totaling $167 million related to assets in the liquid-cooled and Austrian air-cooled automotive businesses, which were first classified as held for sale in fiscal 2021. See Note 2 of the Notes to Consolidated Financial Statements for further information.
Operating income of $77 million during fiscal 2022 represents a $186 million improvement from the prior-year operating loss of $109 million. The operating income and operating loss during fiscal 2022 and 2021 were largely driven by the significant net impairment reversal and impairment charges, respectively. In addition, as compared with the prior year, operating income was unfavorably impacted by lower gross profit and higher 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, 20162023 of $69$67 million, and an available borrowing capacity of $207$270 million under lines ofour revolving credit provided by banks in the United States and abroad.facility. Given our extensive international operations, $49approximately $63 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 long-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 $42 million as of March 31, 2023. As a result of funding relief provisions within the American Rescue Plan Act of 2021, we do not expect to encounter, any difficulty meeting the liquidity requirements ofmake cash contributions to our global operations.U.S. pension plans during fiscal 2024.
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 20162023 was $72$108 million, an increase of $8$96 million from $64$12 million in the prior year. This increase in operating cash flow was primarily due to the favorable impact of higher earnings and favorable net changes in working capital, includingas compared with the prior year. While inventories have increased $44 million from the prior year, the increase has been less significant than the increase in the prior year. In fiscal 2023, the Company increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases. In fiscal 2022, the higher inventory levels largely resulted from increased raw material prices and impacts from global supply constraints and challenges, which continued to impact our businesses in fiscal 2023. In addition, the favorable changes in working capital include lower payments for incentive compensation payments duringand lower pension plan contributions in fiscal 2016 and2023, as compared with the timing of value-added tax payments.prior year.
Net cash provided by operating activities in fiscal 20152022 was $64$12 million, a decrease of $41$138 million from $105$150 million in the prior year. This decrease in operating cash flow was primarily due to unfavorable net changes in working capital, including higher inventory and accounts receivable levels and higher payments for incentive compensation payments during fiscal 2015 relatedand employee benefits as compared with the prior year. Inventory increased $61 million from March 31, 2021 to fiscal 2014 performance, and the timing of customer-owned tooling reimbursements.March 31, 2022.
Capital Expenditures
Capital expenditures of $63$51 million during fiscal 20162023 increased $5$11 million compared with fiscal 2015. In fiscal 2016, our2022. Our capital spending primarily occurredin fiscal 2023 in the AmericasPerformance Technologies and EuropeClimate Solutions segments which totaled $27$25 million and $25$24 million, respectively. Capital projectsexpenditures in fiscal 2016 includedthe Performance Technologies segment include tooling and equipment purchases in conjunction with new and renewal programs with customers.
At March 31, 2016, our capital expenditure commitments totaled $21 million. Significant commitments included tooling and equipment expenditures for new and renewal programs with customers Capital spending in the Americas and Europe segments.Climate Solutions segment include investments supporting our strategic growth initiatives, including expanding our data center business.
Dividends
We did not pay dividends in fiscal 2016, 2015, or 2014. We currently do not intend to pay dividends in fiscal 2017.
Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275 million revolving credit facility and term loan facilities maturing in October 2027. This credit agreement modified our then existing $250 million revolver and term loan facilities, which would have matured in June 2024.
Our total debt outstanding increased $14decreased $25 million to $163$353 million at March 31, 2016,2023 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 2023.
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 and an interest expense coverage ratio covenant, which are discussed further below. Indebtedness under our credit agreements is secured by liens on substantially all domestic assets. These agreements further require compliance with various covenants that may limit our ability to incur additional indebtedness; grant liens; make investments, loans, or guarantees; engage in certain transactions with affiliates; or make restricted payments including dividends. Also, the credit agreements may require prepayments in the event of certain asset sales.
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 leverage ratio for the four fiscal quarters ended As of March 31, 2016 was 1.2, which was below the maximum permitted ratio of 3.25. Our interest expense coverage ratio for the four fiscal quarters ended March 31, 2016 was 10.5, which exceeded the minimum requirement of 3.0. We2023, we were in compliance with our debt covenants as of March 31, 2016 andcovenants. We expect to remain in compliance with our debt covenants during fiscal 20172024 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 termscredit agreements.
Share Repurchase Program
During fiscal 2023, we repurchased $7 million of our debt 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 ascommon stock. As of March 31, 2016. We are unable2023, we had $45 million of authorized share repurchases remaining under our current repurchase program, which expires in November 2024. Our decision whether and to determine the ultimate timingwhat extent to repurchase additional shares depends on a number 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.factors, including business conditions, other cash priorities, and stock price.
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 significantlymaterially impact our financial statements 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 toward 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. WhenIn the event 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.charge. 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$315 million and $81 million, respectively, at March 31, 2016.2023. 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 Climate Solutions 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 2016,2022, we recorded a $10net impairment reversal of $56 million, impairment chargeprimarily related to a manufacturing facilityassets that were held for sale in Germany. Seethe Performance Technologies segment. In fiscal 2021, we recorded $167 million of impairment charges to write down the long-lived assets in the liquid- and air-cooled automotive businesses when they were classified as held for sale. In fiscal 2022, we adjusted the long-lived assets in the liquid-cooled automotive business to the lower of carrying or fair value when they no longer met the held for sale classification criteria. See Note 62 of the Notes to the Consolidated Financial Statements for additional information.
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. Goodwill resulting from recent acquisitions generally represents 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 theand risk-adjusted discount rate, business trends and market conditions.rates. 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-specificcountry- and business-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 continued inflationary market conditions, including the impacts associated with the military conflict in Ukraine and 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, 2023, our goodwill totaled $166 million related to our Climate Solutions and Performance Technologies segments. We conducted our annual assessment for goodwill impairment during the fourth quartertests as of fiscal 2016March 31, 2023 by applying a fair value-based test and determined the fair value of ourthe reporting units substantiallyin each of our operating segments exceeded their respective book values.value. A 10 percent decrease in the estimated fair value of each reporting unit would not have resulted in a different conclusion. 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 million at March 31, 2016, 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, 2016,2023, our pension liabilities totaled $120$42 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 benefit cost. Our domestic pension expenses. Currently,plans are closed to new participants; therefore, participants in our domestic pensionthese 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 fiscal 20162023 and 20152022 was 8.0 percent.7.0 percent and 7.5 percent, respectively. For fiscal 2017,2024, we have also assumed a rate of 8.06.5 percent. The impactA change of a 25 basis point decreasepoints in the expected rate of return on assets would result in an increase of $0.4 million inimpact our fiscal 20172024 pension expense.expense by less than $1 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 2016,2023 and 2022, for purposes of determining pension expense, we used a discount rate of 4.13.9 and 3.2 percent, compared with 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 affectedfor our 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 20172024 pension expense and projected benefit obligation by less than $0.1 million.$1 million and approximately $4 million, respectively.
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-jurisdictionlegal entity-by-legal entity 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 asincluding environmental remediation costs, product warranties, self-insurance reserves, uncollectible accounts receivable,costs, 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 19Notes 15 and 20 of the Notes to Consolidated Financial Statements for additional information regarding product warranties and contingencies and litigation. litigation, respectively.
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 potential adverse developments or disruptions in the global economy and financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the military conflict between Russia and Ukraine;
| · | 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 |
The impact of other 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 foreign currency exchange rate fluctuations; increases in interest rates; recession and recovery therefrom; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade that have been or may be implemented in the U.S. or abroad;
| · | 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. |
The impact of potential further 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, including through our quotation process or through contract provisions for prospective price adjustments, as well as the inherent lag in timing of such contract provisions;
Our ability to mitigate increased labor costs and labor shortages;
The impact of public health threats, such as COVID-19, on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; and
The impact of current and future environmental laws and regulations on our business and the businesses of our customers, including our ability to take advantage of opportunities to supply alternative new technologies to meet environmental and/or energy standards and objectives.
Operational Risks:
| · | The overall health and 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; |
34The impact of problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;
The overall health of and price-reduction pressure from our vehicular customers in light of economic and market-specific factors, the potential lower overall win rate for sales programs with contractual price reductions as a result of pricing strategies to ensure satisfactory profit margins for the duration of the programs, and the potential impact on us from any deterioration in the stability or performance of any of our major customers;
| · | Our ability to effectively 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 maintain current customer relationships and compete effectively for new business, including our ability to achieve profit margins acceptable to us by offsetting or otherwise addressing any cost increases associated with supply chain challenges and inflationary market conditions;
| · | Our ability to complete the transition of our Washington, Iowa production to other facilities efficiently and effectively; |
The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims;
| · | Costs and other effects of the remediation of environmental contamination; |
The impact of delays or modifications initiated by major customers with respect to program launches, product applications or requirements;
| · | 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; |
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;
| · | Work stoppages or interference at our facilities or those of our major customers and/or suppliers; and |
Our ability to effectively and efficiently manage our cost structure in response to sales volume increases or decreases and to complete restructuring activities and realize the anticipated benefits of those activities;
| · | Costs and other effects of unanticipated litigation or claims, and the constant pressures associated with healthcare and insurance costs. |
Costs and other effects of the investigation and remediation of environmental contamination; including when related to the actions or inactions of others and/or facilities over which we have no control;
Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, in light of tight global labor markets;
Our ability to protect our proprietary information and intellectual property from theft or attack by internal or external sources;
The impact of a 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 realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles to our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;
Our ability to identify and execute on organic growth opportunities and acquisitions, and to efficiently and successfully integrate acquired businesses;
Our ability to successfully execute strategies to reduce costs and improve operating margins; and
The potential impacts from 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 infor our Asia business segment,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 increases in interest rates in relation to our variable-rate debt obligations; | · | 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. |
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 2023, we recorded a net gain 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, more than2023, approximately 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 2016,2023, changes in foreign currencies negativelycurrency exchange rates unfavorably impacted our sales by $110$111 million; however, the impact on our operating income was only $4$7 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 2016,2023, there would not have been a material impact on our fiscal 20162023 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, including swingline borrowings, is variable and is currently based primarily on a variable interest rate of London Interbank Offered Rate (“LIBOR”)either SOFR or EURIBOR, plus 125137.5 to 225175 basis points, depending on our leverage ratio. WeAs a result, we are subject to risk of fluctuations in LIBORSOFR 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.
As of March 31, 2023, our outstanding borrowings on variable-rate term loans totaled $216 million. There were no outstanding borrowings outstanding under theon our revolving credit facility as of March 31, 2016.2023. Based onupon our outstanding debt with variable interest rates at March 31, 2016,2023, a 100 basis100-basis point increase in interest rates would increase our annual interest expense in fiscal 20172024 by less than $1approximately $2 million.
Commodity Price and Supply Risk
We are dependent uponTo produce the supply ofproducts we sell, we purchase raw materials and supplies in the production process and, from time to time, enter into firm purchase commitments forincluding aluminum, copper, nickel,steel and stainless steel (nickel), refrigerants, and gases such as natural gas. gas, helium, and nitrogen. In addition, we also purchase components and parts that are integrated into our end products.
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 agreementsrisk primarily by adjusting product pricing in response to applicable price increases. Our contracts with certain vehicular customers contain provisions 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 marketsexclude additional cost elements, such as related premiums and are influenced by similar market and general economic factors. fabrication. 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 offsettinginstances where the risk associatedis not covered contractually, we seek to adjust product pricing in response to price increases, including through our quotation process and through price list increases.
In fiscal 2023, we continued to experience a significant increase in raw material prices and price increases on other goods and services in connection with a downturn in any of the marketsglobal supply chain challenges and inflationary market conditions. In response, we serve. However, risk associated with market downturns, such as the global downturn experienced in fiscal 2009 and fiscal 2010, isimplemented selling price increases for our products. Nevertheless, we are still present.
We monitor economic conditions in the U.S., in our foreign markets and elsewhere. As 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 examples of new and emerging markets for us include those related to waste heat recovery, coils, and the Chinese and Indian markets. Our investment in these areas is subject to the risks associatedrisk of further price increases on commodities, components, and other goods and services that we purchase.
Regarding supply risk in light of current supply chain challenges, we are engaged with business integration, technological success, customerour suppliers to ensure availability of purchased commodities and market acceptance,components and we have added key suppliers to our ability to meetsupply base during the demandslast year. However, we are still dependent upon limited sources of supply for certain components used in the manufacture 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. We(nickel). Even with this expanded supply base, we are exposed to the risk of suppliers of certain raw materials not being able or willing to meet strong customer demand, as they may not increase their output capacity as quickly as customers increase their orders, the impact of trade laws and oftariffs, and increased prices being charged by raw material suppliers.
In addition, weWe also 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, 2023, 37 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, data center cooling, and 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 current inflationary market conditions.
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, 2023; |
| • | 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 price reduction pressure applied by OEM customers. If contractual price downs are unavoidable, we contemplate them in our overall strategy and adjust pricing as necessary to provide profit margins that are acceptable to us.
Economic and Market Risk
Economic risk represents the possibility of loss resulting from economic instability in certain areas of the world, such as that caused by geopolitical uncertainly or pandemics, or downturns in markets in which we operate. We sell a broad range of thermal solution systems to customers operating in diverse markets, including the commercial, industrial, and building HVAC&R and commercial vehicle, off-highway, and automotive and light vehicle markets.
Considering our global presence, we also encounter risks imposed by potential trade restrictions, including tariffs, embargoes, sanctions, 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 examples of new and emerging markets for us include those related to electric vehicles, data centers, indoor air quality, and aftermarket coatings. Our investments in these areas are subject to the risks associated with technological success, customer and market acceptance, and our ability to meet the demands byof our customers for decreases in the price of our products. We attempt to offset this risk with firm agreements with our customers whenever possible, butas these agreements often contain provisions for future price reductions. In addition, customers occasionally link price reductions to future program awards, and we must assess the overall implications of such requests on a case-by-case basis.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. We periodically designate certain commodity forward contracts as cash flow hedges for accounting purposes. 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 2016, 2015,2023, 2022, and 2014, expenses2021, net gains and losses recognized in cost of sales related to commodity derivativeforward contracts totaled less thanwere approximately $1 million or less 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 and designate certain hedges of forecasted transactions as cash flow hedges for accounting purposes. 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 2023, 2022, and 2021, net gains and losses recognized in sales and cost of sales related to foreign currency forward contracts were $1 million or less 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, 2016,2023, all counterparties had a sufficient long-term credit rating.
| 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. |
MODINE MANUFACTURING COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended March 31, 2016, 20152023, 2022 and 20142021 (In millions, except per share amounts)
| | | 2016 | | 2015 | | 2014 | | Net sales | | $ | 1,352.5 | | | $ | 1,496.4 | | | $ | 1,477.6 | | | Cost of sales | | | 1,129.0 | | | | 1,249.9 | | | | 1,239.4 | | | Gross profit | | | 223.5 | | | | 246.5 | | | | 238.2 | | | Selling, general and administrative expenses | | | 204.5 | | | | 184.5 | | | | 181.7 | | | Restructuring expenses | | | 16.6 | | | | 4.7 | | | | 16.1 | | | Impairment charges | | | 9.9 | | | | 7.8 | | | | 3.2 | | | Gain on sale of wind tunnel | | | - | | | | (3.2 | ) | | | - | | | Operating (loss) income | | | (7.5 | ) | | | 52.7 | | | | 37.2 | | | Interest expense | | | (11.1 | ) | | | (11.7 | ) | | | (12.4 | ) | | 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 | | | | - | | | Net (loss) earnings | | | (1.0 | ) | | | 22.8 | | | | 131.9 | | | Net earnings attributable to noncontrolling interest | | | (0.6 | ) | | | (1.0 | ) | | | (1.5 | ) | | Net (loss) earnings attributable to Modine | | $ | (1.6 | ) | | $ | 21.8 | | | $ | 130.4 | | | | | | | | | | | | | | | | | (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 | | | Diluted | | $ | (0.03 | ) | | $ | 0.45 | | | $ | 2.72 | | | | | | | | | | | | | | | | | Weighted-average shares outstanding: | | | | | | | | | | | | | | Basic | | | 47.3 | | | | 47.2 | | | | 46.9 | | | Diluted | | | 47.3 | | | | 47.8 | | | | 47.6 | |
| | 2023 | | | 2022 | | | 2021 | | | Net sales | | $ | 2,297.9 | | | $ | 2,050.1 | | | $ | 1,808.4 | | | Cost of sales | | | 1,908.5 | | | | 1,740.8 | | | | 1,515.0 | | | Gross profit | | | 389.4 | | | | 309.3 | | | | 293.4 | | | Selling, general and administrative expenses | | | 234.0 | | | | 215.1 | | | | 210.9 | | | Restructuring expenses | | | 5.0 | | | | 24.1 | | | | 13.4 | | | Impairment charges (reversals) – net | | | - | | | | (55.7 | ) | | | 166.8 | | | Loss on sale of assets | | | - | | | | 6.6 | | | | - | | | Operating income (loss) | | | 150.4 | | | | 119.2 | | | | (97.7 | ) | | Interest expense | | | (20.7 | ) | | | (15.6 | ) | | | (19.4 | ) | | Other expense – net | | | (4.4 | ) | | | (2.1 | ) | | | (2.2 | ) | | Earnings (loss) before income taxes | | | 125.3 | | | | 101.5 | | | | (119.3 | ) | | Benefit (provision) for income taxes | | | 28.3 | | | | (15.2 | ) | | | (90.2 | ) | | Net earnings (loss) | | | 153.6 | | | | 86.3 | | | | (209.5 | ) | | Net earnings attributable to noncontrolling interest | | | (0.5 | ) | | | (1.1 | ) | | | (1.2 | ) | | Net earnings (loss) attributable to Modine | | $ | 153.1 | | | $ | 85.2 | | | $ | (210.7 | ) | | | | | | | | | | | | | | | | Net earnings (loss) per share attributable to Modine shareholders: | | | | | | | | | | | | | | Basic | | $ | 2.93 | | | $ | 1.64 | | | $ | (4.11 | ) | | Diluted | | $ | 2.90 | | | $ | 1.62 | | | $ | (4.11 | ) | | | | | | | | | | | | | | | | Weighted-average shares outstanding: | | | | | | | | | | | | | | Basic | | | 52.3 | | | | 52.0 | | | | 51.3 | | | Diluted | | | 52.8 | | | | 52.5 | | | | 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, 20152023, 2022 and 20142021 (In millions)
| | | 2016 | | 2015 | | 2014 | | Net (loss) earnings | | $ | (1.0 | ) | | $ | 22.8 | | | $ | 131.9 | | | Other comprehensive income (loss): | | | | | | | | | | | | | | Foreign currency translation | | | 4.6 | | | | (68.2 | ) | | | 9.7 | | | 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 | | | Total other comprehensive income (loss) | | | 24.3 | | | | (94.9 | ) | | | 24.7 | | | | | | | | | | | | | | | | | Comprehensive income (loss) | | | 23.3 | | | | (72.1 | ) | | | 156.6 | | | Comprehensive income attributable to noncontrolling interest | | | (0.5 | ) | | | (0.8 | ) | | | (1.7 | ) | | Comprehensive income (loss) attributable to Modine | | $ | 22.8 | | | $ | (72.9 | ) | | $ | 154.9 | |
| | 2023 | | | 2022 | | | 2021 | | | Net earnings (loss) | | $ | 153.6 | | | $ | 86.3 | | | $ | (209.5 | ) | | Other comprehensive income (loss): | | | | | | | | | | | | | | Foreign currency translation | | | (18.9 | ) | | | (8.3 | ) | | | 30.9 | | Defined benefit plans, net of income taxes of $1.1, $0 and $10.4 million | | | 6.7 | | | | 19.7 | | | | 30.1 | | Cash flow hedges, net of income taxes of $0, $0 and $0.6 million | | | 0.1 | | | | 0.1 | | | | 1.6 | | | Total other comprehensive income (loss) | | | (12.1 | ) | | | 11.5 | | | | 62.6 | | | | | | | | | | | | | | | | | Comprehensive income (loss) | | | 141.5 | | | | 97.8 | | | | (146.9 | ) | | Comprehensive income attributable to noncontrolling interest | | | - | | | | (0.9 | ) | | | (1.7 | ) | | Comprehensive income (loss) attributable to Modine | | $ | 141.5 | | | $ | 96.9 | | | $ | (148.6 | ) |
The notes to consolidated financial statements are an integral part of these statements.
MODINE MANUFACTURING COMPANY CONSOLIDATED BALANCE SHEETS March 31, 20162023 and 20152022 (In millions, except per share amounts)
| | | 2016 | | 2015 | ASSETS | | | | | | | | Cash and cash equivalents | | $ | 68.9 | | | $ | 70.5 | | | Trade accounts receivable – net | | | 189.1 | | | | 192.9 | | | Inventories | | | 111.0 | | | | 107.7 | | | Other current assets | | | 43.5 | | | | 79.7 | | | Total current assets | | | 412.5 | | | | 450.8 | | | Property, plant and equipment – net | | | 338.6 | | | | 322.1 | | | Intangible assets – net | | | 8.2 | | | | 9.9 | | | Goodwill | | | 15.8 | | | | 16.2 | | | Deferred income taxes | | | 123.1 | | | | 115.4 | | | Other noncurrent assets | | | 22.7 | | | | 16.5 | | | Total assets | | $ | 920.9 | | | $ | 930.9 | | | | | | | | | | | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | | | Short-term debt | | $ | 28.6 | | | $ | 18.6 | | | Long-term debt – current portion | | | 8.5 | | | | 0.5 | | | Accounts payable | | | 142.4 | | | | 152.0 | | | Accrued compensation and employee benefits | | | 58.6 | | | | 56.7 | | | Other current liabilities | | | 35.5 | | | | 83.0 | | | Total current liabilities | | | 273.6 | | | | 310.8 | | | Long-term debt | | | 125.5 | | | | 129.6 | | | Deferred income taxes | | | 4.2 | | | | 3.1 | | | Pensions | | | 118.6 | | | | 110.4 | | | Other noncurrent liabilities | | | 16.3 | | | | 16.4 | | | Total liabilities | | | 538.2 | | | | 570.3 | | | 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 | | | Additional paid-in capital | | | 185.6 | | | | 180.6 | | | Retained earnings | | | 358.2 | | | | 359.8 | | | Accumulated other comprehensive loss | | | (174.2 | ) | | | (198.6 | ) | | Treasury stock, at cost, 1.6 million and 0.7 million shares | | | (24.0 | ) | | | (16.2 | ) | | Total Modine shareholders' equity | | | 376.2 | | | | 356.0 | | | Noncontrolling interest | | | 6.5 | | | | 4.6 | | | Total equity | | | 382.7 | | | | 360.6 | | | Total liabilities and equity | | $ | 920.9 | | | $ | 930.9 | |
| | 2023 | | | 2022 | | | ASSETS | | | | | | | | Cash and cash equivalents | | $ | 67.1 | | | $ | 45.2 | | | Trade accounts receivable – net | | | 398.0 | | | | 367.5 | | | Inventories | | | 324.9 | | | | 281.2 | | | Other current assets | | | 56.4 | | | | 63.7 | | | Total current assets | | | 846.4 | | | | 757.6 | | | Property, plant and equipment – net | | | 314.5 | | | | 315.4 | | | Intangible assets – net | | | 81.1 | | | | 90.3 | | | Goodwill | | | 165.6 | | | | 168.1 | | | Deferred income taxes | | | 83.7 | | | | 27.2 | | | Other noncurrent assets | | | 74.6 | | | | 68.4 | | | Total assets | | $ | 1,565.9 | | | $ | 1,427.0 | | | | | | | | | | | | | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | | Short-term debt | | $ | 3.7 | | | $ | 7.7 | | | Long-term debt – current portion | | | 19.7 | | | | 21.7 | | | Accounts payable | | | 332.8 | | | | 325.8 | | | Accrued compensation and employee benefits | | | 89.8 | | | | 85.1 | | | Other current liabilities | | | 61.1 | | | | 54.2 | | | Total current liabilities | | | 507.1 | | | | 494.5 | | | Long-term debt | | | 329.3 | | | | 348.4 | | | Deferred income taxes | | | 4.8 | | | | 5.9 | | | Pensions | | | 40.2 | | | | 47.2 | | | Other noncurrent liabilities | | | 84.9 | | | | 72.9 | | | Total liabilities | | | 966.3 | | | | 968.9 | | | Commitments and contingencies (see Note 20) | | |
| | | |
| | | 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 55.4 million and 54.8 million shares | | | 34.6 | | | | 34.2 | | | Additional paid-in capital | | | 270.8 | | | | 261.6 | | | Retained earnings | | | 497.5 | | | | 344.4 | | | Accumulated other comprehensive loss | | | (161.1 | ) | | | (149.5 | ) | Treasury stock, at cost, 3.3 million and 2.8 million shares | | | (49.0 | ) | | | (40.0 | ) | | Total Modine shareholders’ equity | | | 592.8 | | | | 450.7 | | | Noncontrolling interest | | | 6.8 | | | | 7.4 | | | Total equity | | | 599.6 | | | | 458.1 | | | Total liabilities and equity | | $ | 1,565.9 | | | $ | 1,427.0 | |
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, 20152023, 2022 and 20142021 (In millions)
| | | 2016 | | 2015 | | 2014 | | Cash flows from operating activities: | | | | | | | | | | | Net (loss) earnings | | $ | (1.0 | ) | | $ | 22.8 | | | $ | 131.9 | | | Adjustments to reconcile net (loss) earnings to net cash provided by operating activities: | | | | | | | | | | | | | | Depreciation and amortization | | | 50.2 | | | | 51.6 | | | | 58.1 | | | Insurance proceeds from Airedale fire | | | 5.9 | | | | 12.9 | | | | 16.9 | | | Impairment charges | | | 9.9 | | | | 7.8 | | | | 3.2 | | | 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 | | | Deferred income taxes | | | (18.8 | ) | | | 5.9 | | | | (116.1 | ) | | Stock-based compensation expense | | | 4.9 | | | | 4.0 | | | | 3.6 | | | Other – net | | | (0.3 | ) | | | (0.7 | ) | | | (0.5 | ) | | Changes in operating assets and liabilities, excluding acquisitions: | | | | | | | | | | | | | | Trade accounts receivable | | | 8.0 | | | | (0.1 | ) | | | (18.2 | ) | | Inventories | | | (2.7 | ) | | | (4.2 | ) | | | (0.1 | ) | | Accounts payable | | | (9.9 | ) | | | (2.4 | ) | | | 15.2 | | | Accrued compensation and employee benefits | | | 0.8 | | | | (5.3 | ) | | | 17.5 | | | Other assets | | | (14.5 | ) | | | (24.5 | ) | | | 2.1 | | | Other liabilities | | | (5.6 | ) | | | (4.5 | ) | | | (14.9 | ) | | Net cash provided by operating activities | | | 72.4 | | | | 63.5 | | | | 104.5 | | | | | | | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | | | | | | Expenditures for property, plant and equipment | | | (62.8 | ) | | | (58.3 | ) | | | (53.1 | ) | | 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 | | | Purchases of short-term investments | | | (2.7 | ) | | | (5.2 | ) | | | - | | | Proceeds from maturities of short-term investments | | | 2.1 | | | | 2.4 | | | | - | | | Other – net | | | 0.9 | | | | 0.8 | | | | - | | | Net cash used for investing activities | | | (77.8 | ) | | | (57.2 | ) | | | (41.5 | ) | | | | | | | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | | | | | | Borrowings of debt | | | 38.0 | | | | 36.4 | | | | 152.6 | | | Repayments of debt | | | (27.1 | ) | | | (50.9 | ) | | | (152.4 | ) | | Purchases of treasury stock under share repurchase program | | | (6.9 | ) | | | - | | | | - | | | Financing fees paid | | | - | | | | (0.1 | ) | | | (0.9 | ) | | Dividend paid to noncontrolling interest | | | (0.9 | ) | | | - | | | | (0.5 | ) | | Other – net | | | (0.4 | ) | | | - | | | | (0.3 | ) | | Net cash provided by (used for) financing activities | | | 2.7 | | | | (14.6 | ) | | | (1.5 | ) | | | | | | | | | | | | | | | | Effect of exchange rate changes on cash | | | 1.1 | | | | (8.4 | ) | | | 1.9 | | | 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 | |
| | 2023 | | | 2022 | | | 2021 | | | Cash flows from operating activities: | | | | | | | | | | | Net earnings (loss) | | $ | 153.6 | | | $ | 86.3 | | | $ | (209.5 | ) | | Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: | | | | | | | | | | | | | | Depreciation and amortization | | | 54.5 | | | | 54.8 | | | | 68.6 | | | Impairment charges (reversals) – net | | | - | | | | (55.7 | ) | | | 166.8 | | | Loss on sale of assets | | | - | | | | 6.6 | | | | - | | | Stock-based compensation expense | | | 6.6 | | | | 5.7 | | | | 6.3 | | | Deferred income taxes | | | (59.6 | ) | | | (3.8 | ) | | | 67.9 | | | Other – net | | | 4.8 | | | | 3.1 | | | | 6.3 | | | Changes in operating assets and liabilities: | | | | | | | | | | | | | | Trade accounts receivable | | | (40.7 | ) | | | (55.6 | ) | | | (17.1 | ) | | Inventories | | | (49.4 | ) | | | (70.7 | ) | | | (5.0 | ) | | Accounts payable | | | 10.2 | | | | 55.1 | | | | 44.0 | | | Accrued compensation and employee benefits | | | 6.4 | | | | 9.8 | | | | 15.7 | | | Other assets | | | 19.6 | | | | (2.4 | ) | | | 27.5 | | | Other liabilities | | | 1.5 | | | | (21.7 | ) | | | (21.7 | ) | | Net cash provided by operating activities | | | 107.5 | | | | 11.5 | | | | 149.8 | | | | | | | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | | | | | | Expenditures for property, plant and equipment | | | (50.7 | ) | | | (40.3 | ) | | | (32.7 | ) | | Proceeds from (payments for) dispositions of assets | | | 0.3 | | | | (7.6 | ) | | | 0.7 | | | Disbursements for loan origination (see Note 1) | | | - | | | | (4.7 | ) | | | - | | | Proceeds from maturities of short-term investments | | | 3.4 | | | | 3.6 | | | | 3.4 | | | Purchases of short-term investments | | | (3.4 | ) | | | (3.9 | ) | | | (3.6 | ) | | Other – net | | | - | | | | 1.9 | | | | 0.9 | | | Net cash used for investing activities | | | (50.4 | ) | | | (51.0 | ) | | | (31.3 | ) | | | | | | | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | | | | | | Borrowings of debt | | | 374.3 | | | | 351.8 | | | | 32.7 | | | Repayments of debt | | | (403.4 | ) | | | (306.7 | ) | | | (183.6 | ) | | Borrowings (repayments) on bank overdraft facilities – net | | | 3.0 | | | | (4.3 | ) | | | 3.6 | | Purchase of treasury stock under share repurchase program
| | | (7.3 | ) | | | - | | | | - | | | Dividend paid to noncontrolling interest | | | (0.6 | ) | | | (0.9 | ) | | | - | | | Financing fees paid | | | (0.6 | ) | | | (0.2 | ) | | | (0.8 | ) | | Other – net | | | 1.3 | | | | (0.5 | ) | | | 3.0 | | | Net cash (used for) provided by financing activities | | | (33.3 | ) | | | 39.2 | | | | (145.1 | ) | | | | | | | | | | | | | | | | Effect of exchange rate changes on cash | | | (2.0 | ) | | | (0.4 | ) | | | 1.4 | | | Net increase (decrease) in cash, cash equivalents and restricted cash | | | 21.8 | | | | (0.7 | ) | | | (25.2 | ) | | Cash, cash equivalents and restricted cash – beginning of year | | | 45.4 | | | | 46.1 | | | | 71.3 | | | Cash, cash equivalents and restricted cash – end of year | | $ | 67.2 | | | $ | 45.4 | | | $ | 46.1 | |
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, 20152023, 2022 and 20142021 (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 comprehensive | | | Treasury stock, at | | | Non- controlling | | | | | | | Shares | | | Amount | | | capital | | | earnings | | | loss | | | cost | | | interest | | | Total | | | Balance, March 31, 2020 | | | 53.4 | | | $ | 33.3 | | | $ | 245.1 | | | $ | 469.9 | | | $ | (223.3 | ) | | $ | (37.1 | ) | | $ | 5.7 | | | $ | 493.6 | | | Net (loss) earnings | | | - | | | | - | | | | - | | | | (210.7 | ) | | | - | | | | - | | | | 1.2 | | | | (209.5 | ) | Other comprehensive income
| | | - | | | | - | | | | - | | | | - | | | | 62.1 | | | | - | | | | 0.5 | | | | 62.6 | | | Stock options and awards | | | 0.9 | | | | 0.6 | | | | 3.6 | | | | - | | | | - | | | | - | | | | - | | | | 4.2 | | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1.1 | ) | | | - | | | | (1.1 | ) | | Stock-based compensation expense | | | - | | | | - | | | | 6.3 | | | | - | | | | - | | | | - | | | | - | | | | 6.3 | | Balance, March 31, 2021 | | | 54.3 | | | | 33.9 | | | | 255.0 | | | | 259.2 | | | | (161.2 | ) | | | (38.2 | ) | | | 7.4 | | | | 356.1 | | | Net earnings | | | - | | | | - | | | | - | | | | 85.2 | | | | - | | | | - | | | | 1.1 | | | | 86.3 | | Other comprehensive income (loss)
| | | - | | | | - | | | | - | | | | - | | | | 11.7 | | | | - | | | | (0.2 | ) | | | 11.5 | | | Stock options and awards | | | 0.5 | | | | 0.3 | | | | 0.9 | | | | - | | | | - | | | | - | | | | - | | | | 1.2 | | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1.8 | ) | | | - | | | | (1.8 | ) | | Stock-based compensation expense | | | - | | | | - | | | | 5.7 | | | | - | | | | - | | | | - | | | | - | | | | 5.7 | | Dividend paid to noncontrolling interest
| | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.9 | ) | | | (0.9 | ) | Balance, March 31, 2022 | | | 54.8 | | | | 34.2 | | | | 261.6 | | | | 344.4 | | | | (149.5 | ) | | | (40.0 | ) | | | 7.4 | | | | 458.1 | | | Net earnings | | | - | | | | - | | | | - | | | | 153.1 | | | | - | | | | - | | | | 0.5 | | | | 153.6 | | | Other comprehensive loss | | | - | | | | - | | | | - | | | | - | | | | (11.6 | ) | | | - | | | | (0.5 | ) | | | (12.1 | ) | | Stock options and awards | | | 0.6 | | | | 0.4 | | | | 2.6 | | | | - | | | | - | | | | - | | | | - | | | | 3.0 | | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (9.0 | ) | | | - | | | | (9.0 | ) | | Stock-based compensation expense | | | - | | | | - | | | | 6.6 | | | | - | | | | - | | | | - | | | | - | | | | 6.6 | | | Dividend paid to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.6 | ) | | | (0.6 | ) | Balance, March 31, 2023 | | | 55.4 | | | $ | 34.6 | | | $ | 270.8 | | | $ | 497.5 | | | $ | (161.1 | ) | | $ | (49.0 | ) | | $ | 6.8 | | | $ | 599.6 | |
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 and environmentally responsible thermal management systems and components, bringing heating and cooling technologyproducts and solutions to diversified global markets and customers in a wide array of commercial, industrial, and building heating, ventilating, air conditioning, and refrigeration (“HVAC&R”) markets. TheIn 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 radiatorsi) heat transfer; ii) HVAC & refrigeration; iii) data center cooling; iv) air-cooled; v) liquid-cooled; and radiator cores, condensers, oil coolers,vi) advanced solutions.
Disposition of Austrian Air-cooled Automotive Business in Fiscal 2022 On April 30, 2021, the Company sold its Austrian air-cooled automotive business to Schmid Metall GmbH. As a result of this transaction, the Company recorded a loss of $6.6 million during fiscal 2022, which included the write-off of $1.7 million of net actuarial losses related to its pension plan. The Company reported this loss within the loss on sale of assets line on the consolidated statement of operations. Upon transaction closing, $5.9 million of cash within the business transferred to the buyer. Later in fiscal 2022, the Company paid the buyer $2.4 million upon the finalization of a purchase price adjustment for net working capital and certain other items. Financial results of this business, prior to the disposition, are reported within the Performance Technologies segment. See Note 2 for information regarding the accounting for this business while it was held for sale. Net sales of this business were $63.0 million in fiscal 2021.
In connection with the sale of this business, the Company provided the buyer with a 5-year, €4.0 million loan facility. Borrowings under the agreement currently bear interest at 5.4 percent. During fiscal 2022, the Company disbursed €4.0 million ($4.7 million) to the buyer under this facility. At both March 31, 2023 and 2022, the Company recorded the loan receivable within other noncurrent assets on its consolidated balance sheet because the Company expects to receive the principal repayment more than twelve months from the balance sheet date.
Disposition of Previously-Closed Facility in Fiscal 2022 During fiscal 2022, the Company sold a previously-closed manufacturing facility in the U.S. and received net cash proceeds of $0.7 million. As a result of the sale, the Company recorded an impairment charge air coolers, heat-transfer modulesof $0.3 million within the Climate Solutions segment to write down the property to fair value less costs to sell.
Chief Executive Officer (“CEO”) Transition in Fiscal 2021 In August 2020, Thomas A. Burke stepped down from his position as President and assemblies, exhaust gas recirculationCEO. 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 (“EGR”SG&A”) coolers, building heating, ventilatingexpenses at Corporate, primarily consisted of severance and air conditioning (“HVAC”) equipment,benefit-related expenses based upon the terms of Mr. Burke’s transition and coils.separation agreement and costs directly associated with the CEO search, partially offset by the impact of Mr. Burke’s forfeited stock-based compensation awards. 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 toward 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, 2023 and 2022, the allowance for credit losses was $2.2 million and $1.7 million, respectively. The changes to the Company’s allowance for credit losses during fiscal 2023 and 2022 were not material and primarily consisted of current-period provisions, write-offs charged against the allowance, recoveries collected, and foreign currency translation.
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 2009,2023, 2022, and 2021, the Company sold its Electronics Cooling business. The buyer financed a portion$150.6 million, $126.4 million, and $88.7 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,2023, 2022, and 2021, the Company recorded a gain of $0.9costs totaling $1.2 million, ($0.6$0.3 million, after income taxes) during fiscal 2015.
Assets held for sale: The Company considers assetsand $0.2 million, respectively, related 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, 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 uncollectibleselling 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.in the consolidated statements of operations.
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 million and $18.7 million, respectively. In certain instances, 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.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, 2023 and 2022, Company-owned tooling totaled $17.1 million and $18.3 million, respectively.
In certain instances, tooling is owned by the customer. 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, 2023 and 2022, customer-owned tooling receivables totaled $10.9 million and $12.3 million, respectively.
Stock-based Compensation The Company recognizes stock-based compensation using the fair value method. Accordingly, compensation expense for stock options, restricted stock and performance-based stock awards is calculated based upon the fair value of the instruments at the time of grant and is recognized as expense over the respective vesting periods. See Note 5 for additional information.
Research and Development The Company expenses research and development costs as incurred within SG&A expenses. During fiscal 2023, 2022, and 2021, research and development costs totaled $44.0 million, $50.3 million, and $46.3 million, respectively.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Shipping and handling costs: The Company records shipping and handling costs incurred upon the shipment of products to its OEM customers in cost of sales, and related amounts billed to these customers in net sales. The Company records shipping and handling costs incurred upon 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.
Research and development: The Company expenses research and development costs as incurred within SG&A expenses. For the years ended March 31, 2016, 2015, and 2014, research and development costs charged to operations totaled $61.1 million, $62.0 million, and $61.7 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. Restricted stock award recipients have a non-forfeitable right to receive dividends declared by the Company. Therefore, these restricted stock awards are 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 amount of those un-presented checks is included in accounts payable.
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, 20162023 and 2015,2022, the Company’s short-term investments totaled $3.3$3.5 million and $2.8$3.7 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.
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 $13.6 million, $9.0 million, and $7.9 million were accrued within accounts payable at March 31, 2023, 2022 and 2021, respectively.
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 manufacturing and information technology equipment and vehicles. The Company recognizes right-of-use (“ROU”) assets and lease liabilities at the lease 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.2023 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 classifies an asset as held for sale when (i) 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; (ii) the asset is available for immediate sale in its present condition; (iii) an active program to locate a buyer and other actions required to complete the sale have been initiated; (iv) the sale of the asset is expected to be completed within one year; and (v) it is unlikely that significant changes will be made to the plan. Upon classification as held for sale, the Company records the carrying value of the asset at the lower of its carrying value or its estimated fair value, less costs to sell. In addition, the Company ceases to record depreciation for assets held for sale. 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.cost of sales or SG&A expenses. 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 guidanceSupplemental Cash Flow Information
| | Years ended March 31, | | | | | 2023 | | | 2022 | | | 2021 | | | Interest paid | | $ | 18.4 | | | $ | 14.1 | | | $ | 17.9 | | | Income taxes paid | | | 31.9 | | | | 21.8 | | | | 19.7 | |
See Note 16 for supplemental cash flow information related 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.leases.
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)
New Accounting Guidance
Supplier Finance Programs
In May 2014,September 2022, the FASBFinancial Accounting Standards Board (“FASB”) issued new guidance that outlines a comprehensive model for entitieswill require companies that use supplier finance programs 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 new guidance also includes a cohesive set of disclosure requirements intended to provide users of financial statements with comprehensivedisclose information about revenue arising from contracts with customers. Thisthe programs, including key terms, outstanding obligations under such programs and where outstanding amounts are presented within their financial statements. In addition, a roll forward of obligations under supplier finance programs will be required annually. The new guidance is effective for the Company’s first quarterfiscal 2024 financial statements, with the exception of fiscal 2019.the roll forward disclosure requirement, which will become effective one year later. The Company is currently evaluating the impact thisnew disclosures, but does not expect the guidance will have a material impact 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 | |
Income Tax Simplification
Note 2: | Airedale Facility Fire |
On September 6, 2013, a fire caused significant destructionIn December 2019, the FASB issued new guidance designed to simplify the accounting for income taxes. The new guidance eliminated certain exceptions related to the Company’s Airedale manufacturing facilityapproach for intraperiod tax allocations and offices in Rawdon (Leeds), United Kingdom.the methodology for deferred tax liabilities. The Company reports Airedale’s financial results within the Building HVAC segment. There were no injuries caused by the fire.adopted this guidance as of April 1, 2021. The Rawdon facility, which is leased, was used to manufacture cooling products and solutions foradoption did not have a variety of applications, including data centers, clean rooms, retail, leisure and process cooling. The Company suspended operations at the Rawdon site 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 date 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, the Company recorded a $9.5 million gain within other income related to an insurance settlement 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 inmaterial impact on the Company’s consolidated financial statements.
Credit Losses In June 2016, the 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 modified the credit loss model to measure and recognize credit losses based upon expected losses rather than incurred losses. The Company adopted this guidance as of April 1, 2020. The adoption did not have a material impact on the Company’s consolidated balance sheets, statements of operations or statements of cash flows.
Note 2: Assets Held for Sale
On February 28, 2014,November 2, 2020, the Company acquired 100 percentsigned a definitive agreement to sell its liquid-cooled automotive business to Dana Incorporated (“Dana”). Beginning at that time, the Company classified this business as held for sale and ceased recording depreciation expense for its long-lived assets. On October 25, 2021, the Company announced that it agreed with Dana to terminate the sale agreement. Both companies had been actively engaged in the regulatory review process in Germany for many months and agreed that it was no longer in the best interest of either party to pursue the sale transaction further.
In connection with the termination of the sharessale agreement, the Company determined that the liquid-cooled automotive business no longer met the requirements to be classified as held for sale. As a result, the Company remeasured the long-lived assets reverting back to held and used classification at the lower of Barkell Limitedtheir (i) carrying value, as if held for sale classification had not been met; or (ii) fair value at the date of Consett, United Kingdomthe decision not to sell and reversed $57.2 million of held for cash considerationsale impairment charges during the third quarter of $7.8 million, netfiscal 2022. The long-lived assets primarily consisted 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 assets and were fully impaired while classified as held for sale. For purposes of $2.0 million;the remeasurement, the Company engaged third-party valuation specialists to assist in estimating the fair values of the assets. The Company primarily used the market and working capital netcost valuation approaches and utilized third-party information from various industry-accepted sources, including applicable government-published statistics and data from appraisal and resale service providers. The market approach focused on prices for comparable assets in arm’s length transactions. For land and building assets, for example, sales of similar properties near the Company’s facilities were analyzed. For machinery and equipment assets, the Company referenced available third-party information regarding the selling prices of similar equipment. The cost approach focused on the amount for which an asset could be replaced or reproduced. The cost of an asset was then adjusted downward based on various factors including, but not limited to, age, location, and physical condition. After estimating the fair values of the assets reverting back to held and used classification, the Company compared the fair value for each asset to its carrying value. Carrying value represented each asset’s carrying value before the initial impairment charge, reduced for depreciation that would have been recorded if the asset had not been classified as held for sale. The Company then adjusted each asset to the lower of fair value or carrying value, resulting in the reversal of $57.2 million of previous impairment charges. In addition, the Company resumed depreciating the property, plant and equipment assets of $1.1 million. Acquired technology consiststhe liquid-cooled automotive business based on the remeasured asset values during the third quarter 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.fiscal 2022.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The results$57.2 million held for sale impairment reversal during the third quarter of operationsfiscal 2022 was partially offset by $1.2 million of net held for sale impairment charges recorded earlier in fiscal 2022. At both June 30, 2021 and September 30, 2021, while the liquid-cooled automotive business was held for sale, the Company reassessed its fair value less costs to sell. As a result of these acquired businesses are includedevaluations, the Company recorded a total of $8.6 million of impairment charges during the first and second quarters of fiscal 2022. These impairment charges reduced the net carrying value of property, plant and equipment additions during each quarter to zero. In addition, in connection with a modification of the sale perimeter in the first quarter of fiscal 2022, the Company determined that certain manufacturing operations no longer met the requirements to be classified as held for sale. As a result, the Company reversed $7.4 million of previous impairment charges to adjust the long-lived assets within the asset groups impacted by the sale perimeter change to their estimated fair value. The Company’s determination of fair value for the long-lived assets within the businesses impacted by the sale perimeter change in the first quarter involved judgement and the use of significant estimates and assumptions, including assumptions regarding future revenue projections and operating profit margins and risk-adjusted discount rates.
When the liquid-cooled automotive business was initially classified as held for sale during the third quarter of fiscal 2021, the Company assessed the disposal group’s fair value less costs to sell and reduced the net carrying value of the disposal group’s long-lived assets to zero. During fiscal 2021, the Company recorded impairment charges totaling $138.3 million related to the long-lived assets within the liquid-cooled automotive business.
Also during fiscal 2021, the Company signed a definitive agreement to sell its Austrian air-cooled automotive business to Schmid Metall GmbH. Upon classification as held for sale, the Company estimated an implied loss in excess of the carrying value of the disposal group’s long-lived assets, which primarily consisted of property, plant and equipment assets. As a result, the Company recorded a $26.8 million impairment charge related to this business, reducing the carrying value of the disposal group’s long-lived assets to zero. In addition, the Company recorded an impairment charge of $1.7 million related to other equipment within the Performance Technologies segment. See Note 1 for additional information regarding the accounting for the sale of the Austrian air-cooled automotive business, which was completed in fiscal 2022.
The Company reported the impairment charges and reversals during fiscal 2022 and 2021 within the impairment charges (reversals) line on the consolidated statements of operations since the dates of acquisition. operations.
Note 3: Revenue Recognition
The Company did not present pro forma financial informationgenerates 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 the effect of these acquisitions is not materialit 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 the 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:
Climate Solutions The Climate Solutions segment principally generates revenue from selling heat transfer products, heating, ventilating, air conditioning, and refrigeration (“HVAC & refrigeration”) products, and data center cooling solutions.
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 practical limitations, the Climate Solutions 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.
Ventilation and air conditioning products are highly-specified to a customer’s needs; the majority of the underlying sales contracts do not provide the Company with an enforceable right to payment for performance completed to date. As a result, the Climate Solutions segment recognizes revenue for the majority of its products at the time control is transferred to the customer based upon shipping terms, which is generally upon shipment.
For the sale of heat transfer products, refrigeration products, and data center cooling solutions, 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 Climate Solutions segment recognizes revenue for these products primarily at the time control is transferred to the customer based upon shipping terms, which is generally upon shipment.
For sales to customers whose contract cancellation terms provide an enforceable right to payment, the Climate Solutions segment recognizes revenue over time based upon its estimated progress toward satisfaction of the performance obligations. The segment measures progress by evaluating the production status toward completion of ordered products not yet shipped to its customers.
Performance Technologies The Performance Technologies segment provides products and solutions that enhance the performance of customer applications. The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications. Air-cooled products include radiators, charge air coolers, condensers, and engine cooling modules. Liquid-cooled products include engine oil coolers, charge air coolers, condensers, and exhaust gas recirculation coolers. In addition, the Performance Technologies segment provides advanced solutions, which are designed to improve battery range and vehicle life, to zero-emission and hybrid commercial vehicle, automotive, bus and specialty vehicle customers. These solutions include battery thermal management systems, electronics cooling packages, and battery chillers. The advanced solutions provided by the segment also include coating products and application services that extend the life of equipment and components by protecting against corrosion.
While the Performance Technologies segment provides 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 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, the Performance Technologies segment recognizes revenue primarily at the time control is transferred to the customer based upon shipping terms, which is generally upon shipment.
In regard to the Performance Technologies 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 toward satisfaction of the performance obligations. The Performance Technologies segment measures progress by evaluating the production status of ordered products not yet shipped to the customer.
For sales of coatings products, in which the customers control the equipment being enhanced by the coating application, the Performance Technologies segment recognizes revenue over time based upon its estimated progress toward satisfaction of the performance obligations. The segment measures progress by evaluating the production status toward completion of ordered products or services not yet shipped to its customers.
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.
Disaggregation of Revenue The tables below present revenue for each of the Company’s operating segments, Climate Solutions and Performance Technologies. Each segment’s revenue is disaggregated by product group, by geographic location and based upon the timing of revenue recognition.
Effective April 1, 2022, the Company began managing its operations or financial position.under two operating segments, Climate Solutions and Performance Technologies. The Climate Solutions segment includes the previously-reported Building HVAC Systems (“BHVAC”) and the Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings. The Performance Technologies segment includes the previously-reported Heavy Duty Equipment (“HDE”) and Automotive segments and the CIS Coatings business. See Note 22 for additional information regarding the Company’s operating segments. The disaggregated revenue information presented in the tables below for fiscal 2022 and 2021 has been recast to be comparable with the fiscal 2023 presentation.
| | | Year ended March 31, 2023 | | | | Climate Solutions | | | Performance Technologies | | | Segment Total | | | Product groups: | | | | | | | | | | | Heat transfer | | $ | 521.2 | | | $ | - | | | $ | 521.2 | | | HVAC & refrigeration | | | 336.3 | | | | - | | | | 336.3 | | | Data center cooling | | | 154.0 | | | | - | | | | 154.0 | | | Air-cooled | | | - | | | | 658.6 | | | | 658.6 | | | Liquid-cooled | | | - | | | | 483.9 | | | | 483.9 | | | Advanced solutions | | | - | | | | 143.9 | | | | 143.9 | | | Inter-segment sales | | | 0.4 | | | | 29.8 | | | | 30.2 | | | Net sales | | $ | 1,011.9 | | | $ | 1,316.2 | | | $ | 2,328.1 | | | | | | | | | | | | | | | | | Geographic location: | | | | | | | | | | | | | | Americas | | $ | 580.9 | | | $ | 702.0 | | | $ | 1,282.9 | | | Europe | | | 406.0 | | | | 408.5 | | | | 814.5 | | | Asia | | | 25.0 | | | | 205.7 | | | | 230.7 | | | Net sales | | $ | 1,011.9 | | | $ | 1,316.2 | | | $ | 2,328.1 | | | | | | | | | | | | | | | | | Timing of revenue recognition: | | | | | | | | | | | | | | Products transferred at a point in time | | $ | 959.8 | | | $ | 1,242.3 | | | $ | 2,202.1 | | | Products transferred over time | | | 52.1 | | | | 73.9 | | | | 126.0 | | | Net sales | | $ | 1,011.9 | | | $ | 1,316.2 | | | $ | 2,328.1 | |
| | | Year ended March 31, 2022 | | | | | | | | | | Segment Total | | | Product groups: | | | | | | | | | | | Heat transfer | | $ | 488.3 | | | $ | - | | | $ | 488.3 | | | HVAC & refrigeration | | | 325.5 | | | | - | | | | 325.5 | | | Data center cooling | | | 96.3 | | | | - | | | | 96.3 | | | Air-cooled | | | - | | | | 572.3 | | | | 572.3 | | | Liquid-cooled | | | - | | | | 448.3 | | | | 448.3 | | | Advanced solutions | | | - | | | | 119.4 | | | | 119.4 | | | Inter-segment sales | | | 0.4 | | | | 32.4 | | | | 32.8 | | | Net sales | | $ | 910.5 | | | $ | 1,172.4 | | | $ | 2,082.9 | | | | | | | | | | | | | | | | | Geographic location: | | | | | | | | | | | | | | Americas | | $ | 485.9 | | | $ | 585.6 | | | $ | 1,071.5 | | | Europe | | | 396.7 | | | | 375.7 | | | | 772.4 | | | Asia | | | 27.9 | | | | 211.1 | | | | 239.0 | | | Net sales | | $ | 910.5 | | | $ | 1,172.4 | | | $ | 2,082.9 | | | | | | | | | | | | | | | | | Timing of revenue recognition: | | | | | | | | | | | | | | Products transferred at a point in time | | $ | 889.3 | | | $ | 1,093.7 | | | $ | 1,983.0 | | | Products transferred over time | | | 21.2 | | | | 78.7 | | | | 99.9 | | | Net sales | | $ | 910.5 | | | $ | 1,172.4 | | | $ | 2,082.9 | |
| | | Year ended March 31, 2021 | | | | | | | | | | Segment Total | | | Product groups: | | | | | | | | | | | Heat transfer | | $ | 386.9 | | | $ | - | | | $ | 386.9 | | | HVAC & refrigeration | | | 279.7 | | | | - | | | | 279.7 | | | Data center cooling | | | 64.5 | | | | - | | | | 64.5 | | | Air-cooled | | | - | | | | 520.3 | | | | 520.3 | | | Liquid-cooled | | | - | | | | 458.9 | | | | 458.9 | | | Advanced solutions | | | - | | | | 98.1 | | | | 98.1 | | | Inter-segment sales | | | 0.1 | | | | 31.5 | | | | 31.6 | | | Net sales | | $ | 731.2 | | | $ | 1,108.8 | | | $ | 1,840.0 | | | | | | | | | | | | | | | | | Geographic location: | | | | | | | | | | | | | | Americas | | $ | 379.7 | | | $ | 472.0 | | | $ | 851.7 | | | Europe | | | 307.0 | | | | 411.1 | | | | 718.1 | | | Asia | | | 44.5 | | | | 225.7 | | | | 270.2 | | | Net sales | | $ | 731.2 | | | $ | 1,108.8 | | | $ | 1,840.0 | | | | | | | | | | | | | | | | | Timing of revenue recognition: | | | | | | | | | | | | | | Products transferred at a point in time | | $ | 722.7 | | | $ | 1,044.7 | | | $ | 1,767.4 | | | Products transferred over time | | | 8.5 | | | | 64.1 | | | | 72.6 | | | Net sales | | $ | 731.2 | | | $ | 1,108.8 | | | $ | 1,840.0 | |
Contract Balances Contract assets and contract liabilities from contracts with customers were as follows:
| | March 31, 2023 | | | March 31, 2022 | | | Contract assets | | $ | 19.3 | | | $ | 26.8 | | | Contract liabilities | | | 21.5 | | | | 11.8 | |
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 $7.5 million decrease in contract assets during fiscal 2023 primarily resulted from a decrease in contract assets for revenue recognized over time.
Contract liabilities, included within other current liabilities in the consolidated balance sheets, consist of payments received in advance of satisfying performance obligations under customer contracts, including contracts for customer-owned tooling. The $9.7 million increase in contract liabilities during fiscal 2023 primarily resulted from payments received in advance of the Company’s satisfaction of performance obligations.
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. |
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 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, 2023 and 2022, the fair values of the investments and obligations for the Company’s trading securities and deferred compensation obligationsplans each totaled $3.2$2.3 million and $3.0$2.9 million, at March 31, 2016 and 2015, respectively. The fair value of the Company’s long-term debt is disclosed in Note 16.
Plan assets related to the Company’s pension plans were classified as follows:
| | | March 31, 2016 | | | | | Level 1 | | | Level 2 | | | Total | | | | | | | | | | | | | | Money market investments | | $ | - | | | $ | 5.8 | | | $ | 5.8 | | | Common stocks | | | 23.7 | | | | 1.3 | | | | 25.0 | | | Corporate bonds | | | - | | | | 8.4 | | | | 8.4 | | | Pooled equity funds | | | 48.7 | | | | 7.3 | | | | 56.0 | | | Pooled fixed-income funds | | | 26.3 | | | | - | | | | 26.3 | | | U.S. government and agency securities | | | - | | | | 18.4 | | | | 18.4 | | | Other | | | 0.4 | | | | 1.2 | | | | 1.6 | | | Total | | $ | 99.1 | | | $ | 42.4 | | | $ | 141.5 | |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Plan assets related to the Company’s pension plans were classified as follows:
| | | 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 | |
| | March 31, 2023 | | | | | Level 1 | | | Level 2 | | | Total | | | | | | | | | | | | | | Money market investments | | $ | - | | | $ | 1.9 | | | $ | 1.9 | | | Pooled equity funds | | | 34.9 | | | | - | | | | 34.9 | | | Other | | | - | | | | 0.4 | | | | 0.4 | | | Fair value excluding investments measured at net asset value | | | 34.9 | | | | 2.3 | | | | 37.2 | | | Investments measured at net asset value | | | | | | | | | | | 116.1 | | | Total fair value | | | | | | | | | | $ | 153.3 | |
| | March 31, 2022 | | | | | Level 1 | | | Level 2 | | | Total | | | | | | | | | | | | | | Money market investments | | $ | - | | | $ | 2.2 | | | $ | 2.2 | | | Fixed income securities | | | - | | | | 9.1 | | | | 9.1 | | | Pooled equity funds | | | 40.4 | | | | - | | | | 40.4 | | | U.S. government and agency securities | | | - | | | | 11.8 | | | | 11.8 | | | Other | | | 0.1 | | | | 1.4 | | | | 1.5 | | | Fair value excluding investment measured at net asset value | | | 40.5 | | | | 24.5 | | | | 65.0 | | | Investments measured at net asset value | | | | | | | | | | | 114.9 | | | Total fair value | | | | | | | | | | $ | 179.9 | |
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, 20162023 and 2015,2022, the Company held no Level 3 assets within its pension plans.
Assets heldAs a practical expedient, the Company valued certain investments, including pooled equity, fixed income and real estate funds, 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 investment fund may be redeemed quarterly with a 90-day notice period. 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 Note 6 for additional information.prices different than the NAV per unit.
Note 5: | 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 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 2023 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 2023, 2022, and 2021. At present, the Company accomplishes the fulfillment of equity-based grants through the issuance of new common shares. As of March 31, 2016,2023, approximately 3.32.2 million shares authorized under the Amended and Restated 2020 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$6.6 million $4.0, $5.7 million, and $3.6$6.3 million in fiscal 2016, 2015,2023, 2022, and 2014,2021, respectively.
Stock Options:Options The Company recorded $0.9$1.2 million $0.9, $1.1 million, and $0.8$0.9 million of compensation expense related to stock options in fiscal 2016, 2015,2023, 2022, and 2014,2021, respectively. The grant date fair value of stock options that vested during fiscal 2016, 2015,2023, 2022, and 20142021, was $0.9$1.0 million $0.9, $0.9 million, and $0.8$1.3 million, respectively. As of March 31, 2016,2023, the total compensation expense not yet recognized related to non-vested stock options was $2.0$2.3 million and the weighted-average period in which the remaining expense is expected to be recognized was 2.52.1 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, | | | | | 2023 | | | 2022 | | | 2021 | | | Fair value of options | | $ | 6.99 | | | $ | 8.79 | | | $ | 3.46 | | | Expected life of awards in years | | | 6.0 | | | | 6.1 | | | | 6.1 | | | Risk-free interest rate | | | 3.0 | % | | | 1.1 | % | | | 0.4 | % | | Expected volatility of the Company’s stock | | | 57.8 | % | | | 56.5 | % | | | 54.1 | % | | 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. OutstandingBased upon the terms of the fiscal 2023 annual awards, stock options grantedvest 33 percent, 33 percent, and 34 percent per year for three years, respectively. Stock option grants preceding the fiscal 2023 grant vest 25 percent annuallyper year for four years. The Company used a pre-vesting forfeiture rate of 2.5 percent as an estimate of expected forfeitures prior to completing the required service period.
A summary of stock option activity for fiscal 20162023 was as follows:
| | | Shares | | Weighted-average exercise price | | | Weighted-average remaining contractual term (years) | | | Aggregate intrinsic value | | | Outstanding, beginning | | | 1.5 | | | $ | 11.99 | | | | | | | | | Granted | | | 0.2 | | | | 11.39 | | | | | | | | | Exercised | | | (0.1 | ) | | | 5.82 | | | | | | | | | Forfeited or expired | | | (0.1 | ) | | | 27.33 | | | | | | | | | Outstanding, ending | | | 1.5 | | | $ | 10.82 | | | | 5.3 | | | $ | 3.0 | | | | | | | | | | | | | | | | | | | | | Exercisable, March 31, 2016 | | | 1.1 | | | $ | 10.41 | | | | 4.3 | | | $ | 3.0 | |
| | Shares | | | Weighted-average exercise price | | | Weighted-average remaining contractual term (years) | | | Aggregate intrinsic value | | | Outstanding, beginning of year | | | 1.0 | | | $ | 12.12 | | | | | | | | | Granted | | | 0.2 | | | | 12.40 | | | | | | | | | Exercised | | | (0.2 | ) | | | 11.77 | | | | | | | | | Forfeited or expired | | | (0.1 | ) | | | 12.26 | | | | | | | | | Outstanding, end of year | | | 0.9 | | | $ | 12.28 | | | | 7.1 | | | $ | 9.6 | | | | | | | | | | | | | | | | | | | | Exercisable, March 31, 2023 | | | 0.4 | | | $ | 12.46 | | | | 5.5 | | | $ | 4.3 | |
The aggregate intrinsic value represents the difference between the closing price of Modine’s common shares on the last trading day of fiscal 20162023 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:
| | | 2016 | | | 2015 | | | 2014 | | | Intrinsic value of stock options exercised | | $ | 0.4 | | | $ | 0.4 | | | $ | 1.1 | | | Proceeds from stock options exercised | | $ | 0.5 | | | $ | 0.6 | | | $ | 1.1 | |
| | Years ended March 31, | | | | | 2023 | | | 2022 | | | 2021 | | | Intrinsic value of stock options exercised | | $ | 1.5 | | | $ | 0.1 | | | $ | 1.4 | | | Proceeds from stock options exercised | | | 2.9 | | | | 1.4 | | | | 4.1 | |
Restricted Stock:Stock The Company recorded $3.5$5.4 million, $2.8$5.0 million, and $2.2$4.3 million of compensation expense related to restricted stock in fiscal 2016, 2015,2023, 2022, and 2014,2021, respectively. The grant date fair value of restricted stock awards that vested during fiscal 2016, 2015,2023, 2022, and 20142021 was $3.4$4.7 million, $2.3$4.4 million, and $1.6$4.5 million, respectively. At March 31, 2016,2023, the Company had $4.7$6.4 million of unrecognized compensation expense related to non-vested restricted stock, which it expects to recognize over a weighted-average period of 2.41.8 years. The Company values restricted stock awards using the closing market valueprice of its common shares on the date of grant. TheBased upon the terms of the fiscal 2023 annual awards, restricted stock awards vest 33 percent, 33 percent, and 34 percent per year for three years, respectively. Restricted stock award grants preceding the fiscal 2023 grant vest 25 percent annuallyper year for four years, with the exception ofyears. Restricted stock awards granted to non-employee directors which fullyin fiscal 2023 vest uponone year from the time of grant.
A summary of restricted stock activity for fiscal 20162023 was as follows:
| | | Shares | | Weighted- average price | | Non-vested balance, beginning | | | 0.7 | | | $ | 10.68 | | | Granted | | | 0.3 | | | | 11.18 | | | Vested | | | (0.4 | ) | | | 10.01 | | | Non-vested balance, ending | | | 0.6 | | | $ | 11.29 | |
| | Shares | | | Weighted-average price | | | Non-vested balance, beginning of year | | | 0.7 | | | $ | 11.61 | | | Granted | | | 0.5 | | | | 13.60 | | | Vested | | | (0.3 | ) | | | 11.85 | | | Forfeited | | | (0.1 | ) | | | 10.58 | | | Non-vested balance, end of year | | | 0.8 | | | $ | 12.95 | |
Restricted Stock – Performance-Based Shares:Shares The Company recorded $0.5 million, $0.3 milliongranted performance-based cash awards in fiscal 2023, 2022, and $0.6 million2021 in lieu of compensation expense related toperformance-based stock awards. For performance-based stock awards, in fiscal 2016, 2015, and 2014, respectively. At March 31, 2016, the Company had $1.2 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. The Company values performance-based stockthe awards using the closing market valueprice of its common shares on the date of grant. During fiscal 2023 all performance-based awards were cash-based, therefore, the Company did not recognize compensation expense related to performance-based stock awards. In fiscal 2022, the Company recorded a $0.4 million benefit related to the performance-based stock awards granted in fiscal 2020. The payout earned for the fiscal 2020 awards was less than previously estimated. In fiscal 2021, the Company recorded $1.1million of compensation expense related to performance-based stock awards.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Shares areThe payouts earned under the performance portion of the restricted stock award program are based upon the attainment of certain financial goalstargets over a three-yearperiod and are awardedpaid after the end of that three-yearperformance period, if the performance targets have been achieved. A new The performance metrics for the performance-based cash awards granted in fiscal 2021 are based upon both a target three-yearaverage consolidated cash flow return on invested capital and a target three-yearaverage annual revenue growth at the end of the three-yearperformance period, may begin eachcommencing with the fiscal year; therefore, multiple performance periods, with distinct goals, may operate simultaneously.
year of grant. The performance components ofmetrics for the programs initiatedperformance-based cash awards granted in fiscal 20162022 and fiscal 2015 were2023 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 in consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”) at the end of athe three-year performance period, commencing with the fiscal year of grant. For the program initiated in fiscal 2014, the performance award was based upon a target three-year average ROACE, three-year average annual revenue growth, and Asia segment operating income at the end of the three-year performance period.
Note 6: | Note 6: Restructuring Activities |
During fiscal 2016,2023, restructuring and repositioning expenses primarily consisted of severance-related expenses for targeted headcount reductions in each the Company offered a voluntary retirement program to certain U.S. salaried employees. The program was offered as part ofClimate Solutions and Performance Technologies segments and supported the Company’s Strengthen, Diversify and Grow transformational initiative and supports the objective of reducing operational and SG&A cost structures. In addition, the Performance Technologies and Climate Solutions segments incurred equipment transfer costs in Europe and closure costs related to a previously-leased facility in the U.S., respectively.
Also duringDuring fiscal 2016,2022, the Company announced a plancommitted to close its Washington, Iowa manufacturing facilityrestructuring actions intended to reduce SG&A and isoperational expenses, particularly within the Performance Technologies segment. During fiscal 2022, the Company recorded $22.1 million of severance expenses, of which $20.3 million were recorded in the process of transferring the facility’s productionPerformance Technologies segment and primarily related to other Americas segment manufacturing facilities, which it expects to complete by the end of fiscal 2017.targeted headcount reductions in Europe. In addition, the Company completedimplemented targeted headcount reductions in 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.
DuringClimate Solutions segment. Also in fiscal 2015,2022, 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 ofincurred equipment transfer and plant consolidation costs.costs within the Performance Technologies segment.
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)
During fiscal 2021, restructuring actions consisted primarily of targeted headcount reductions and plant consolidation activities. The headcount reductions were primarily in Europe and in the Americas within the Performance Technologies segment and supported the Company’s objective of reducing operational and SG&A cost structures. During fiscal 2021, the Company transferred production from its manufacturing facility in Zhongshan, China to another Climate Solutions segment manufacturing facility in China. As a result of this plant consolidation, the Company recorded $3.7 million of severance expenses during fiscal 2021. Other plant consolidation activities in fiscal 2021 included transferring product lines to the Company’s Climate Solutions manufacturing facility in Mexico.
Restructuring and repositioning expenses were as follows:
| | Years ended March 31, | | | | | 2023 | | | 2022 | | | 2021 | | Employee severance and related benefits
| | $ | 3.5 | | | $ | 22.1 | | | $ | 11.7 | | | Other restructuring and repositioning expenses | | | 1.5 | | | | 2.0 | | | | 1.7 | | Total
| | $ | 5.0 | | | $ | 24.1 | | | $ | 13.4 | |
Other restructuring and repositioning expenses primarily consist of equipment transfer and plant consolidation costs.
The Company accrues severance in accordance with its written plans, procedures, and relevant statutory requirements. Changes in accrued severance were as follows:
| | | Years ended March 31, | | | | 2016 | | 2015 | | Beginning balance | | $ | 9.9 | | | $ | 19.4 | | | Additions | | | 12.8 | | | | 1.2 | | | Payments | | | (8.5 | ) | | | (7.3 | ) | | Effect of exchange rate changes | | | 0.5 | | | | (3.4 | ) | | Ending balance | | $ | 14.7 | | | $ | 9.9 | |
| | Years ended March 31, | | | | | 2023 | | | 2022 | | | Beginning balance | | $ | 20.2 | | | $ | 4.0 | | | Additions | | | 3.5 | | | | 22.1 | | | Payments | | | (12.4 | ) | | | (5.7 | ) | | Reclassified from held for sale | | | - | | | | 0.4 | | | Effect of exchange rate changes | | | (0.7 | ) | | | (0.6 | ) | | Ending balance | | $ | 10.6 | | | $ | 20.2 | |
During fiscal 2016,2022 and 2021, the Company identified potentialrecorded $56.0 million of a net asset impairment indicators related to a manufacturing facility in Germany, including pre-tax lossesreversal and $166.8 million of impairment charges, respectively, within its strategic decision to exit a certain product line in the future. In response,Performance Technologies segment. See Note 2 for additional information.
Also during fiscal 2022, the Company performed an impairment evaluation and recorded an asset impairment charge of $9.9$0.3 million withinto reduce the carrying value of a previously closed Climate Solutions facility to its Europe segment to write down the manufacturing facility’s long-lived assets to fair value. The Company determinedestimated fair value, using Level 3 inputs, primarily consisting of a facility appraisal, which considered the market rental value,less costs to sell.
Note 7: Other Income and estimated scrap values, which considered the specialized nature of the machinery and equipment.Expense
During fiscal 2014, the Company recorded asset impairment charges totaling $3.2 million, including $2.0 million within its Europe segment, primarily due to a manufacturing facility in Germany that the Company has closed, and $1.2 million within its Americas segment, related to the closure of its McHenry, Illinois manufacturing facility.
During fiscal 2015, the Company sold a wind tunnel within its Europe segment for cash proceeds of $5.8 million and recognized a gain of $3.2 million. At March 31, 2016 and 2015, assets held for sale of $8.5 million and $3.2 million, respectively, were included in other noncurrent assets and consisted of facilities that the Company is marketing for sale.
Note 7: | Other Income and Expense |
Other income and expense consisted of the following:
| | | Years ended March 31, | | | | 2016 | | 2015 | | 2014 | | Equity in earnings of non-consolidated affiliate | | $ | 0.1 | | | $ | 0.6 | | | $ | 0.7 | | | Interest income | | | 0.4 | | | | 0.5 | | | | 0.5 | | | Foreign currency transactions (a) | | | (1.3 | ) | | | (0.9 | ) | | | (2.0 | ) | | Gain from insurance recovery (b) | | | 9.5 | | | | - | | | | - | | | Total other income (expense) - net | | $ | 8.7 | | | $ | 0.2 | | | $ | (0.8 | ) |
| | Years ended March 31, | | | | | 2023 | | | 2022 | | | 2021 | | | Interest income | | $ | 1.3 | | | $ | 0.4 | | | $ | 0.5 | | | Foreign currency transactions (a) | | | (3.7 | ) | | | (1.4 | ) | | | 0.6 | | | Net periodic benefit cost (b) | | | (2.0 | ) | | | (1.1 | ) | | | (3.3 | ) | | Total other expense - net | | $ | (4.4 | ) | | $ | (2.1 | ) | | $ | (2.2 | ) |
| (a) | Foreign currency transactions primarily consist of foreign currency transaction gains and losses on the re-measurement or settlement of foreign currency-denominated assets and liabilities, including intercompany loans and transactions denominated in a foreign currencyand intercompany loans, along with gains and losses on foreign currency exchange contracts. |
| (b) | During fiscal 2016,Net periodic benefit cost for the Company settled an insurance claim related to machineryCompany’s pension and equipment destroyed in a fire at its Airedale facility and recorded a gainpostretirement plans is exclusive of $9.5 million. See Note 2 for additional information.service cost. |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Note 8: Income Taxes
The U.S. and foreign components of earnings from continuing operationsor loss before income taxes and the provisionbenefit or benefitprovision for income taxes consisted of the following:
| | | Years ended March 31, | | | | 2016 | | 2015 | | 2014 | | Components of (loss) earnings from continuing operations before income taxes: | | | | | | | | | | | United States | | $ | (15.4 | ) | | $ | 31.1 | | | $ | 14.1 | | | Foreign | | | 5.5 | | | | 10.1 | | | | 9.9 | | | Total (loss) earnings from continuing operations before income taxes | | $ | (9.9 | ) | | $ | 41.2 | | | $ | 24.0 | | | | | | | | | | | | | | | | | Income tax (benefit) expense: | | | | | | | | | | | | | | Federal: | | | | | | | | | | | | | | Current | | $ | 0.1 | | | $ | 0.4 | | | $ | (2.0 | ) | | Deferred | | | (13.0 | ) | | | 7.1 | | | | (95.8 | ) | | State: | | | | | | | | | | | | | | Current | | | 0.2 | | | | - | | | | 0.2 | | | Deferred | | | (2.5 | ) | | | 1.1 | | | | (21.4 | ) | | Foreign: | | | | | | | | | | | | | | Current | | | 9.6 | | | | 12.7 | | | | 10.0 | | | Deferred | | | (3.3 | ) | | | (2.3 | ) | | | 1.1 | | | Total income tax (benefit) expense | | $ | (8.9 | ) | | $ | 19.0 | | | $ | (107.9 | ) |
| | Years ended March 31, | | | | | 2023 | | | 2022 | | | 2021 | | | Components of earnings (loss) before income taxes: | | | | | | | | | | | United States | | $ | 12.5 | | | $ | 0.4 | | | $ | (48.7 | ) | | Foreign | | | 112.8 | | | | 101.1 | | | | (70.6 | ) | | Total earnings (loss) before income taxes | | $ | 125.3 | | | $ | 101.5 | | | $ | (119.3 | ) |
| Income tax (benefit) provision: | | | | | | | | | | | Federal: | | | | | | | | | | | Current | | $ | 1.5 | | | $ | 0.1 | | | $ | (0.1 | ) | | Deferred | | | (47.5 | ) | | | - | | | | 58.3 | | | State: | | | | | | | | | | | | | | Current | | | 2.3 | | | | 1.1 | | | | 0.4 | | | Deferred | | | (11.4 | ) | | | - | | | | 9.2 | | | Foreign: | | | | | | | | | | | | | | Current | | | 27.5 | | | | 17.8 | | | | 22.0 | | | Deferred | | | (0.7 | ) | | | (3.8 | ) | | | 0.4 | | | Total income tax (benefit) provision | | $ | (28.3 | ) | | $ | 15.2 | | | $ | 90.2 | |
The Company allocatesreconciliation between the U.S. federal statutory rate and the Company’s effective tax rate was as follows:
| | Years ended March 31, | | | | | 2023 | | | 2022 | | | 2021 | | | Statutory federal tax | | | 21.0 | % | | | 21.0 | % | | | 21.0 | % | | State taxes, net of federal benefit | | | (0.1 | ) | | | 1.4 | | | | 0.9 | | | Taxes on non-U.S. earnings and losses | | | 5.8 | | | | 3.5 | | | | (9.1 | ) | | Valuation allowances | | | (42.9 | ) | | | (8.8 | ) | | | (92.9 | ) | | Tax credits | | | (4.5 | ) | | | (3.4 | ) | | | 2.2 | | | Compensation | | | 0.7 | | | | 0.6 | | | | (1.3 | ) | | Tax rate or law changes | | | (0.2 | ) | | | 0.6 | | | | (0.2 | ) | | Uncertain tax positions, net of settlements | | | 0.4 | | | | (0.2 | ) | | | 0.1 | | | Notional interest deductions | | | (1.7 | ) | | | (2.7 | ) | | | 1.3 | | | Dividends and taxable foreign inclusions | | | 0.9 | | | | 1.6 | | | | 3.0 | | | Other | | | (2.0 | ) | | | 1.4 | | | | (0.6 | ) | | Effective tax rate | | | (22.6 | %) | | | 15.0 | % | | | (75.6 | %) |
The Company’s fiscal 2023 effective tax rate was favorably impacted by an income tax expense among continuing operations, discontinued operations, and other comprehensive income. The Company applies accounting for income taxes by tax jurisdiction, and in periods in which there is a loss from continuing operations before income taxes and pre-tax income in other categories (e.g., discontinued operations or other comprehensive income), it first allocates income tax expensebenefit related to the other sources of income, and records a related tax benefit in continuing operations.
Income tax expense attributable to earnings from continuing operations before income taxes differed from the amounts computed by applying the statutory U.S. federal income tax rate as a result of the following:
| | | Years ended March 31, | | | | 2016 | | 2015 | | 2014 | | Statutory federal tax | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % | | State taxes, net of federal benefit | | | 11.5 | | | | 2.4 | | | | 2.1 | | | Taxes on non-U.S. earnings and losses | | | 26.4 | | | | (4.9 | ) | | | (3.8 | ) | | Valuation allowance | | | (20.9 | ) | | | 8.3 | | | | (471.7 | ) | | Tax credits | | | 20.5 | | | | (6.1 | ) | | | (7.1 | ) | | Compensation | | | (3.7 | ) | | | 1.0 | | | | 0.4 | | | Tax rate or law changes | | | 1.3 | | | | 1.2 | | | | (9.2 | ) | | Uncertain tax positions, net of settlements | | | (4.3 | ) | | | 2.2 | | | | 0.4 | | | Dividend repatriation | | | 16.0 | | | | 2.4 | | | | 5.8 | | | Other | | | 8.1 | | | | 4.6 | | | | (1.5 | ) | | Effective tax rate | | | 89.9 | % | | | 46.1 | % | | | (449.6 | %) |
The Company recorded an additional valuation allowance of $5.0 million, $2.6 million and $12.3 million in fiscal 2016, 2015, and 2014, respectively, against neton deferred tax assets in certain jurisdictions after determining it was more likely than not that the net deferredU.S. The effective tax assetsrates in these jurisdictions will not be realized. The Company will continueboth fiscal 2022 and 2021 were significantly impacted by impairment charges or reversals, largely related to provide a valuation allowance against its net deferred tax assets in each of the applicable jurisdictions going forward until the need for a valuation allowance is eliminated. The need for a valuation allowance is eliminated when the Company determines it is more likely than not the deferred tax assets will be realized.
During fiscal 2016liquid-cooled automotive business, and 2014, the Company concluded it no longer needed a valuation allowance on certain deferred tax assets after determining it was more likely than not they would be realized. As a result, the Company recorded reversals of its deferred tax asset valuation allowance of $3.0 million and $119.2 million in fiscal 2016 and 2014, respectively. Also during fiscal 2014, the Company recorded income tax charges or benefits totaling $2.2 million related to foreignvaluation allowances. See Note 2 for information regarding the impairment charges and reversals. The income tax law changes.charges or benefits related to valuation allowances are described below.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The Company records valuation allowances against its net deferred tax assets to the extent it determines it is more likely than not that such assets will not be realized in the future. Each quarter, the Company evaluates the probability that its deferred tax assets will be realized and determines whether valuation allowances or adjustments thereto are needed. This determination involves judgement and the use of significant estimates and assumptions, including expectations of future taxable income and tax planning strategies. In addition, the Company considers the duration of statutory carryforward periods and historical financial results.
Since the third quarter of fiscal 2021, the Company has maintained a full valuation allowance against net deferred tax assets in the U.S. since the Company determined, at that time, it was more likely than not that the net deferred tax assets would not be realized. In the fourth quarter of fiscal 2023, based on the Company’s recent history of earnings, coupled with its forecasted profitability, the Company determined it was more likely than not that certain deferred tax assets in the U.S. will be realized. As a result, the Company reversed the valuation allowance related to these deferred tax assets and recorded an income tax benefit of $57.3 million. The Company evaluated both positive and negative objectively verifiable evidence and placed substantial weight on its fiscal 2022 and 2023 earnings, which resulted in a significant cumulative three-year income position. The Company also considered its forecasts for future earnings in certain key businesses. The Company has determined it is more likely than not that a portion of the deferred tax assets in the U.S. related to certain federal and state tax attributes will not be realized prior to expiration and, as such, has maintained a valuation allowance against these assets. In addition, the Company recorded a net increase of other deferred tax asset valuation allowances totaling $3.6 million.
Based upon its analyses during fiscal 2022, the Company determined it was more likely than not that the deferred tax assets in certain foreign jurisdictions would be realized. As a result, the Company reversed the valuation allowances related to these deferred tax assets and recorded income tax benefits totaling $13.0 million. The Company’s analyses included consideration of the transaction perimeter modification and the termination of the sale agreement for the liquid-cooled automotive business and the related impairment reversals. Separately, the Company determined it was more likely than not that the deferred tax assets in a foreign jurisdiction would not be realized. As a result, the Company recorded an income tax charge of $1.6 million. Together, these fiscal 2022 valuation allowance adjustments resulted in a net income tax benefit of $11.4 million during fiscal 2022. In addition, the Company recorded a net increase of other deferred tax asset valuation allowances totaling $2.5 million.
Based upon its analyses during fiscal 2021, the Company determined it was more likely than not that its deferred tax assets in the U.S. and in certain foreign jurisdictions would not be realized. As a result, the Company recorded income tax charges totaling $116.5 million to increase the valuation allowances on deferred tax assets in the U.S. ($103.3 million) and in certain foreign jurisdictions ($13.2 million). The Company’s analyses during fiscal 2021 included consideration of the impairment charges recorded for the liquid-cooled automotive business, which contributed to the Company entering into a three-year cumulative loss position in the U.S. and in certain foreign jurisdictions as of December 31, 2020. Also during fiscal 2021, the Company recorded a net increase of other deferred tax asset valuation allowances totaling $22.0 million and recorded a $9.3 million income tax benefit resulting from allocation of the income tax provision between net earnings and other comprehensive income.
At March 31, 2023, valuation allowances against deferred tax assets in the U.S. and in certain foreign jurisdictions totaled $33.9 million and $27.7 million, respectively. The Company will maintain the valuation allowances in each applicable tax jurisdiction until it determines it is more likely than not the deferred tax assets will be realized, thereby eliminating the need for a valuation allowance. Future events or circumstances, such as lower taxable income or unfavorable changes in the financial outlook of the Company’s operations in certain jurisdictions, could necessitate the establishment of further valuation allowances.
The tax effects of temporary differences that gave rise to deferred tax assets and liabilities were as follows:
| | | March 31, | | | | 2016 | | 2015 | | Deferred tax assets: | | | | | | | | Accounts receivable | | $ | 0.1 | | | $ | 0.3 | | | Inventories | | | 3.6 | | | | 3.8 | | | Plant and equipment | | | 4.3 | | | | 0.8 | | | Pension and employee benefits | | | 52.6 | | | | 50.5 | | | Net operating loss, capital loss, and credit carryforwards | | | 109.4 | | | | 105.0 | | | Other, principally accrued liabilities | | | 6.9 | | | | 6.8 | | | Total gross deferred tax assets | | | 176.9 | | | | 167.2 | | | Less: valuation allowance | | | (50.8 | ) | | | (48.0 | ) | | Net deferred tax assets | | | 126.1 | | | | 119.2 | | | | | | | | | | | | | Deferred tax liabilities: | | | | | | | | | | Plant and equipment | | | 5.5 | | | | 5.3 | | | Goodwill | | | 0.6 | | | | 0.6 | | | Other | | | 1.1 | | | | 1.0 | | | Total gross deferred tax liabilities | | | 7.2 | | | | 6.9 | | | Net deferred tax asset | | $ | 118.9 | | | $ | 112.3 | |
| | March 31, | | | | | 2023 | | | 2022 | | | Deferred tax assets: | | | | | | | | Accounts receivable | | $ | 0.9 | | | $ | 0.8 | | | Inventories | | | 6.0 | | | | 6.5 | | | Plant and equipment | | | 17.2 | | | | 19.9 | | | Lease liabilities | | | 15.9 | | | | 13.5 | | | Pension and employee benefits | | | 24.1 | | | | 27.5 | | | Net operating and capital losses | | | 55.4 | | | | 53.9 | | | Credit carryforwards | | | 49.0 | | | | 48.5 | | | Research and experimental expenditures | | | 8.0 | | | | - | | | Other, principally accrued liabilities | | | 13.2 | | | | 13.5 | | | Total gross deferred tax assets | | | 189.7 | | | | 184.1 | | | Less: valuation allowances | | | (61.6 | ) | | | (112.2 | ) | | Net deferred tax assets | | | 128.1 | | | | 71.9 | | | | | | | | | | | | | Deferred tax liabilities: | | | | | | | | | | Plant and equipment | | | 7.5 | | | | 8.6 | | | Lease assets | | | 15.7 | | | | 13.2 | | | Goodwill | | | 4.8 | | | | 4.9 | | | Intangible assets | | | 20.1 | | | | 22.4 | | | Other | | | 1.1 | | | | 1.5 | | | Total gross deferred tax liabilities | | | 49.2 | | | | 50.6 | | | Net deferred tax assets | | $ | 78.9 | | | $ | 21.3 | |
As of March 31, 2016, the Company adopted new accounting guidance, which requires that all deferred taxes be presented as non-current on the consolidated balance sheets. See Note 1 for additional information.
Unrecognized tax benefits were as follows:
| | | Years ended March 31, | | | | 2016 | | 2015 | | Beginning balance | | $ | 5.6 | | | $ | 2.1 | | | Gross increases - tax positions in prior period | | | - | | | | 3.1 | | | Gross decreases - tax positions in prior period | | | (0.1 | ) | | | - | | | Gross increases - tax positions in current period | | | 0.4 | | | | 0.4 | | | Ending balance | | $ | 5.9 | | | $ | 5.6 | |
| | Years ended March 31, | | | | | 2023 | | | 2022 | | | Beginning balance | | $ | 9.3 | | | $ | 9.6 | | | Gross increases - tax positions in prior period | | | 0.2 | | | | 0.1 | | | Gross decreases - tax positions in prior period | | | (0.1 | ) | | | (0.2 | ) | | Gross increases - tax positions in current period | | | 0.9 | | | | 1.0 | | | Lapse of statute of limitations | | | (0.6 | ) | | | (1.2 | ) | | Ending balance | | $ | 9.7 | | | $ | 9.3 | |
The Company’s liability for unrecognized tax benefits as of March 31, 20162023 was $5.9$9.7 million and, if recognized, $3.5$7.8 million would have an effective tax rate impact. The Company estimates a $2.0 million net decrease in unrecognized tax benefits during fiscal 2024 mainly due to lapses in statutes of limitations. If recognized, these reductions would have an impact on the Company’s effective tax rate.
The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense. During fiscal 2023, 2022 and 2021, interest and penalties included within income tax expense in the consolidated statements of operations were not significant. At March 31, 20162023 and 2015,2022, accrued interest and penalties were not significant.totaled $0.8 million and $0.7 million, respectively.
The Company files income tax returns in multiple jurisdictions and is subject to examination by taxing authorities throughout the world. At March 31, 2016,2023, the Company was under income tax examination in a number of foreign jurisdictions. The Company does not anticipate a significant change in unrecognized tax benefits during the next twelve months.
The following tax years remain subject to examination for the Company’s major tax jurisdictions:
Austria | Fiscal 2012 - 2015 | Brazil | Calendar 2011 - 2015 | | Germany | Fiscal 20122017 - 2015Fiscal 2022 | | Italy | Fiscal 2018 - Fiscal 2022 | | United States | Fiscal 20132020 - 2015Fiscal 2022 |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
At March 31, 2016,2023, the Company had federal and state research and development tax credits of $23.3$60.4 million that, if not utilized against domesticU.S. taxes, will expire between fiscal 20182024 and 2036.2043. The Company also had various state and local tax loss carry forwards of $190.8 million that, ifcarryforwards totaling $136.7 million. If not utilized against state apportioned taxable income, certain state and local carryforwards will expire at various times duringbetween fiscal 2017 through 2036.2024 and 2042, while some will not expire due to an unlimited carryforward period. In addition, the Company had tax loss carry forwards of $330.7and foreign attribute carryforwards totaling $285.0 million in various tax jurisdictions throughout the world. Certain of the carry forwards in the U.S. and manycarryforwards in foreign jurisdictions are offset by a valuation allowance.allowances. If not utilized against taxable income, $156.9$54.9 million of these tax lossescarryforwards will expire at various times duringbetween fiscal 2017 through 2035,2024 and $173.82034, and $230.1 million, mainly related to Germany Austria and India,Italy, will not expire due to an unlimited carry-forwardcarryforward period.
At March 31, 2016,The Company’s practice and intention is to reinvest, with certain insignificant exceptions, the earnings of its non-U.S. subsidiaries outside of the U.S., and therefore, the Company provided $1.1 million of tax on undistributed earningshas not recorded foreign withholding taxes or deferred income taxes for certain subsidiaries not considered permanently reinvested. Undistributed earnings totaling $491.0 million are considered permanently reinvested inthese earnings. The Company has estimated the Company’s remaining foreign operations, and no provision has been made for taxes that would be payable upon the distribution of such earnings. It is not practicable to estimate thenet amount of unrecognized foreign withholding taxestax and deferred tax liabilityliabilities would total approximately $12.0 million if the accumulated foreign earnings were distributed; however, the actual tax cost would be dependent on such earnings.circumstances existing when remittance occurs.
Note 9: | Note 9: Earnings Per Share |
The components of basic and diluted earnings per share were as follows:
| | | Years ended March 31, | | | | 2016 | | 2015 | | 2014 | | Basic: | | | | | | | | | | | (Loss) earnings from continuing operations | | $ | (1.0 | ) | | $ | 22.2 | | | $ | 131.9 | | | Less: Net earnings attributable to noncontrolling interest | | | (0.6 | ) | | | (1.0 | ) | | | (1.5 | ) | | Less: Undistributed earnings attributable to unvested shares | | | - | | | | (0.2 | ) | | | (1.7 | ) | | (Loss) earnings from continuing operations available to Modine shareholders | | | (1.6 | ) | | | 21.0 | | | | 128.7 | | | Earnings from discontinued operations, net of income taxes | | | - | | | | 0.6 | | | | - | | | Net (loss) earnings available to Modine shareholders | | $ | (1.6 | ) | | $ | 21.6 | | | $ | 128.7 | | | | | | | | | | | | | | | | | Weighted-average shares outstanding - basic | | | 47.3 | | | | 47.2 | | | | 46.9 | | | | | | | | | | | | | | | | | Basic Earnings Per Share: | | | | | | | | | | | | | | (Loss) earnings per share - continuing operations | | $ | (0.03 | ) | | $ | 0.45 | | | $ | 2.75 | | | Earnings per share - discontinued operations | | | - | | | | 0.01 | | | | - | | | Net (loss) earnings per share - basic | | $ | (0.03 | ) | | $ | 0.46 | | | $ | 2.75 | | | | | | | | | | | | | | | | | Diluted: | | | | | | | | | | | | | | (Loss) earnings from continuing operations | | $ | (1.0 | ) | | $ | 22.2 | | | $ | 131.9 | | | Less: Net earnings attributable to noncontrolling interest | | | (0.6 | ) | | | (1.0 | ) | | | (1.5 | ) | | Less: Undistributed earnings attributable to unvested shares | | | - | | | | (0.2 | ) | | | (0.9 | ) | | (Loss) earnings from continuing operations available to Modine shareholders | | | (1.6 | ) | | | 21.0 | | | | 129.5 | | | Earnings from discontinued operations, net of income taxes | | | - | | | | 0.6 | | | | - | | | Net (loss) earnings available to Modine shareholders | | $ | (1.6 | ) | | $ | 21.6 | | | $ | 129.5 | | | | | | | | | | | | | | | | | Weighted-average shares outstanding - basic | | | 47.3 | | | | 47.2 | | | | 46.9 | | | Effect of dilutive securities | | | - | | | | 0.6 | | | | 0.7 | | | Weighted-average shares outstanding - diluted | | | 47.3 | | | | 47.8 | | | | 47.6 | | | | | | | | | | | | | | | | | Diluted Earnings Per Share: | | | | | | | | | | | | | | (Loss) earnings per share - continuing operations | | $ | (0.03 | ) | | $ | 0.44 | | | $ | 2.72 | | | Earnings per share - discontinued operations | | | - | | | | 0.01 | | | | - | | | Net (loss) earnings per share - diluted | | $ | (0.03 | ) | | $ | 0.45 | | | $ | 2.72 | |
| | Years ended March 31, | | | | | 2023 | | | 2022 | | | 2021 | | | Basic Earnings Per Share: | | | | | | | | | | | Net earnings (loss) attributable to Modine | | $ | 153.1 | | | $ | 85.2 | | | $ | (210.7 | ) | | | | | | | | | | | | | | | | Weighted-average shares outstanding – basic | | | 52.3 | | | | 52.0 | | | | 51.3 | | | | | | | | | | | | | | | | | Net earnings (loss) per share – basic | | $ | 2.93 | | | $ | 1.64 | | | $ | (4.11 | ) | | | | | | | | | | | | | | | | Diluted Earnings Per Share: | | | | | | | | | | | | | | Net earnings (loss) attributable to Modine | | $ | 153.1 | | | $ | 85.2 | | | $ | (210.7 | ) | | | | | | | | | | | | | | | | Weighted-average shares outstanding – basic | | | 52.3 | | | | 52.0 | | | | 51.3 | | | Effect of dilutive securities | | | 0.5 | | | | 0.5 | | | | - | | | Weighted-average shares outstanding – diluted | | | 52.8 | | | | 52.5 | | | | 51.3 | | | | | | | | | | | | | | | | | Net earnings (loss) per share – diluted | | $ | 2.90 | | | $ | 1.62 | | | $ | (4.11 | ) |
For the years ended March 31, 2016, 2015,fiscal 2023, 2022 and 2014,2021, the calculation of diluted earnings per share excluded 0.80.5 million, 0.60.5 million, and 0.81.0 million, stock options, respectively, because they were anti-dilutive. For fiscal 2023, 2022 and 2021, the year ended March 31, 2016,calculation of diluted earnings per share excluded 0.2 million, 0.2 million, and 0.4 million restricted stock awards, respectively, because they were anti-dilutive. For fiscal 2021 the total number of potential dilutivepotentially-dilutive securities was 0.40.2 million. However, these securities were not included in the computation of diluted net loss per share since to do so would decreasehave decreased the loss per share.
54Note 10: Cash, Cash Equivalents and Restricted Cash
Cash, cash equivalents and restricted cash consisted of the following:
| | March 31, | | | | | 2023 | | | 2022 | | | Cash and cash equivalents | | $ | 67.1 | | | $ | 45.2 | | | Restricted cash | | | 0.1 | | | | 0.2 | | Total cash, cash equivalents and restricted cash
| | $ | 67.2 | | | $ | 45.4 | |
Restricted cash, which is reported within other current assets and other noncurrent assets in the consolidated balance sheets, consists primarily of deposits for contractual guarantees or commitments required for rents, import and export duties, and commercial agreements.
Note 11: Inventories
Inventories consisted of the following:
| | | March 31, | | | | 2016 | | 2015 | | Raw materials and work in process | | $ | 79.5 | | | $ | 80.7 | | | Finished goods | | | 31.5 | | | | 27.0 | | | Total inventories | | $ | 111.0 | | | $ | 107.7 | |
| | March 31, | | | | | 2023 | | | 2022 | | | Raw materials | | $ | 218.3 | | | $ | 186.7 | | | Work in process | | | 49.9 | | | | 55.1 | | | Finished goods | | | 56.7 | | | | 39.4 | | | Total inventories | | $ | 324.9 | | | $ | 281.2 | |
Note11: | Note 12: Property, Plant and Equipment |
Property, plant and equipment, including depreciable lives, consisted of the following:
| | | March 31, | | | | 2016 | | 2015 | | Land | | $ | 7.2 | | | $ | 8.2 | | | Buildings and improvements (10-40 years) | | | 221.3 | | | | 221.0 | | | Machinery and equipment (3-12 years) | | | 694.3 | | | | 652.0 | | | Office equipment (3-10 years) | | | 84.1 | | | | 81.9 | | | Construction in progress | | | 36.7 | | | | 31.7 | | | | | | 1,043.6 | | | | 994.8 | | | Less: accumulated depreciation | | | (705.0 | ) | | | (672.7 | ) | | Net property, plant and equipment | | $ | 338.6 | | | $ | 322.1 | |
| | March 31, | | | | | 2023 | | | 2022 | | | Land | | $ | 16.4 | | | $ | 16.8 | | Buildings and improvements (10-40 years) | | | 264.0 | | | | 264.6 | | Machinery and equipment (3-15 years) | | | 853.3 | | | | 869.4 | | Office equipment (3-10 years) | | | 93.6 | | | | 96.2 | | | Construction in progress | | | 47.5 | | | | 31.2 | | | | | | 1,274.8 | | | | 1,278.2 | | | Less: accumulated depreciation | | | (960.3 | ) | | | (962.8 | ) | | Net property, plant and equipment | | $ | 314.5 | | | $ | 315.4 | |
Depreciation expense totaled $48.6$46.5 million, $50.0$46.4 million, and $57.3$60.1 million for the years ended March 31, 2016, 2015,fiscal 2023, 2022, and 2014,2021, respectively.
Gains and losses related to the disposal of property, plant and equipment are recorded inwithin SG&A expenses. TotalFor fiscal 2023 and 2021, losses related to the disposal of property, plant and equipment were $0.4 million, $1.1 million and $2.6 million for the years ended March 31, 2016, 2015, and 2014, respectively.
Note 12: | Investment in Affiliate |
The Company’s investment in its non-consolidated affiliate is accounted for under the equity method. The Company has a 50 percent ownership of Nikkei Heat Exchanger Company, Ltd. (“NEX”). At both March 31, 2016 and 2015, the Company included the investment in NEX of $3.2 million in other noncurrent assets. At March 31, 2016, the investment in NEX is equal to the Company's investment in the underlying assets.
The Company reports the results of operations for NEX in the consolidated financial statements using a one-month reporting delay. The Company reports equity in earnings from non-consolidated affiliates within other income and expense in the consolidated statements of operations. The Company’s share of NEX’s earnings for the years ended March 31, 2016, 2015, and 2014 wastotaled $0.1 million, $0.6 million and $0.7 million, respectively. For fiscal 2022, gains related to the disposal of property, plant and equipment totaled $0.1 million.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note13: | Note 13: Intangible Assets |
Intangible assets consisted of the following:
| | | March 31, 2016 | | | March 31, 2015 | | | | | | | | | | | | | | | | | | | | | | | Trade names | | $ | 8.9 | | | $ | (6.3 | ) | | $ | 2.6 | | | $ | 9.1 | | | $ | (5.8 | ) | | $ | 3.3 | | | Acquired technology | | | 5.5 | | | | (1.5 | ) | | | 4.0 | | | | 5.6 | | | | (0.9 | ) | | | 4.7 | | | Customer relationships | | | 2.0 | | | | (0.4 | ) | | | 1.6 | | | | 2.1 | | | | (0.2 | ) | | | 1.9 | | | Total intangible assets | | $ | 16.4 | | | $ | (8.2 | ) | | $ | 8.2 | | | $ | 16.8 | | | $ | (6.9 | ) | | $ | 9.9 | |
| | March 31, 2023 | | | March 31, 2022 | | | | | Gross Carrying Value | | | Accumulated Amortization | | | Net Intangible Assets | | | Gross Carrying Value | | | Accumulated Amortization | | | Net Intangible Assets | | | Customer relationships | | $ | 60.3 | | | $ | (23.4 | ) | | $ | 36.9 | | | $ | 61.2 | | | $ | (20.1 | ) | | $ | 41.1 | | | Trade names | | | 50.1 | | | | (15.9 | ) | | | 34.2 | | | | 50.8 | | | | (13.8 | ) | | | 37.0 | | | Acquired technology | | | 22.6 | | | | (12.6 | ) | | | 10.0 | | | | 23.1 | | | | (10.9 | ) | | | 12.2 | | | Total intangible assets | | $ | 133.0 | | | $ | (51.9 | ) | | $ | 81.1 | | | $ | 135.1 | | | $ | (44.8 | ) | | $ | 90.3 | |
The Company recorded $1.6$8.0 million, $1.6$8.4 million, and $0.8$8.5 million of amortization expense during fiscal 2016, 20152023, 2022, and 2014,2021, respectively. Estimated futureThe Company estimates that it will record approximately $8.0 million of annual amortization expense is as follows:in fiscal 2024 through 2028.
| Fiscal Year | | Estimated Amortization Expense | | | 2017 | | $ | 1.6 | | | 2018 | | | 1.6 | | | 2019 | | | 1.5 | | | 2020 | | | 1.3 | | | 2021 | | | 0.8 | | | 2022 & Beyond | | | 1.4 | |
Note 14: Goodwill
Changes in
The following table presents a roll forward of the carrying amountvalue of goodwill byfrom March 31, 2021 to March 31, 2023. The Company has recast the March 31, 2022 and 2021 goodwill balances to be comparable with the current segment and instructure. There was no impact to the aggregate, wereunderlying reporting units as follows:a result of the segment realignment during fiscal 2023.
| | | Americas | | Asia | | Building HVAC | | Total | | Balance, March 31, 2014 | | $ | 10.9 | | | $ | 0.5 | | | $ | 17.3 | | | $ | 28.7 | | | Impairment charge | | | (7.8 | ) | | | - | | | | - | | | | (7.8 | ) | | Effect of exchange rate changes | | | (3.1 | ) | | | - | | | | (1.6 | ) | | | (4.7 | ) | | Balance, March 31, 2015 | | | - | | | | 0.5 | | | | 15.7 | | | | 16.2 | | | Effect of exchange rate changes | | | - | | | | - | | | | (0.4 | ) | | | (0.4 | ) | | Balance, March 31, 2016 | | $ | - | | | $ | 0.5 | | | $ | 15.3 | | | $ | 15.8 | |
| | Climate Solutions
| | | Performance Technologies
| | | Total | | Balance, March 31, 2021 | | $ | 110.5 | | | $ | 60.2 | | | $ | 170.7 | | | Effect of exchange rate changes | | | (2.4 | ) | | | (0.2 | ) | | | (2.6 | ) | Balance, March 31, 2022 | | | 108.1 | | | | 60.0 | | | | 168.1 | | | Effect of exchange rate changes | | | (2.4 | ) | | | (0.1 | ) | | | (2.5 | ) | Balance, March 31, 2023 | | $ | 105.7 | | | $ | 59.9 | | | $ | 165.6 | |
The Company assessestests goodwill for impairment annually, as of March 31, or more frequently if events or circumstances change that would, more likely than not, reduce the fair value of a reporting unit below its carrying value. To test goodwill for impairment, the Company determines the fair value of each reporting unit based upon the present value of estimated future cash flows and compares the fair value of each reporting unit with its carrying value. The Company conductedCompany’s determination of fair value involves judgment and the use of estimates and assumptions, including assumptions regarding the revenue growth rates and operating profit margins used to calculate estimated future cash flows and risk-adjusted discount rates.
As a result of its annual assessment for goodwill impairment duringtests performed as of March 31, 2023, the fourth quarter of fiscal 2016 by applying a fair value-based test andCompany determined that the fair value of itseach of the reporting units within its Climate Solutions and Performance Technologies segments exceeded their respective book values. In fiscal 2015, the Company recorded a $7.8 million goodwill impairment charge within the Americas segment in connection with its annual assessment. The impairment charge was primarily caused by a decline in the financial outlook for Brazil.
At both March 31, 20162023 and 2015,2022, accumulated goodwill impairment losses totaled $31.6 million and $8.7$40.8 million within the AmericasPerformance Technologies segment.
Note 15: Product Warranties and Europe segments, respectively.Other Commitments
Note 15: | Product Warranties Operating Leases, and Other Commitments |
Product warranties: MostMany of the Company’s products are covered under a warranty period ranging from one to five years. The Company records a liability for product warranty obligations at the time of sale to a customer based upon historical warranty experience. In addition, the Companyand adjusts its warranty accruals if it becomes probable that expected claims will differ from initialprevious estimates.
Changes in accrued warranty costs were as follows:
| | Years ended March 31, | | | | | 2023 | | | 2022 | | | Beginning balance | | $ | 6.3 | | | $ | 5.2 | | | Warranties recorded at time of sale | | | 5.4 | | | | 5.5 | | | Adjustments to pre-existing warranties | | | 0.9 | | | | (1.3 | ) | | Settlements | | | (5.6 | ) | | | (4.4 | ) | | Reclassified from held for sale | | | - | | | | 1.3 | | | Effect of exchange rate changes | | | (0.1 | ) | | | - | | | Ending balance | | $ | 6.9 | | | $ | 6.3 | |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Changes in accrued warranty costs were as follows:Indemnification Agreements
| | | Years ended March 31, | | | | 2016 | | 2015 | | Beginning balance | | $ | 10.4 | | | $ | 14.0 | | | Warranties recorded at time of sale | | | 5.7 | | | | 5.8 | | | Adjustments to pre-existing warranties | | | (1.1 | ) | | | 1.5 | | | Settlements | | | (6.7 | ) | | | (9.2 | ) | | Effect of exchange rate changes | | | - | | | | (1.7 | ) | | Ending balance | | $ | 8.3 | | | $ | 10.4 | |
Operating leases: The Company leases various facilities and equipment under operating leases. Rental expense for these leases totaled $11.9 million in fiscal 2016, and $11.5 million in both fiscal 2015 and 2014.
Future minimum rental commitments at March 31, 2016 under non-cancelable operating leases were as follows:
| Fiscal Year | | | | | 2017 | | $ | 8.1 | | | 2018 | | | 5.6 | | | 2019 | | | 4.8 | | | 2020 | | | 4.6 | | | 2021 | | | 4.1 | | | 2022 and beyond | | | 26.3 | | | Total | | $ | 53.5 | |
Indemnification agreements: From time to time, the Company provides indemnification agreements related to the sale or purchase of an entity or facility. These indemnification agreements cover customary representations and warranties typically provided in conjunction with such transactions, including income, sales, excise or other tax matters, environmental matters and other third-party claims. The indemnification periods provided generally range from less than one year to fifteen years. In addition, standard indemnification provisions reside in many commercial agreements to which the Company is a party and relate to responsibility in the event of potential third-party claims. The fair value of the Company’s outstanding indemnification obligations at March 31, 2016 is2023 was not material.
Commitments: Commitments
At March 31, 2016,2023, the Company had capital expenditure commitments of $20.5 million.$25.3 million. Significant commitments include equipment expenditures to support expanding manufacturing capacity in the Climate Solutions segment and tooling and equipment expenditures for new and renewal programs with vehicular customers in the Americas and Europe segments.Performance Technologies segment. The Company utilizes inventory arrangements with certain vendors in the normal course of business under which the vendors maintain inventory stock at the Company’s facilities or at outside facilities. Title passes to the Company at the time goods are withdrawn for use in production. The Company has agreements with the vendors to use the material within a specific period of time. In some cases, the Company bears the risk of loss for the inventory because Modine is required to insure the inventory against damage and/or theft. This inventory is included within the Company’s consolidated balance sheets as raw materials inventory.
57
Note 16: Leases
The Company determines if an arrangement is a lease at contract inception. The lease term begins upon lease commencement, which is when the Company takes possession of the asset, and may include options to extend or terminate the lease when it is reasonably certain that such options will be exercised. The Company uses the lease term within its determination of the appropriate lease classification, either as an operating lease or as a finance lease, and to calculate straight-line lease expense for its operating leases.
ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. The Company recognizes ROU assets and lease liabilities at the lease commencement date, based upon the present value of lease payments over the lease term. As its lease agreements typically do not provide an implicit interest rate, the Company primarily uses an incremental borrowing rate to calculate the ROU asset and lease liability. In determining the incremental borrowing rate, the Company considers its current collateralized borrowing rate, the term of the lease, and the economic environment where the lease activity is concentrated. The Company believes this method effectively estimates a borrowing rate that it could obtain for a debt instrument with similar terms as the lease agreement.
Based upon its accounting policy, the Company does not separate lease and non-lease components for any asset class. In addition, the Company does not record short-term leases (i.e. leases with an initial term of 12 months or less) on its consolidated balance sheets.
Certain leases require the Company to pay taxes, insurance, maintenance, and other operating expenses associated with the leased asset. Such amounts are not included in the measurement of the lease liability to the extent they are variable in nature. These variable lease costs are recognized as variable lease expense when incurred. The depreciable life of the ROU assets and related leasehold improvements are limited by the expected lease term, unless the lease contains a provision to transfer title to the Company or a purchase option that the Company expects to execute.
The Company’s most significant leases represent leases of real estate, such as manufacturing facilities, warehouses, and offices. In addition, the Company leases manufacturing and IT equipment and vehicles. The Company’s most significant leases have remaining lease terms of 1 to 11 years. Certain leases contain renewal options for varying periods, which are at the Company’s discretion. If reasonably certain of exercise, the Company includes the renewal periods within the calculation of ROU assets and lease liabilities. The Company’s lease agreements do not contain material residual value guarantees or material restrictive covenants.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts) Lease Assets and Liabilities The following table provides a summary of leases recorded on the consolidated balance sheets.
| | Balance Sheet Location | | March 31, 2023 | | | March 31, 2022 | | | Lease Assets | | | | | | | | | | Operating lease ROU assets | | Other noncurrent assets | | $ | 59.1 | | | $ | 52.1 | | | Finance lease ROU assets (a) | | Property, plant and equipment - net | | | 7.1 | | | | 7.7 | | | | | | | | | | | | | | | Lease Liabilities | | | | | | | | | | | | Operating lease liabilities | | Other current liabilities
| | $ | 11.8 | | | $ | 12.7 | | | Operating lease liabilities | | Other noncurrent liabilities | | | 48.9 | | | | 41.2 | | | Finance lease liabilities | | Long-term debt - current portion | | | 0.4 | | | | 0.4 | | | Finance lease liabilities | | Long-term debt | | | 2.3 | | | | 2.8 | |
Note 16:(a) | IndebtednessFinance lease ROU assets were recorded net of accumulated amortization of $3.2 million and $2.8 million as of March 31, 2023 and 2022, respectively. |
Components of Lease Expense The Company records operating lease expense as either cost of sales or SG&A expenses within its consolidated statements of operations, depending upon the nature and use of the ROU assets. The Company records finance lease expense as depreciation expense within cost of sales or SG&A expenses, depending upon the nature and use of the ROU assets, and as interest expense in its consolidated statements of operations.
The components of lease expense were as follows:
| | Years ended March 31, | | | | | 2023 | | | 2022 | | | 2021
| | | Operating lease expense (a) | | $ | 21.9 | | | $ | 20.0 | | | $ | 19.5 | | | Finance lease expense: | | | | | | | | | | | | | | Depreciation of ROU assets | | | 0.5 | | | | 0.5 | | | | 0.5 | | | Interest on lease liabilities | | | 0.1 | | | | 0.2 | | | | 0.2 | | | Total lease expense | | $ | 22.5 | | | $ | 20.7 | | | $ | 20.2 | |
| (a) | In fiscal 2023, 2022, and 2021 operating lease expense included short-term lease expense of $5.7 million, $4.2 million, and $3.5 million respectively. Variable lease expense was not significant. |
Supplemental Cash Flow Information
| | Years ended March 31, | | | | | 2023 | | | 2022 | | | 2021
| | | Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | | | | | Operating cash flows for operating leases | | $ | 14.6 | | | $ | 15.7 | | | $ | 14.2 | | | Financing cash flows for finance leases | | | 0.5 | | | | 0.6 | | | | 0.6 | | | | | | | | | | | | | | | | | ROU assets obtained in exchange for lease liabilities: | | | | | | | | | | | | | | Operating leases | | $ | 21.2 | | | $ | 7.8 | | | $ | 9.8 | | | Finance leases | | | - | | | | 0.1 | | | | 0.1 | |
Lease Term and Discount Rates
| | March 31, 2023 | | | March 31, 2022 | | | Weighted-average remaining lease term: | | | | | | | | Operating leases | | 8.3 years | | | 8.5 years | | | Finance leases | | 5.8 years | | | 6.8 years | | | | | | | | | | | Weighted-average discount rate: | | | | | | | | Operating leases | | | 3.7 | % | | | 3.4 | % | | Finance leases | | | 4.6 | % | | | 4.6 | % |
Maturity of Lease Liabilities Future minimum rental payments for leases with initial non-cancellable lease terms in excess of one year were as follows at March 31, 2023:
| Fiscal Year | | Operating Leases | | | Finance Leases | | | 2024 | | $ | 13.8 | | | $ | 0.5 | | | 2025 | | | 11.5 | | | | 0.5 | | | 2026 | | | 10.1 | | | | 0.5 | | | 2027 | | | 8.4 | | | | 0.5 | | | 2028 | | | 7.3 | | | | 0.5 | | 2029 and beyond | | | 19.2 | | | | 0.6 | | | Total lease payments | | | 70.3 | | | | 3.1 | | | Less: Interest | | | (9.6 | ) | | | (0.4 | ) | | Present value of lease liabilities | | $ | 60.7 | | | $ | 2.7 | |
Note 17: Indebtedness
In October 2022, the Company executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and U.S. dollar- and euro-denominated term loan facilities maturing in October 2027. In addition, the credit agreement provides for shorter-duration swingline loans. This credit agreement modified the Company’s then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.
In connection with the credit agreement modification during fiscal 2023, the Company incurred $2.2 million of debt issuance costs. Of these costs, the Company deferred $1.5 million, which will be amortized as interest expense over the term of the debt, and recorded $0.7 million as interest expense on the consolidated statement of operations. The Company paid $0.6 million for debt issuance costs during fiscal 2023 and the remaining issuance costs were added to the new term loan principal at the time of the modification.
Long-term debt was comprisedconsisted of the following:
| | | Fiscal year of maturity | | | March 31, 2016 | | March 31, 2015 | | | | | | | | | | | | | Foreign credit agreements | | | 2018-2020 | | | $ | 0.4 | | | $ | 0.2 | | | 6.8% Senior Notes | | | 2017-2021 | | | | 125.0 | | | | 125.0 | | | Revolving credit facility | | | 2019 | | | | - | | | | - | | | | | | | | | | 125.4 | | | | 125.2 | | | Other (a) | | | 2017-2030 | | | | 8.6 | | | | 4.9 | | | | | | | | | | 134.0 | | | | 130.1 | | | Less: current portion | | | | | | | (8.5 | ) | | | (0.5 | ) | | Total long-term debt | | | | | | $ | 125.5 | | | $ | 129.6 | |
| Fiscal year of maturity | | March 31, 2023 | | | March 31, 2022 | | | | | | | | | | | | Term loans | 2028 | | $ | 215.7 | | | $ | 163.7 | | 5.9% Senior Notes | 2029 | | | 100.0 | | | | 100.0 | | 5.8% Senior Notes | 2027 | | | 33.3 | | | | 41.7 | | | Revolving credit facility | 2028 | | | - | | | | 64.9 | | | Other (a) | | | | 2.7 | | | | 3.2 | | | | | | | 351.7 | | | | 373.5 | | | Less: current portion | | | | (19.7 | ) | | | (21.7 | ) | | Less: unamortized debt issuance costs | | | | (2.7 | ) | | | (3.4 | ) | | Total long-term debt | | | $ | 329.3 | | | $ | 348.4 | |
| (a) | Other long-term debt primarily includes capitalfinance lease obligations and other financing-type obligations. |
The Company maintains a $175.0 million domestic revolving credit facility, which expires in August 2018. Long-term debt, including the current portion of long-term debt, matures as follows:
| Fiscal Year | | | | | 2024 | | $ | 19.7 | | | 2025 | | | 19.7 | | | 2026 | | | 44.7 | | | 2027 | | | 44.7 | | | 2028 | | | 197.4 | | 2029 and beyond | | | 25.5 | | | Total | | $ | 351.7 | |
Borrowings under the revolving credit, agreementswingline and term loan facilities bear interest at a variable rate, based onupon the London Interbank Offered Rate (“LIBOR”) plus 125 to 225 basis points (1.8 percent at March 31, 2016) dependingapplicable reference rate and including a margin percentage dependent upon the Company’s leverage ratio, as defineddescribed below. At March 31, 20162023, the weighted-average interest rate for the term loans was 6.0 percent. Based upon the terms of the credit agreement, the Company classifies borrowings under its revolving credit and 2015,swingline facilities as long-term and short-term debt, respectively, on its consolidated balance sheets.
At March 31, 2023, the Company had no outstanding borrowings were outstanding underrelated to the revolving credit facility.and swingling facilities and domestic letters of credit totaled $5.4 million. As a result, available borrowing capacity under the Company’s revolving credit facility was $269.6 million as of March 31, 2023. At March 31, 2022, the Company’s borrowings under its revolving credit and swingline facilities totaled $64.9 million and $7.0 million, respectively.
The Company also maintains credit agreements for its foreign subsidiaries, withsubsidiaries. The outstanding short-term borrowings at March 31, 2016 and 2015 of $28.6related to these foreign credit agreements totaled $3.7 million and $18.6 million, respectively. At March 31, 2016, the Company’s foreign unused lines of credit totaled $32.0 million. In aggregate, the Company had total available lines of credit of $207.0$0.7 million at March 31, 2016.2023 and March 31, 2022, respectively.
Provisions in
Indebtedness under the Company’s revolving credit facility,agreement and Senior Note agreements and various foreign credit agreements require the Company to maintain compliance with various covenants and include certain cross-default clauses. Under its primary debt agreements in the U.S., the Company has providedis secured by liens on substantially all domestic assets. The Company is also subjectThese agreements further require compliance with various covenants that may limit the Company’s ability to a leverage ratio covenant, which requiresincur additional indebtedness; grant liens; make investments, loans, or guarantees; engage in certain transactions with affiliates; and make restricted payments including dividends. In addition, the agreements may require prepayment in the event of certain asset sales.
Financial covenants within its credit agreements require the Company to limit its consolidated indebtedness, less a portion of the Company’sits cash balance,balances, 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”.), and an interest expense coverage The Company must also maintain a ratio which requires the Company to maintainof Adjusted EBITDA of at least three times consolidated interest expense. TheAs of March 31, 2023, the Company was in compliance with its debt covenants as of March 31, 2016.covenants.
Long-term debt matures as follows:
| Fiscal Year | | | | | 2017 | | $ | 8.5 | | | 2018 | | | 16.5 | | | 2019 | | | 16.5 | | | 2020 | | | 16.6 | | | 2021 | | | 69.4 | | | 2022 & beyond | | | 6.5 | | | Total | | $ | 134.0 | |
The Company estimates the fair value of long-term debt using discounted future cash flows at rates offered to the Company for similar debt instruments of comparable maturities. AtAs of March 31, 20162023 and 2015,2022, the carrying value of Modine’sthe Company’s long-term debt approximated fair value, with the exception of the Senior Notes, which had aan aggregate fair value of approximately $139.0$125.9 million and $141.0$138.9 million, respectively. The fair value of the Senior NotesCompany’s long-term debt is categorized as Level 2 within the fair value hierarchy. Refer to Note 4 for the definition of a Level 2 fair value measurement. MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 17: | Note 18: Pension and Employee Benefit Plans |
Defined Contribution Employee Benefit Plans:
Plans
The Company maintains a domestic 401(k) plansplan that allowallows employees to contribute a portion of their salary to help them save for retirement. The Company matched 50 percent ofcurrently matches employee contributions up to 54.5 percent of their compensation. During fiscal 2021, as part of its response to the negative impacts of the COVID-19 pandemic, the Company suspended matching employee compensation, during fiscal 2016, 2015, and 2014. The Company also makes annual employer contributions into active employee accounts based upon a percentagefor part of employee compensation. Employees can choose among various investment alternatives, including (subject to restrictions) Modine stock. The Company’s matching contributions and annual employer contributions are discretionary.the year. The Company’s expense for defined contribution employee benefit plans during fiscal 2016, 2015,2023, 2022, and 20142021 was $4.6 $6.9 million, $5.9$6.4 million, and $8.3$3.0 million, respectively. The decreasing trend in expense from fiscal 2014 was primarily due to lower discretionary employer contributions.
In addition, the Company maintains a non-qualified deferred compensation planplans for eligible employees, and various non-U.S. subsidiaries have government-required defined contribution plans in place, under which they contribute a percentage of employee earnings into accounts, consistent with local laws.
Statutory Termination Plans:
Plans
Certain non-U.S. subsidiaries have statutory termination indemnity plans covering eligible employees. The benefits under these plans are based upon years of service and final average compensation levels or a monthly retirement benefit amount. These programs are all substantially unfunded in accordance with local laws, but are often covered by national obligatory umbrella insurance programs that protect employees from losses in the event that an employer defaults on its obligations.laws.
Defined Benefit Employee Benefit Plans:Pension Plans
Pension plans:The Company maintains non-contributory defined benefit pension plans that cover eligible domestic employees. These plans are closed to new participants. The primary domestic plans cover most of its domestic employees hired on or before December 31, 2003. The2003 and provide benefits provided are based primarily onupon years of service and average compensation for salaried and some hourly employees. Benefits for other hourly employees are based onupon a monthly retirement benefit amount. Domestic salaried employees hired after December 31, 2003 are not covered under a defined benefit plan. Currently, the Company’s domestic pension plans do not include increases in annual earnings or future service in calculating the average annual earnings and years of credited service under the pension plan benefit formula. Certain non-U.S. subsidiaries of the Company also have legacy defined benefit plans which cover a smaller number of active employees and are substantially unfunded. The primary non-U.S. plans are maintained in Germany and AustriaItaly and are closed to new participants.
The Company contributed $6.7 million, $5.9 million, and $8.0 millionpreviously maintained a pension plan in Austria that conveyed to the buyer of the air-cooled automotive business during fiscal 2022; see Note 1 for additional information.
In connection with funding relief provisions within the American Rescue Plan Act of 2021, the Company did not make cash contributions to its U.S. pension plans during fiscal 2016, 2015,2023. The Company contributed $3.5 million and 2014,$19.3 million to its U.S. pension plans during fiscal 2022 and 2021, respectively. In addition, the Company contributed $1.5 million, $1.5 million, and $2.2 million to its non-U.S. pension plans during fiscal 2023, 2022, and 2021, respectively. These contributions are reported in the change in other liabilities in the consolidated statements of cash flows.
During fiscal 2016, in an effort to reduce the size, volatility, mortality risk, and costs associated with its U.S. pension plans, the Company completed a voluntary lump-sum payout program offered to certain eligible former employees. Approximately 2,000 participants accepted the lump-sum settlement offer. During fiscal 2016, a total of $65.3 million was paid from pension plan assets for lump-sum payouts, which reduced the Company’s pension obligation by the same amount. In connection with these lump-sum payouts, the Company recorded $42.1 million of non-cash settlement losses related to the accelerated recognition of unamortized actuarial losses previously recorded on the consolidated balance sheets within accumulated other comprehensive loss. During fiscal 2016, the Company recorded $33.3 million and $8.8 million of settlement losses as SG&A expenses and cost of sales, respectively, within the consolidated statements of operations.Postretirement Plans
Postretirement plans: The Company provides selected healthcare and life insurance benefits for eligible retired domestic employees. The Company periodically amends these unfunded plans to change the contribution rate of retirees and the amounts and forms of coverage. An annual limit on the Company’s cost is defined for the majority of these plans. The Company’s net periodic income for its postretirement plans duringin each of fiscal 2016, 2015,2023, 2022, and 20142021 was $0.3 million, $0.1 million, and $1.0 million, respectively.million.
Measurement Date: The Company uses March 31 as the measurement date for its pension and postretirement plans.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Measurement Date
The Company uses March 31 as the measurement date for its pension and postretirement plans.
Changes in benefit obligations and plan assets, as well as the funded status of the Company’s global pension plans, for the fiscal years ended March 31, 2016 and 2015 were as follows:
| | | 2016 | | 2015 | | Change in benefit obligation: | | | | | | | | Benefit obligation at beginning of year | | $ | 328.2 | | | $ | 295.7 | | | Service cost | | | 0.6 | | | | 0.5 | | | Interest cost | | | 11.2 | | | | 13.0 | | | Actuarial (gain) loss | | | (2.8 | ) | | | 40.6 | | | Benefits paid (a) | | | (78.1 | ) | | | (14.6 | ) | | Effect of exchange rate changes | | | 1.9 | | | | (7.0 | ) | | Benefit obligation at end of year | | $ | 261.0 | | | $ | 328.2 | | | | | | | | | | | | | Change in plan assets: | | | | | | | | | | Fair value of plan assets at beginning of year | | $ | 217.0 | | | $ | 213.7 | | | Actual return on plan assets | | | (5.3 | ) | | | 10.8 | | | Benefits paid (a) | | | (78.1 | ) | | | (14.6 | ) | | Employer contributions | | | 7.9 | | | | 7.1 | | | Fair value of plan assets at end of year | | $ | 141.5 | | | $ | 217.0 | | | Funded status at end of year | | $ | (119.5 | ) | | $ | (111.2 | ) | | | | | | | | | | | | Amounts recognized in the consolidated balance sheets: | | | | | | | | | | Current liability | | $ | (0.9 | ) | | $ | (0.8 | ) | | Noncurrent liability | | | (118.6 | ) | | | (110.4 | ) | | | | $ | (119.5 | ) | | $ | (111.2 | ) |
| | Years ended March 31, | | | | | 2023 | | | 2022 | | | Change in benefit obligation: | | | | | | | | Benefit obligation at beginning of year | | $ | 228.6 | | | $ | 260.6 | | | Service cost | | | 0.2 | | | | 0.3 | | | Interest cost | | | 8.1 | | | | 7.3 | | Actuarial gain
| | | (25.8 | ) | | | (16.5 | ) | | Benefits paid | | | (16.1 | ) | | | (16.0 | ) | | Disposition of air-cooled automotive business | | | - | | | | (5.5 | ) | | Effect of exchange rate changes | | | (0.1 | ) | | | (1.6 | ) | | Benefit obligation at end of year | | $ | 194.9 | | | $ | 228.6 | | | | | | | | | | | | | Change in plan assets: | | | | | | | | | | Fair value of plan assets at beginning of year | | $ | 179.9 | | | $ | 183.3 | | | Actual return on plan assets | | | (12.0 | ) | | | 7.6 | | | Benefits paid | | | (16.1 | ) | | | (16.0 | ) | | Employer contributions | | | 1.5 | | | | 5.0 | | | Fair value of plan assets at end of year | | $ | 153.3 | | | $ | 179.9 | | | Funded status at end of year | | $ | (41.6 | ) | | $ | (48.7 | ) | | | | | | | | | | | | Amounts recognized in the consolidated balance sheets: | | | | | | | | | | Current liability | | $ | (1.4 | ) | | $ | (1.5 | ) | | Noncurrent liability | | | (40.2 | ) | | | (47.2 | ) | | | | $ | (41.6 | ) | | $ | (48.7 | ) |
| (a) | In fiscal 2016, $65.3 million was paid from plan assets in connection with lump-sum payouts. |
As of March 31, 2023, 2022, and 2021, the benefit obligation associated with the Company’s non-U.S. pension plans totaled $21.2 million, $26.5 million, and $36.4 million, respectively. The $5.3 million decrease in the benefit obligation associated with non-U.S. pension plans as of March 31, 2023, compared with the prior year, was primarily due to net actuarial gains during the year from an increase in discount rates and employer contributions for benefits paid to plan participants which decreased the obligation by $4.4 million and $1.5 million, respectively, and to a lesser extent, the impact of foreign currency exchange rates. The decreases were partially offset by service and interest cost totaling $0.7 million. In fiscal 2022, the $9.9 million decrease was primarily due to the sale of the air-cooled automotive business in Austria, which resulted in a $5.5 million decrease. In addition, net actuarial gains during the year, the impact of foreign currency exchange rate changes, and employer contributions for benefits paid to plan participants decreased the obligation by $1.9 million, $1.6 million, and $1.5 million, respectively. The decreases were partially offset by service and interest cost totaling $0.6 million.
The accumulated benefit obligation for pension plans was $257.9$194.4 million and $325.5$228.1 million as of March 31, 20162023 and 2015,2022, respectively. The net actuarial loss related to the pension plans recognized in accumulated other comprehensive loss was $162.0$123.5 million and $192.3$131.5 million as of March 31, 20162023 and 2015,2022, respectively.
Costs for the Company’s pension plans included the following components for the fiscal years ended March 31, 2016, 2015, and 2014:
| | | 2016 | | 2015 | | 2014 | | Components of net periodic benefit cost: | | | | | | | | | | | Service cost | | $ | 0.6 | | | $ | 0.5 | | | $ | 0.6 | | | Interest cost | | | 11.2 | | | | 13.0 | | | | 13.0 | | | Expected return on plan assets | | | (14.9 | ) | | | (16.7 | ) | | | (15.7 | ) | | Amortization of net actuarial loss | | | 6.4 | | | | 5.5 | | | | 6.3 | | | Settlements (a) | | | 42.1 | | | | - | | | | - | | | Net periodic benefit cost | | $ | 45.4 | | | $ | 2.3 | | | $ | 4.2 | | | | | | | | | | | | | | | | | Other changes in benefit obligation recognized in other comprehensive loss (income): | | | | | | | | | | | | | | Net actuarial loss (gain) | | $ | 17.5 | | | $ | 46.4 | | | $ | (17.3 | ) | | Amortization of net actuarial loss (a) | | | (48.5 | ) | | | (5.5 | ) | | | (6.3 | ) | | Total recognized in other comprehensive (income) loss | | $ | (31.0 | ) | | $ | 40.9 | | | $ | (23.6 | ) |
| (a) | During fiscal 2016, in connection with lump-sum payouts to pension plan participants, the Company recorded $42.1 million of settlement losses, which were previously recorded in accumulated other comprehensive loss. |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Costs for the Company’s global pension plans included the following components:
| | Years ended March 31, | | | | | 2023 | | | 2022 | | | 2021 | | | Components of net periodic benefit cost: | | | | | | | | | | | Service cost | | $ | 0.2 | | | $ | 0.3 | | | $ | 0.4 | | | Interest cost | | | 8.1 | | | | 7.3 | | | | 7.9 | | | Expected return on plan assets | | | (11.6 | ) | | | (12.9 | ) | | | (11.5 | ) | | Amortization of net actuarial loss | | | 5.7 | | | | 6.9 | | | | 6.9 | | | Settlements (a) | | | - | | | | - | | | | 0.2 | | | Net periodic benefit cost | | $ | 2.4 | | | $ | 1.6 | | | $ | 3.9 | | | | | | | | | | | | | | | | Other changes in benefit obligation recognized in other comprehensive income: | | | | | | | | | | | | | Net actuarial gain
| | $ | 2.1 | | | $ | 11.4 | | | $ | 33.8 | | | Amortization of net actuarial loss (b) | | | 5.7 | | | | 8.6 | | | | 7.1 | | Total recognized in other comprehensive income
| | $ | 7.8 | | | $ | 20.0 | | | $ | 40.9 | |
| (a) | The settlement charges resulted from activity associated with the Company’s non-U.S. pension plans. |
| (b) | The fiscal 2022 amount includes $1.7 million of net actuarial losses written-off as a result of the sale of the Austrian air-cooled automotive business. See Note 1 for additional information. |
The Company estimates $5.6 amortized $5.7 million, $8.6 million, and $7.1million of net actuarial loss for itsin fiscal 2023, 2022, and 2021, respectively. Exclusive of the $1.7 million written-off in fiscal 2022 upon the sale of the Austrian air-cooled automotive business referenced above, less than $1.0 million of the amortization was attributable to the Company’s non-U.S. pension plans will be amortized from accumulated other comprehensive loss into net periodic benefit cost during fiscal 2017.in each of these years.
The Company used a discount rate of 4.1%5.2% and 4.0%3.9% as of March 31, 20162023 and 2015,2022, respectively, infor determining its benefit obligations under its U.S. pension plans. The Company used a weighted-average discount rate of 1.8%3.8% and 1.3%1.8% as of March 31, 20162023 and 2015,2022, respectively, infor determining its benefit obligations under its non-U.S. pension plans. The Company used a discount rate of 4.3%3.9%, 4.7%3.2%, and 4.4%3.4% to determine its costs under its U.S. pension plans for the fiscal years ended March 31, 2016, 2015,2023, 2022, and 2014,2021, respectively. The Company used a weighted-average discount rate of 1.3%2.9%, 3.0%1.6%, and 3.5%1.4% to determine its costs under its non-U.S. pension plans for the fiscal years ended March 31, 2016, 2015,2023, 2022, and 2014,2021, respectively. The Company determined the discount rates used for its U.S. pension plans by modeling a portfolio of high-quality corporate bonds, with appropriate consideration given to expected defined benefit payment terms and duration of the respective pension obligations. The Company used a similar process to determine the discount rate for its non-U.S. pension obligations.
Plan assets in the Company’s U.S. defined benefitpension plans comprise 100 percent of the Company’s world-wide pension plan assets. The Company’s U.S. pension plan weighted-average asset allocations at the measurement dates of March 31, 20162023 and 20152022 were as follows:
| | | Target allocation | | Plan assets | | | | | | | 2016 | | 2015 | | Equity securities | | | 55 | % | | | 56 | % | | | 55 | % | | Debt securities | | | 38 | % | | | 36 | % | | | 36 | % | | Alternative assets | | | 5 | % | | | 4 | % | | | 5 | % | | Cash | | | 2 | % | | | 4 | % | | | 4 | % | | | | | 100 | % | | | 100 | % | | | 100 | % |
| | Target allocation | | | Plan assets | | | | | | | | 2023 | | | 2022 | | | Equity securities | | | 76 | % | | | 76 | % | | | 74 | % | | Debt securities | | | 18 | % | | | 15 | % | | | 17 | % | | Real estate investments | | | 5 | % | | | 8 | % | | | 8 | % | | Cash and cash equivalents | | | 1 | % | | | 1 | % | | | 1 | % | | | | | 100 | % | | | 100 | % | | | 100 | % |
Due to market conditions and other factors, including timing of benefit payments and other transactions, actual asset allocation may vary from the target allocation outlined above. The Company periodically rebalances the assets to the target allocations. As of March 31, 20162023 and 2015,2022, the Company’s pension plans did not directly own shares of Modine common stock.
The Company employs a total return investment approach, whereby a mix of equities and fixed-income investments are used to maximize the long-term returngrowth of plan assets,principal, while avoiding excessive risk. The Company has established pension plan guidelines based upon an evaluation of market conditions, tolerance for risk and cash requirements for benefit payments. The Company measures and monitors investment risk on an ongoing basis through quarterly investment portfolio reviews, annual liability measurements and periodic asset/liability studies.
The expected rate of return on U.S. plan assets is based upon historical return experience and forward-looking return expectations for major asset class categories. For fiscal 2016, 2015, and 20142023, U.S. pension plan expense, the expected rate of return on plan assets was 8.07.0 percent. For fiscal 20172022, and 2021 U.S. pension plan expense, the expected rate of return on plan assets was 7.5 percent. For fiscal 2024 U.S. pension plan expense, the Company has assumed a rate of return on plan assets of 8.06.5 percent.
The Company’s funding policy for its U.S. pension plans is to contribute annually, at a minimum, the amount necessary on an actuarial basis to provide for benefits in accordance with applicable laws and regulations. TheAs a result of funding relief provisions within the American Rescue Plan Act of 2021, the Company expectsdoes not expect to make cash contributions of $8.1 million to theseits U.S. plans during fiscal 2017.2024.
Estimated pension benefit payments for the next ten fiscal years are as follows:
| Fiscal Year | | Estimated Pension Benefit Payments | | | 2017 | | $ | 14.5 | | | 2018 | | | 15.2 | | | 2019 | | | 15.3 | | | 2020 | | | 15.8 | | | 2021 | | | 16.1 | | | 2022-2026 | | | 79.3 | |
| Fiscal Year | | Estimated Pension Benefit Payments | | | 2024 | | $ | 15.5 | | | 2025 | | | 15.7 | | | 2026 | | | 15.6 | | | 2027 | | | 15.5 | | | 2028 | | | 15.4 | | 2029-2033 | | | 72.4 | |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 18: | Note 19: Derivative Instruments |
The Company uses derivative financial instruments from time to time as a tool to manage certain financial risks. The Company’s policy prohibits the use of leveraged derivatives. Accounting for derivatives and hedging activities requires derivative financial instruments to be measured at fair value and recognized as assets or liabilities in the consolidated balance sheets. All of the Company’s derivative financial instruments are categorized within Level 2 of the fair value hierarchy. Refer to Note 4 for the definition of a Level 2 fair value measurement. Accounting for the gain or loss resulting from the change in fair value of the derivative financial instruments depends on whether it has been designated and is effective, as a hedge, and, if so, on the nature of the hedging activity.
Commodity Derivatives:Derivatives The Company periodically enters into futuresover-the-counter forward contracts related to certain forecasted purchases of aluminum and copper. The Company’s strategy in entering into these contracts is to reduce its exposure to changing market prices for future purchases of these commodities. The Company has notdesignates certain commodity forward contracts as cash flow hedges for accounting purposes. Accordingly, for these designated commodity contracts entered into in fiscal 2014, 2015, and 2016 for hedge accounting. Accordingly,hedges, the Company records unrealized gains and losses on theserelated to the change in the fair value of the contracts are recordedin accumulated other comprehensive income (loss) (“AOCI”) within shareholders’ equity and subsequently recognizes the gains and losses within cost of sales.sales as the underlying inventory is sold.
Foreign exchange contracts:Exchange Contracts The Company’s foreign exchange risk management strategy uses derivative financial instruments to mitigate foreign currency exchange risk. The Company periodically enters into foreign currency exchangeforward contracts to hedge specific foreign currency-denominated assets and liabilities.liabilities as well as forecasted transactions. The Company designates certain hedges of forecasted transactions as cash flow hedges for accounting purposes. Accordingly, for these designated hedges, the Company records unrealized gains and losses related to the change in the fair value of the contracts in AOCI within shareholders’ equity and subsequently recognizes 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. The Company has not designated forward contracts related to foreign currency-denominated assets and liabilities as hedges. Accordingly, for these non-designated contracts, for hedge accounting. Accordingly,the Company records unrealized gains and losses related to changes in fair value are recorded in other income and expense. Gains and losses on these foreign currency contracts are offset by foreign currency gains and losses associated with the related assets and liabilities.
The fair value of the Company’s derivative financial instruments recorded in the consolidated balance sheets were as follows:
| | Balance Sheet Location | | March 31, 2016 | | | March 31, 2015 | | | Foreign exchange contracts | Other current assets | | $ | 0.1 | | | $ | - | | | Foreign exchange contracts | Other current liabilities | | | - | | | | 0.3 | | | Commodity derivatives | Other current liabilities | | | 0.1 | | | | 0.1 | |
| _ | Balance Sheet Location | | March 31, 2023 | | | March 31, 2022 | | | Derivatives designated as hedges: | | | | | | | | | Commodity derivatives | Other current assets | | $ | - | | | $ | 0.5 | | | Foreign exchange contracts | Other current assets | | | 1.3 | | | | 0.3 | | | | | | | | | | | | | | Derivatives not designated as hedges: | | | | | | | | | | | Foreign exchange contracts | Other current liabilities | | $ | 0.2 | | | $ | 0.3 | |
The amounts recorded in the consolidated statements of operations for the Company’sassociated with derivative financial instruments that the Company designated for hedge accounting during the years ended March 31 were as follows:
| | Statement of Operations | | Years ended March 31, | | Location | | 2016 | | 2015 | | 2014 | | Commodity derivatives | Cost of sales | | $ | (0.7 | ) | | $ | (0.2 | ) | | $ | (0.5 | ) | | Foreign exchange contracts | Other income (expense) - net | | | 0.6 | | | | (1.1 | ) | | | - | | | Total loss | | | $ | (0.1 | ) | | $ | (1.3 | ) | | $ | (0.5 | ) |
| | Gain (loss) recognized in other comprehensive income | | Statement of Operations | | Gain (loss) reclassified from AOCI | | | | | 2023 | | | 2022 | | | 2021 | | Location | | 2023 | | | 2022 | | | 2021 | | | Commodity derivatives | | $ | (1.6 | ) | | $ | 1.1 | | | $ | 2.2 | | Cost of sales
| | $ | (1.0 | ) | | $ | 1.2 | | | $ | - | | | Foreign exchange contracts | | | 1.6 | | | | - | | | | - | | Net sales | | | 0.6 | | | | - | | | | - | | | Foreign exchange contracts | | | 0.4 | | | | 0.6 | | | | (0.1 | ) | Cost of sales | | | 0.7 | | | | 0.4 | | | | (0.1 | ) | | Total gains (losses) | | $ | 0.4 | | | $ | 1.7 | | | $ | 2.1 | | | | $ | 0.3 | | | $ | 1.6 | | | $ | (0.1 | ) |
Note 19: | Contingencies and Litigation |
The amounts associated with derivative financial instruments that the Company did not designate for hedge accounting were as follows:
| Statement of Operations | | Years ended March 31, | | | _ | Location | | 2023 | | 2022 | | 2021 | | | Foreign exchange contracts | Net sales | | | $ | (0.5 | ) | | $ | (0.6 | ) | | $ | - | | | Foreign exchange contracts | Other income (expense) - net | | | | (2.6 | ) | | | (0.8 | ) | | | 0.6 | | | Total gains (losses) | | | | $ | (3.1 | ) | | $ | (1.4 | ) | | $ | 0.6 | |
Note 20: Risks, Uncertainties, Contingencies and Litigation
Supply Chain Disruptions and Inflationary Market risk: Conditions Market and economic dynamics, including the impacts of the COVID-19 pandemic, have contributed to global supply chain challenges and inflationary market conditions. Since the fourth quarter of fiscal 2022, the military conflict between Russia and Ukraine and the related sanctions imposed by governments in the U.S. and abroad have also impacted these market conditions. The Company sells a broad rangeis focused on mitigating the negative impacts of productslabor shortages, supply chain challenges and inflationary market conditions, including changing raw material, energy and logistic costs, as well as delays and shortages in certain purchased commodities and components. At this time, the Company cannot reasonably estimate the full impact that provide thermal solutions to customers operating primarilythe supply chain challenges and other related economic and market dynamics will have on the Company’s business, results of operations and cash flows in the commercial vehicle, off-highway, automotive, and commercial heating and air conditioning markets. The Company operates in diversified markets as a strategy for offsetting the risk associated with a downturn in any one or morefuture.
Credit risk: Risk The Company invests excess cash primarily in investment quality, short-term liquid debt instruments. Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of accounts receivable. The Company sells a broad range of products that provide thermal solutions to customers operating throughout the world. In fiscal 20162023 and 2015, two2022, no customers each accounted for more than ten percent or more of the Company’s total sales. In fiscal 2014,2021, one vehicular customer accounted for more than ten percent or more of the Company’s total sales. Sales to the Company’s top ten customers represented 63were 39 percent, 39 percent, and 43 percent of total sales in both fiscal 20162023, 2022, and 2015 and 56 percent in fiscal 2014.2021, respectively. At March 31, 20162023 and 2015, 452022, 37 percent and 4729 percent, respectively, of the Company'sCompany’s trade accounts receivable were due from the Company'sCompany’s top ten customers. These customers operate primarily in the commercial vehicle, off-highway, automotive truck, and heavy equipment marketslight vehicle, data center cooling, and are influenced by similar marketcommercial air conditioning and general economic factors. Collateralrefrigeration markets. The Company generally does not require collateral or advanced payments are generally not required.from its customers. The Company has not experienced significant credit losses to customers in the markets served. MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The Company manages credit risk through its focus on the following:
| ● | Cash and investments – reviewing cash deposits and short-term investments to ensure banks have credit ratings acceptable to the Company and that short-term investments are maintained in secured or guaranteed instruments; |
| ● | Accounts receivable – performing periodic customer credit evaluations and actively monitoring their financial condition and applicable business news; |
| ● | Pension assets – ensuring that investments within pension plans provide appropriate diversification, monitoring of investment teams, ensuring that portfolio managers adhere to the Company’s investment policies and directives, and ensuring that exposure to high risk investments is limited; and |
| ● | Insurance – ensuring that insurance providers maintain acceptable financial ratings. |
Insurance – ensuring that insurance providers maintain financial ratings that are acceptable to the Company.
Counterparty risks: Risk The Company manages counterparty risksrisk through its focus on the following:
| ● | Customers – performing thorough reviews of customer credit reports and accounts receivable aging reports by internal credit committees; |
| ● | Suppliers – maintaining a supplier risk management program and utilizing industry sources to identify and mitigate high risk situations; and |
| ● | Derivatives – ensuring that counterparties to derivative instruments maintain credit ratings that are acceptable to the Company. |
Environmental: The United States Environmental Protection Agency has designated the Company as a potentially responsible party for remediation of three sites. These sites are: Auburn Incinerator, Inc./Lake Calumet Cluster (Illinois), Cam-Or (Indiana) and a scrap metal site known as Chemetco (Illinois). In addition, Modine is voluntarily participating in the care of an inactive landfill owned by the City of Trenton (Missouri). These sites are not Company-owned; however, they allegedly contain materials attributable to Modine from past operations. The percentage of material allegedly attributable to Modine is relatively low. Remediation of these sites is in various stages of administrative or judicial proceedings and includes recovery of past governmental costs and the costs of future investigations and remedial actions. The Company accrues for costs anticipated for the remedial settlement of the sites listed above if they are probable and can be reasonably determined. Costs anticipated for the remedial settlement of the sites listed above that are not probable or cannot be reasonably determined at this time have not been accrued; however, the Company does not believe any potential costs would be materialacceptable to the Company’s financial position due to its relatively small portion of contributed materials.Company.
Environmental The Company has recorded environmental investigation and remediation accruals for subsurface contaminationrelated to manufacturing facilities in the U.S., one of which the Company currently owns and operates, and at its former manufacturing facility in the NetherlandsNetherlands. These accruals primarily relate to soil and groundwater contamination at its manufacturing facility in Brazil. During fiscal 2016, the Company recorded charges totaling $1.6 million, within cost of sales, to establish an environmental accrual for investigative work related to a previously-owned manufacturing facility in the United States. In addition, the Company has recorded accruals for other lesser environmental matters at certain facilities located in the United States. These accruals generally relate to facilities where past operations followed practices and procedures that were considered acceptable under then-existing regulations, or where the Company is a successor to the obligations of prior owners, and current laws and regulations require investigative and/or remedial work to ensure sufficient environmental compliance. In instances where a range of loss can be reasonably estimated for a probable environmental liability, but no amount within the range is a better estimate than any other amount, the Company accrues the minimum of the range. The Company’s accruals for these environmental matters totaled $5.1$17.6 million and $3.8$18.2 million at March 31, 20162023 and 2015,2022, respectively. During fiscal 2023 and 2022, the Company increased its remediation accrual related to a former manufacturing facility in the U.S. by $1.0 million and $3.4 million, respectively. As additional information becomes available regarding environmental matters, the Company will re-assess the liability related to these mattersliabilities and revise the estimated accrual, accruals, if necessary. Based onWhile it is possible that the ultimate environmental remediation costs may be in excess of amounts accrued, the Company believes, based upon currently available information, the Company believesthat the ultimate outcome of these matters, individually and in the aggregate, will not have a material adverse effect on its financial position. However, these matters are subject to inherent uncertainties, and unfavorable outcomes could occur, including significant monetary damages. During fiscal 2011, one
Other litigation:Litigation In the normal course of business, the Company and its subsidiaries are named as defendants in various other lawsuits and enforcement proceedings by private parties, governmental agencies and/or others in which claims are asserted against Modine. The Company believes that any additional loss in excess of amounts already accrued would not have a material effect on the Company’s consolidated balance sheet, results of operations, and cash flows. In the opinion ofaddition, management expects that the liabilities if any, which may ultimately result from such lawsuits or proceedings, areif any, would not expected to have a material adverse effect on the Company’s consolidated financial statements.position.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 20: | Note 21: Accumulated Other Comprehensive Loss |
Changes in accumulated other comprehensive loss were as follows:
| | | Foreign Currency Translation | | Defined Benefit Plans | | Total | | Balance, March 31, 2015 | | $ | (40.7 | ) | | $ | (157.9 | ) | | $ | (198.6 | ) | | | | | | | | | | | | | | | | Other comprehensive loss before reclassifications | | | 4.7 | | | | (16.6 | ) | | | (11.9 | ) | | Reclassifications: | | | | | | | | | | | | | | Amortization of unrecognized net loss (a) | | | - | | | | 48.3 | | | | 48.3 | | | Amortization of unrecognized prior service credit (a) | | | - | | | | (0.2 | ) | | | (0.2 | ) | | Income taxes | | | - | | | | (11.8 | ) | | | (11.8 | ) | | Total other comprehensive loss | | | 4.7 | | | | 19.7 | | | | 24.4 | | | | | | | | | | | | | | | | | Balance, March 31, 2016 | | $ | (36.0 | ) | | $ | (138.2 | ) | | $ | (174.2 | ) |
| | Foreign Currency Translation | | | Defined Benefit Plans | | | Cash Flow Hedges | | | Total | | Balance, March 31, 2022 | | $ | (39.1 | ) | | $ | (111.1 | ) | | $ | 0.7 | | | $ | (149.5 | ) | | | | | | | | | | | | | | | | | | | | Other comprehensive income (loss) before reclassifications | | | (18.4 | ) | | | 2.5 | | | | 0.4 | | | | (15.5 | ) | | Reclassifications: | | | | | | | | | | | | | | | | | | Amortization of unrecognized net loss (a) | | | - | | | | 5.3 | | | | - | | | | 5.3 | | | Realized gains - net (b) | | | - | | | | - | | | | (0.3 | ) | | | (0.3 | ) | | Income taxes | | | - | | | | (1.1 | ) | | | - | | | | (1.1 | ) | | Total other comprehensive income (loss) | | | (18.4 | ) | | | 6.7 | | | | 0.1 | | | | (11.6 | ) | | | | | | | | | | | | | | | | | | | Balance, March 31, 2023 | | $ | (57.5 | ) | | $ | (104.4 | ) | | $ | 0.8 | | | $ | (161.1 | ) |
| | | Foreign Currency Translation | | Defined Benefit Plans | | Total | | Balance, March 31, 2014 | | $ | 27.3 | | | $ | (131.2 | ) | | $ | (103.9 | ) | | | | | | | | | | | | | | | | Other comprehensive loss before reclassifications | | | (68.0 | ) | | | (45.2 | ) | | | (113.2 | ) | | Reclassifications: | | | | | | | | | | | | | | Amortization of unrecognized net loss (a) | | | - | | | | 5.4 | | | | 5.4 | | | Amortization of unrecognized prior service credit (a) | | | - | | | | (0.1 | ) | | | (0.1 | ) | | Income taxes | | | - | | | | 13.2 | | | | 13.2 | | | Total other comprehensive loss | | | (68.0 | ) | | | (26.7 | ) | | | (94.7 | ) | | | | | | | | | | | | | | | | Balance, March 31, 2015 | | $ | (40.7 | ) | | $ | (157.9 | ) | | $ | (198.6 | ) |
| | Foreign Currency Translation | | | Defined Benefit Plans | | | Cash Flow Hedges | | | Total | | Balance, March 31, 2021 | | $ | (31.0 | ) | | $ | (130.8 | ) | | $ | 0.6 | | | $ | (161.2 | ) | | | | | | | | | | | | | | | | | | | | Other comprehensive income (loss) before reclassifications | | | (8.1 | ) | | | 11.5 | | | | 1.7 | | | | 5.1 | | | Reclassifications: | | | | | | | | | | | | | | | | | | Amortization of unrecognized net loss (a) | | | - | | | | 6.5 | | | | - | | | | 6.5 | | | Unrecognized net pension loss in disposed business (c) | | | - | | | | 1.7 | | | | - | | | | 1.7 | | | Realized gains - net (b) | | | - | | | | - | | | | (1.6 | ) | | | (1.6 | ) | | Income taxes | | | - | | | | - | | | | - | | | | - | | Total other comprehensive income (loss) | | | (8.1 | ) | | | 19.7 | | | | 0.1 | | | | 11.7 | | | | | | | | | | | | | | | | | | | | Balance, March 31, 2022 | | $ | (39.1 | ) | | $ | (111.1 | ) | | $ | 0.7 | | | $ | (149.5 | ) |
| (a) | Amounts are included in the calculation of net periodic benefit cost for the Company’s defined benefit plans, which include pension and other postretirement plans. See Note 1718 for additional information about the Company’s pension plans. |
| (b) | Amounts represent net gains and losses associated with cash flow hedges that were reclassified to net earnings. See Note 19 for additional information regarding derivative instruments. |
| (c) | As a result of the sale of the Austrian air-cooled automotive business, the Company wrote-off $1.7 million of net actuarial losses related to its pension plan as a component of the loss on sale recorded during fiscal 2022. See Note 1 for additional information. |
Note 21: | Note 22: Segment and Geographic Information |
The Company’s product lines consist of heat-transfer componentssystems and systems.components. The Company serves the vehicular,commercial, industrial, and building HVAC&R markets and vehicular markets.
The Company’s Climate Solutions segment provides heat transfer products, heating, ventilating, and air conditioning markets. During fiscal 2016, the Company combined its North America and South America segments into the Americasrefrigeration products and data center cooling solutions to global customers. The Company’s Performance Technologies segment to streamline operations, gain synergiesdesigns and improve its cost structure. As a result, the Company recast the prior-period segment financial information to conform to the current-period presentation. There was no impact to the Company’s consolidated financial statements as a result. Throughout fiscal 2016, the Company’s four operating segments were as follows:
Americas:
Comprised ofmanufactures air-and liquid-cooled technology for vehicular, stationary power, and industrial original equipmentapplications. In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coatings products in North America and South America, as well as aftermarket products in South America.application services.
Europe:
Comprised of vehicular and industrial original equipment products in Europe.
Asia:
Comprised of vehicular and industrial original equipment products in Asia.
Building HVAC:
Comprised of building heating, ventilating and air conditioning products throughout the world.
Each operating segment is managed by a vice president and has separate financial results reviewed by the Company’s chief operating decision maker. TheseFinancial results, including net sales, gross profit, gross margin and operating income, together with other considerations, are used by managementthe chief operating decision maker in evaluating the performance of each segment and in making decisions on the allocation of resources among the Company’s various businesses.
Effective April 1, 2022, the Company began managing its operations under two operating segments, Climate Solutions and Performance Technologies. The Climate Solutions segment includes the previously-reported BHVAC and CIS segments, with the exception of CIS Coatings. The Performance Technologies segment includes the previously-reported HDE and Automotive segments and the CIS Coatings business. See Note 3 for information regarding the primary operating activities of each segment. The Company’s new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management. The Company believes this simplified segment structure allows it to better focus resources on targeted growth opportunities and allows for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow. The segment realignment had no impact on the Company’s consolidated financial position, results of operations, and cash flows. Segment financial information for the prior periods has been recast to conform to the current presentation.
The following is a summary of net sales, gross profit, and operating income by segment:segment. See Note 3 for additional information regarding net sales by product groups within each segment.
| | Year ended March 31, 2023 | | | | | External Sales | | | Inter-segment Sales | | | Total | | | Net sales: | | | | | | | | | | | | $ | 1,011.5 | | | $ | 0.4 | | | $ | 1,011.9 | | | | | 1,286.4 | | | | 29.8 | | | | 1,316.2 | | | Segment total | | | 2,297.9 | | | | 30.2 | | | | 2,328.1 | | | Corporate and eliminations | | | - | | | | (30.2 | ) | | | (30.2 | ) | | Net sales | | $ | 2,297.9 | | | $ | - | | | $ | 2,297.9 | |
| | Years ended March 31, | | Net sales: | | 2016 | | 2015 | | 2014 | | Americas | | $ | 585.5 | | | $ | 666.9 | | | $ | 688.3 | | | Europe | | | 524.1 | | | | 578.2 | | | | 584.4 | | | Asia | | | 79.0 | | | | 81.2 | | | | 71.5 | | | Building HVAC | | | 181.4 | | | | 186.3 | | | | 146.5 | | | Segment total | | | 1,370.0 | | | | 1,512.6 | | | | 1,490.7 | | | Corporate and eliminations | | | (17.5 | ) | | | (16.2 | ) | | | (13.1 | ) | | Net sales | | $ | 1,352.5 | | | $ | 1,496.4 | | | $ | 1,477.6 | |
| | | Years ended March 31, | | | | 2016 | | 2015 | | 2014 | | Gross profit: | | $'s | | | % of sales | | $'s | | | % of sales | | $'s | | | % of sales | | Americas | | $ | 100.1 | | | | 17.1 | % | | $ | 109.1 | | | | 16.3 | % | | $ | 114.3 | | | | 16.6 | % | | Europe | | | 68.1 | | | | 13.0 | % | | | 68.7 | | | | 11.9 | % | | | 70.8 | | | | 12.1 | % | | Asia | | | 12.2 | | | | 15.5 | % | | | 11.5 | | | | 14.2 | % | | | 8.9 | | | | 12.5 | % | | Building HVAC | | | 54.2 | | | | 29.9 | % | | | 55.9 | | | | 30.0 | % | | | 43.4 | | | | 29.6 | % | | Segment total | | | 234.6 | | | | 17.1 | % | | | 245.2 | | | | 16.2 | % | | | 237.4 | | | | 15.9 | % | | Corporate and eliminations (a) | | | (11.1 | ) | | | - | | | | 1.3 | | | | - | | | | 0.8 | | | | - | | | Gross profit | | $ | 223.5 | | | | 16.5 | % | | $ | 246.5 | | | | 16.5 | % | | $ | 238.2 | | | | 16.1 | % |
| | | Years ended March 31, | | Operating income: | | 2016 | | 2015 | | 2014 | | Americas | | $ | 36.2 | | | $ | 33.4 | | | $ | 49.6 | | | Europe | | | 13.3 | | | | 25.7 | | | | 9.6 | | | Asia | | | 0.8 | | | | 0.3 | | | | (3.3 | ) | | Building HVAC | | | 13.9 | | | | 19.1 | | | | 9.4 | | | Segment total | | | 64.2 | | | | 78.5 | | | | 65.3 | | | Corporate and eliminations (a) | | | (71.7 | ) | | | (25.8 | ) | | | (28.1 | ) | | Operating (loss) income | | $ | (7.5 | ) | | $ | 52.7 | | | $ | 37.2 | |
| (a) | During fiscal 2016, the Company recorded pension settlement losses of $42.1 million at Corporate, within SG&A expenses ($33.3 million) and cost of sales ($8.8 million). See Note 17 for additional information. |
Inter-segment sales are accounted for based on an established markup over production costs. Net sales for corporate and eliminations primarily represent the elimination of inter-segment sales. The operating loss for corporate includes certain research and development costs, legal, finance and other general corporate and central services expenses, and other costs that are either not directly attributable to an operating segment or not considered when management evaluates segment performance.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts) | | Year ended March 31, 2022 | | | | | External Sales | | | Inter-segment Sales | | | Total | | | Net sales: | | | | | | | | | | | | $ | 910.1 | | | $ | 0.4 | | | $ | 910.5 | | | | | 1,140.0 | | | | 32.4 | | | | 1,172.4 | | | Segment total | | | 2,050.1 | | | | 32.8 | | | | 2,082.9 | | | Corporate and eliminations | | | - | | | | (32.8 | ) | | | (32.8 | ) | | Net sales | | $ | 2,050.1 | | | $ | - | | | $ | 2,050.1 | |
| | Year ended March 31, 2021 | | | | | External Sales | | | Inter-segment Sales | | | Total | | | Net sales: | | | | | | | | | | | | $ | 731.1 | | | $ | 0.1 | | | $ | 731.2 | | | | | 1,077.3 | | | | 31.5 | | | | 1,108.8 | | | Segment total | | | 1,808.4 | | | | 31.6 | | | | 1,840.0 | | | Corporate and eliminations | | | - | | | | (31.6 | ) | | | (31.6 | ) | | Net sales | | $ | 1,808.4 | | | $ | - | | | $ | 1,808.4 | |
Inter-segment sales are accounted for based upon an established markup over production costs. Net sales for Corporate and eliminations primarily represent the elimination of inter-segment sales.
| | Years ended March 31, | | | | | 2023 | | | 2022 | | | 2021 | | | Gross profit: | | _$’s | | | % of sales | | | _$’s | | | % of sales | | | | | | % of sales | | | Climate Solutions | | $ | 223.6 | | | | 22.1 | % | | $ | 166.3 | | | | 18.3 | % | | $ | 136.6 | | | | 18.7 | % | | Performance Technologies | | | 166.1 | | | | 12.6 | % | | | 142.2 | | | | 12.1 | % | | | 157.1 | | | | 14.2 | % | | Segment total | | | 389.7 | | | | 16.7 | % | | | 308.5 | | | | 14.8 | % | | | 293.7 | | | | 16.0 | % | | Corporate and eliminations | | | (0.3 | ) | | | - | | | | 0.8 | | | | - | | | | (0.3 | ) | | | - | | | Gross profit | | $ | 389.4 | | | | 16.9 | % | | $ | 309.3 | | | | 15.1 | % | | $ | 293.4 | | | | 16.2 | % |
| | Years ended March 31, | | | Operating income: | | 2023 | | | 2022 | | | 2021 | | | | $
| 124.1 | | | $
| 73.4 | | | $
| 49.9 | | | Performance Technologies | | | 65.6 | | | | 77.4 | | | | (109.1 | ) | | Segment total | | | 189.7 | | | | 150.8 | | | | (59.2 | ) | | Corporate and eliminations (a) | | | (39.3 | ) | | | (31.6 | ) | | | (38.5 | ) | | Operating income (loss) | | $
| 150.4 | | | $
| 119.2 | | | $
| (97.7 | ) |
| (a) | The operating loss for Corporate includes certain research and development costs, legal, finance and other general corporate and central services expenses, and other costs that are either not directly attributable to an operating segment or not considered when management evaluates segment performance. |
The following is a summary of totalsegment assets, by segment:comprised entirely of trade accounts receivable and inventories, and other assets:
| | March 31, | | | Assets: | | 2023 | | | 2022 | | | | $ | 334.8 | | | $ | 291.7 | | | | | 388.1 | | | | 357.0 | | | | | 843.0 |
| | | 778.3 |
| | Total assets | | $ | 1,565.9 | | | $ | 1,427.0 | |
| | | March 31, | | | | | 2016 | | | 2015 | | | Americas | | $ | 267.2 | | | $ | 277.7 | | | Europe | | | 301.9 | | | | 282.7 | | | Asia | | | 104.0 | | | | 92.2 | | | Building HVAC (a) | | | 99.0 | | | | 131.3 | | | Corporate and eliminations | | | 148.8 | | | | 147.0 | | | Total assets | | $ | 920.9 | | | $ | 930.9 | |
| (a) | As of March 31, 2015, totalRepresents cash and cash equivalents, other current assets, within the Building HVAC segment included $48.0 million of insurance-relatedproperty plant and equipment, intangible assets, goodwill, deferred income taxes, and other noncurrent assets for the rebuild of the facility damaged by the Airedale fire. See Note 2 for additional information.Climate Solutions and Performance Technologies segments and Corporate. |
The following is a summary of capital expenditures and depreciation and amortization expense by segment:
| | Years ended March 31, | | | Capital expenditures: | | 2023 | | | 2022 | | | 2021 | | | | $ | 24.2 | | | $ | 9.9 | | | $ | 7.2 | | | | | 25.2 | | | | 29.2 | | | | 25.0 | | | | | 1.3 | | | | 1.2 | | | | 0.5 | | | Total capital expenditures | | $ | 50.7 | | | $ | 40.3 | | | $ | 32.7 | |
| | Years ended March 31, | | | Depreciation and amortization expense: | | 2023 | | | 2022 | | | 2021 | | | | $ | 21.7 | | | $ | 23.6 | | | $ | 24.9 | | Performance Technologies (a)
| | | 31.8 | | | | 29.9 | | | | 42.1 | | | Corporate | | | 1.0 | | | | 1.3 | | | | 1.6 | | | Total depreciation and amortization expense | | $ | 54.5 | | | $ | 54.8 | | | $ | 68.6 | |
| | | Years ended March 31, | | | Capital expenditures: | | 2016 | | | 2015 | | | 2014 | | | Americas | | $ | 26.7 | | | $ | 30.2 | | | $ | 24.6 | | | Europe | | | 24.8 | | | | 21.5 | | | | 22.9 | | | Asia | | | 6.2 | | | | 3.8 | | | | 4.6 | | | Building HVAC | | | 5.1 | | | | 2.8 | | | | 1.0 | | | Total capital expenditures | | $ | 62.8 | | | $ | 58.3 | | | $ | 53.1 | |
| (a) | During fiscal 2021, upon classifying the liquid- and air-cooled automotive businesses as held for sale, the Company ceased depreciating the long-lived assets within the disposal groups. In fiscal 2022, the Company resumed depreciating the long-lived assets within the liquid-cooled automotive business when it no longer met the requirements to be classified as held for sale. See Note 2 for additional information. |
| | | Years ended March 31, | | | Depreciation and amortization expense: | | 2016 | | | 2015 | | | 2014 | | | Americas | | $ | 22.1 | | | $ | 21.3 | | | $ | 22.6 | | | Europe | | | 18.0 | | | | 19.8 | | | | 26.6 | | | Asia | | | 6.5 | | | | 7.2 | | | | 6.7 | | | Building HVAC | | | 3.6 | | | | 3.3 | | | | 2.2 | | | Total depreciation and amortization expense | | $ | 50.2 | | | $ | 51.6 | | | $ | 58.1 | |
The following is a summary of net sales by geographicalgeographic area, based upon the location of the selling unit:
| | Years ended March 31, | | | | | 2023 | | | 2022 | | | 2021 | | | United States | | $ | 1,139.3 | | | $ | 949.6 | | | $ | 765.7 | | | Italy | | | 249.5 | | | | 232.0 | | | | 188.6 | | | Hungary | | | 210.7 | | | | 185.2 | | | | 153.7 | | | China | | | 151.6 | | | | 166.0 | | | | 217.6 | | | Brazil | | | 103.6 | | | | 81.2 | | | | 48.5 | | | United Kingdom | | | 93.6 | | | | 118.6 | | | | 96.4 | | | Other | | | 349.6 | | | | 317.5 | | | | 337.9 | | | Net sales | | $ | 2,297.9 | | | $ | 2,050.1 | | | $ | 1,808.4 | |
| | | Years ended March 31, | | | | | 2016 | | | 2015 | | | 2014 | | | United States | | $ | 627.6 | | | $ | 669.3 | | | $ | 645.7 | | | Germany | | | 155.3 | | | | 193.8 | | | | 229.5 | | | Hungary | | | 145.9 | | | | 161.0 | | | | 150.3 | | | Austria | | | 113.1 | | | | 118.7 | | | | 109.8 | | | Other | | | 310.6 | | | | 353.6 | | | | 342.3 | | | Net sales | | $ | 1,352.5 | | | $ | 1,496.4 | | | $ | 1,477.6 | |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The following is a summary of property, plant and equipment by geographicalgeographic area:
| | March 31, | | | | | 2023 | | | 2022 | | | United States | | $ | 96.4 | | | $ | 83.6 | | Hungary
| | | 40.8 | | | | 44.0 | | | China | | | 40.2 | | | | 45.6 | | | Mexico | | | 34.0 | | | | 38.5 | | | Italy | | | 32.8 | | | | 33.2 | | | Other | | | 70.3 | | | | 70.5 | | Total property, plant and equipment
| | $ | 314.5 | | | $ | 315.4 | |
| | | March 31, | | | | | 2016 | | | 2015 | | | United States | | $ | 92.5 | | | $ | 92.7 | | | Austria | | | 44.2 | | | | 41.5 | | | China | | | 33.6 | | | | 31.8 | | | Germany | | | 32.1 | | | | 47.2 | | | Hungary | | | 31.4 | | | | 28.9 | | | Other | | | 104.8 | | | | 80.0 | | | Total property, plant and equipment | | $ | 338.6 | | | $ | 322.1 | |
The following is a summary of net sales by end market:
| | | Years ended March 31, | | | | | 2016 | | | 2015 | | | 2014 | | | Commercial vehicle | | $ | 459.8 | | | $ | 512.5 | | | $ | 477.0 | | | Automotive | | | 396.8 | | | | 401.8 | | | | 395.6 | | | Off-highway | | | 206.2 | | | | 274.6 | | | | 320.8 | | | Building HVAC | | | 181.4 | | | | 186.3 | | | | 146.5 | | | Other | | | 108.3 | | | | 121.2 | | | | 137.7 | | | Net sales | | $ | 1,352.5 | | | $ | 1,496.4 | | | $ | 1,477.6 | |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 22: | Quarterly Financial Data (Unaudited) |
Quarterly financial data is summarized below for the years ended March 31, 2016 and 2015:
| | | Fiscal 2016 quarters ended | | | | | | | June | | Sept. | | Dec. | | March | | Fiscal 2016 | | | | | | | | | | | | | | | | | | | Net sales | | $ | 346.1 | | | $ | 334.0 | | | $ | 328.7 | | | $ | 343.7 | | | $ | 1,352.5 | | | Gross profit | | | 57.0 | | | | 45.7 | | | | 58.6 | | | | 62.2 | | | | 223.5 | | | Earnings (loss) from continuing operations (a) | | | 5.5 | | | | (22.5 | ) | | | 8.2 | | | | 7.8 | | | | (1.0 | ) | | Net earnings (loss) attributable to Modine (a) | | | 5.1 | | | | (22.5 | ) | | | 8.2 | | | | 7.6 | | | | (1.6 | ) | | Net earnings (loss) per share attributable to Modine shareholders: | | | | | | | | | | | | | | | | | | | | | | Basic | | $ | 0.11 | | | $ | (0.47 | ) | | $ | 0.17 | | | $ | 0.16 | | | $ | (0.03 | ) | | Diluted | | | 0.11 | | | | (0.47 | ) | | | 0.17 | | | | 0.16 | | | | (0.03 | ) |
| | | Fiscal 2015 quarters ended | | | | | | | June | | Sept. | | Dec. | | March | | Fiscal 2015 | | | | | | | | | | | | | | | | | | | Net sales | | $ | 392.5 | | | $ | 377.3 | | | $ | 363.6 | | | $ | 363.0 | | | $ | 1,496.4 | | | Gross profit | | | 67.7 | | | | 56.7 | | | | 59.4 | | | | 62.7 | | | | 246.5 | | | Earnings (loss) from continuing operations (b) | | | 14.1 | | | | 2.0 | | | | 9.1 | | | | (3.0 | ) | | | 22.2 | | | Net earnings (loss) attributable to Modine (b) | | | 13.7 | | | | 1.7 | | | | 9.6 | | | | (3.2 | ) | | | 21.8 | | | Net earnings (loss) per share attributable to Modine shareholders: | | | | | | | | | | | | | | | | | | | | | | Basic | | $ | 0.29 | | | $ | 0.04 | | | $ | 0.20 | | | $ | (0.07 | ) | | $ | 0.46 | | | Diluted | | | 0.28 | | | | 0.04 | | | | 0.20 | | | | (0.07 | ) | | | 0.45 | |
| (a) | During fiscal 2016, restructuring expenses totaled $2.6 million, $1.0 million, $1.6 million, and $11.4 million for the quarters ended June 30, 2015, September 30, 2015, December 31, 2015, and March 31, 2016, respectively (see Note 6). During the fourth quarter of fiscal 2016, the Company recorded a $9.9 million asset impairment charge related to a manufacturing facility in Germany (see Note 6). During fiscal 2016, non-cash pension settlement losses totaled $39.2 million, $1.1 million, and $1.8 million for the quarters ended September 30, 2015, December 31, 2015, and March 31, 2016, respectively (see Note 17). During the fourth quarter of fiscal 2016, the Company recorded a $9.5 million gain related to an insurance settlement for equipment losses resulting from the Airedale fire (see Note 2). Also during the fourth quarter of fiscal 2016, the Company reversed a deferred tax asset valuation allowance, and, as a result, recorded an income tax benefit of $3.0 million (see Note 8). |
| (b) | During fiscal 2015, restructuring expenses totaled $0.8 million, $1.0 million, $1.9 million, and $1.0 million for the quarters ended June 30, 2014, September 30, 2014, December 31, 2014, and March 31, 2015, respectively (see Note 6). During the third quarter of fiscal 2015, the Company sold a wind tunnel and recognized a gain of $3.2 million (see Note 6). During the fourth quarter of fiscal 2015, the Company recorded a $7.8 million goodwill impairment charge (see Note 14) and a $3.2 million charge associated with a legal matter in Brazil (see Note 19). |
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of
Modine Manufacturing Company:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheet of Modine Manufacturing Company and subsidiaries (the Company) as of March 31, 2023, the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for the year ended March 31, 2023, and the related notes and financial statement schedule II - Valuation and Qualifying Accounts (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of March 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the accompanying consolidated financial statements listed in the index appearing under Item 15(a)(1),referred to above present fairly, in all material respects, the financial position of Modine Manufacturingthe Company and its subsidiaries atas of March 31, 2016 and 2015,2023, and the results of theirits operations and theirits cash flows for each of the three years in the periodyear ended March 31, 20162023, in conformity with accounting principlesU.S. generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2016,2023 based on criteria established in Internal Control -– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Commission.
Basis for Opinions
The Company'sCompany’s management is responsible for these consolidated financial statements, and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting,, included in the accompanying Management’s Report on Internal Control overOver Financial Reporting appearing under Item 9A.Reporting. Our responsibility is to express opinionsan opinion on thesethe Company’s consolidated financial statements and an opinion on the financial statement schedule, and on the Company'sCompany’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordanceare a public accounting firm registered with the standards of the Public Company Accounting Oversight Board (United States). (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our auditsaudit of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements, assessingstatements. Our audit also included evaluating the accounting principles used and significant estimates made by management, andas well as evaluating the overall presentation of the consolidated financial statement presentation.statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it classifies deferred taxes in fiscal 2016.Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i)(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii)(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii)(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Realizability of certain domestic deferred tax assets
As discussed in Notes 1 and 8 to the consolidated financial statements, 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. In making this assessment, the Company considers expectations of future taxable income and tax planning strategies. In addition, the Company considers the duration of statutory carryforward periods and historical financial results. Valuation allowances as of March 31, 2023 were $61.6 million, a portion of which are related to certain domestic deferred tax assets. The Company recorded a reduction in its valuation allowance on its deferred tax assets during the year ended March 31, 2023.
We identified the evaluation of the realizability of certain domestic deferred tax assets, specifically certain federal carryforward assets, as a critical audit matter. Subjective and challenging auditor judgment was required to: (i) evaluate the realizability of certain federal carryforward assets based on the projected future taxable income over the periods in which those federal carryforward assets will be utilized, and (ii) assess the application of tax laws to utilize the federal carryforward assets.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s evaluation of the realizability of the federal carryforward assets, including controls related to the projections of future taxable income and the application of tax laws to utilize the federal carryforward assets. We evaluated the reasonableness of management’s projections of future taxable income, including positive and negative evidence used, by comparing the projections to:
recent financial profitability trends of the Company industry data and economic trends, and evidence obtained in other areas of the audit.
We assessed the Company’s ability to project future earnings based on comparisons of the Company’s previous annual projections to actual results. We performed a sensitivity analysis over the amount and timing of future taxable income to assess the impact on utilization of the federal carryforward assets. We involved tax professionals with specialized skills and knowledge, who assisted in assessing the Company’s application of tax laws to utilize the federal carryforward assets and evaluating the recognition and realizability of the carryforward assets.
/s/PricewaterhouseCoopers KPMG LLP
We have served as the Company’s auditor since 2022. Milwaukee, Wisconsin May 26, 201625, 2023
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Modine Manufacturing Company
Opinion on the Financial Statements
We have audited the consolidated balance sheet of Modine Manufacturing Company and its subsidiaries (the “Company”) as of March 31, 2022, and the related consolidated statements of operations, comprehensive income, cash flows and shareholders’ equity for each of the two years in the period ended March 31, 2022, including the related notes and schedule of valuation and qualifying accounts as of and for each of the two years in the period ended March 31, 2022 listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2022, and the results of its operations and its cash flows for each of the two years in the period ended March 31, 2022 in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
May 26, 2022, except for the change in composition of reportable segments discussed in Note 22 to the consolidated financial statements, as to which the date is May 25, 2023
We served as the Company’s auditor from 1935to 2022.
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. |
Not applicable.Applicable
| ITEM 9A. | CONTROLS AND PROCEDURES. |
Conclusion Regarding Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report on Form 10-K, management of the Company, at the direction of the General Counsel and under the supervision, and with the participation, of the Company'sCompany’s President and Chief Executive Officer and Executive Vice President, Finance and Chief Financial Officer, evaluated the effectiveness of the Company'sCompany’s disclosure controls and procedures, at a reasonable assurance level, as defined in the Securities Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Finance and Chief Financial Officer have concluded that the design and operation of the Company'sCompany’s disclosure controls and procedures were effective, at a reasonable assurance level, as of March 31, 2016.2023.
Management’s Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. The Company’s internal control over financial reporting is a process designed by, or under the supervision of, the Company’s President and Chief Executive Officer and Executive Vice President, Finance and Chief Financial Officer, and effected by the Company'sCompany’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of its financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management, with the participation of the Company’s President and Chief Executive Officer and Executive Vice President, Finance and Chief Financial Officer, has assessed the effectiveness of the Company’s internal control over financial reporting as of March 31, 2016.2023. In making its assessment, of internal control over financial reporting, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in “Internal Control—Integrated Framework (2013).” Based onupon this assessment, management concluded that, as of March 31, 2016,2023, the Company’s internal control over financial reporting was effective.
The effectiveness of the Company’s internal control over financial reporting as of March 31, 20162023 has been audited by PricewaterhouseCoopersKPMG LLP, an independent registered public accounting firm, as stated in their report which appears herein.
Changes in Internal Control Over Financial Reporting
There have been no changes in internal control over financial reporting during the fourth quarter of fiscal 20162023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
| ITEM 9B. | OTHER INFORMATION. |
None.
| ITEM 9C. | DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS. |
Not Applicable.
PART III
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. |
Directors. The Company incorporates by reference the information appearing in the Company'sCompany’s Proxy Statement for the 20162023 Annual Meeting of Shareholders to be held on July 21, 2016August 17, 2023 (the “2016“2023 Annual Meeting Proxy Statement”) under the caption “Election of Directors.”
Executive Officers. The information in response to this Item appears under the caption "Executive Officers of the Registrant"“Information about our Executive Officers” in this Form 10-K.
Compliance with Section 16(a)Code of the Exchange Act. Conduct
The Company incorporates by reference the information appearing in the 2016 Annual Meeting Proxy Statement under the caption “Section 16(a) Beneficial Ownership Reporting Compliance.”
Code of Ethics. The Company incorporates by reference the information appearing in the 20162023 Annual Meeting Proxy Statement under the caption “Corporate Governance – Code of Ethics.Conduct.” The Company'sCompany’s Code of Ethics (labeled as the Code of Conduct)Conduct is included on its website, www.modine.com (About Modine link). We intend to satisfy our disclosure requirements under Item 5.05 of Form 8-K regarding amendments to, or waivers of, any provision of our Code of Conduct that applies to our principal executive, financial and accounting officers and our directors by posting such information on our website.
Board Committee Charters. Charters The Board of Directors has approved charters for its Audit Committee, Officer NominationHuman Capital and Compensation Committee, Corporate Governance and Nominating Committee and Technology Committee. These charters are included on the Company’s website, www.modine.com (Investors link).
Audit Committee Financial Expert. The Company incorporates by reference the information appearing in the 20162023 Annual Meeting Proxy Statement under the caption “Committees of the Board of Directors – Audit Committee.”
Audit Committee Disclosure. The Company incorporates by reference the information appearing in the 20162023 Annual Meeting Proxy Statement under the captions “Committees of the Board of Directors – Audit Committee” and “Board Meetings and Committees.”
Guidelines on Corporate Governance. The Board of Directors has adopted Guidelines on Corporate Governance. The Company’s Guidelines on Corporate Governance are included on its website, www.modine.com (Investors link).
Security Holder Recommendation of Board Nominees. The Company incorporates by reference the information appearing in the 20162023 Annual Meeting Proxy Statement under the caption “Shareholder Nominations and Recommendations of Director Candidates.”
Delinquent Section 16(a) Reports The Company incorporates by reference the information appearing in the 2023 Annual Meeting Proxy Statement under the caption “Delinquent Section 16(a) Reports.”
We do not intend to incorporate our internet website and the information contained therein or incorporated therein into this annual report on Form 10-K.
| ITEM 11. | EXECUTIVE COMPENSATION. |
The information appearing in the 20162023 Annual Meeting Proxy Statement under the captions “Compensation Discussion and Analysis,” “Compensation of Directors,” “Committees of the Board of Directors – Officer NominationHuman Capital and Compensation Committee: CompensationHCC Committee Interlocks and Insider Participation,” and “Compensation Committee Report” is incorporated herein by reference.
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. |
The Company incorporatesOther than the information below, the information required by this Item 12 is incorporated by reference to the information relating to stock ownershipsection under the caption “Security Ownership of Certain Beneficial Owners and Management,” and under the caption “Equity Compensation Plan Information,”Management” in the 20162023 Annual Meeting Proxy Statement.
Each of the Company’s equity compensation plans, listed below, has been approved by its shareholders:
Amended and Restated 2008 Incentive Compensation Plan; 2017 Incentive Compensation Plan; and Amended and Restated 2020 Incentive Compensation Plan.
The following table sets forth required information about equity compensation plans as of March 31, 2023:
| Plan Category | | Number of shares to be issued upon exercise of outstanding options, warrants or rights (a) | | Weighted-average exercise price of outstanding options, warrants and rights (b) | | Number of shares remaining available for future issuance (excluding securities reflected in 1st column) (c) | | Equity Compensation Plans approved by security holders | | 1,889,799 | | $12.28 | | 2,159,658 | | Equity Compensation Plans not approved by security holders | | - | | - | | - | | Total | | 1,889,799 | | $12.28 | | 2,159,658 |
| (a) | Includes shares issuable under the following type of awards: options – 890,687 shares and restricted stock units –999,112 shares. The number of shares subject to options were granted under the following plans: 2008 Incentive Plan – 136,735 shares, 2017 Incentive Plan – 142,972 shares, 2020 Incentive Plan –610,980 shares. Shares issuable under restricted stock unit awards were granted under the following plans: 2017 Incentive Plan – 83,350 shares, 2020 Incentive Plan – 915,762 shares. |
| (b) | The weighted average exercise price does not take into account awards of restricted stock units or performance stock which do not have an exercise price. |
| (c) | Includes the number of shares remaining available for future issuance under the Amended and Restated 2020 Incentive Compensation Plan. |
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. |
The Company incorporates by reference the information contained in the 20162023 Annual Meeting Proxy Statement under the captions “Certain Relationships and Related Party Transactions” and “Director Independence.”
| ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES. |
The Company incorporates by reference the information contained in the 20162023 Annual Meeting Proxy Statement under the caption “Independent Auditors’ Fees for Fiscal 20162023 and 2015.2022.”
PART IV
| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. |
(a) Documents Filed. The following documents are filed as part of this Report:
(a) | Documents Filed. The following documents are filed as part of this Report: |
| | Page in Form 10-K | | | | 1. The consolidated financial statements of Modine Manufacturing Company and its subsidiaries filed under Item 8: | | | | | Consolidated Statements of Operations for the years ended March 31, 2016, 20152023, 2022 and 20142021 | 3842 | Consolidated Statements of Comprehensive Income for the years ended March 31, 2016, 20152023, 2022 and 20142021 | 3943 | Consolidated Balance Sheets at March 31, 20162023 and 20152022 | 4044 | Consolidated Statements of Cash Flows for the years ended March 31, 2016, 20152023, 2022 and 20142021 | 4145 | Consolidated Statements of Shareholders'Shareholders’ Equity for the years ended March 31, 2016, 20152023, 2022 and 20142021 | 4246 | | Notes to Consolidated Financial Statements | 43-6847-81 | Report of Independent Registered Public Accounting Firm (KPMG PCAOB ID 185) | 6982
| Report of Independent Registered Public Accounting Firm (PricewaterhouseCoopers PCAOB ID 238) | 83
| | | | 2. Financial Statement Schedules | | | | | The following financial statement schedule should be read in conjunction with the consolidated financial statements set forth in Item 8: | | | Schedule II -- Valuation and Qualifying Accounts for the years ended March 31, 2023, 2022 and 2021 | 7487 | | | | Schedules other than those listed above are omitted because they are not applicable, not required, or because the required information is included in the consolidated financial statements and the notes thereto. | | | | | | 3. Exhibits and Exhibit Index. | 75-7788-91 | | | | See the Exhibit Index included as the last part of this report, which is incorporated herein by reference. Each management contract and compensatory plan or arrangement required to be filed as an exhibit to this report is identified in the Exhibit Index by an asterisktwo asterisks following its exhibit number. | |
ITEM 16. | FORM 10-K SUMMARY. |
None.
MODINE MANUFACTURING COMPANY AND SUBSIDIARIES (A Wisconsin Corporation)
SIGNATURESSCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the years ended March 31, 2023, 2022 and 2021
(In millions)
| | | | | Additions | | | | | | | | | Description | | Balance at Beginning of Period | | | Charged (Benefit) to Costs and Expenses | | | Charged to Other Accounts | | | Reclassified from (to) Held for Sale | | | Balance at End of Period | | | | | | | | | | | | | | | | | | | | 2023: Valuation Allowance for Deferred Tax Assets | | $ | 112.2 | | | $ | (49.7 | ) | | $ | (0.9 | )(a) | | $ | - | | | $ | 61.6 | | | | | | | | | | | | | | | | | | | | | | | | | 2022: Valuation Allowance for Deferred Tax Assets | | $ | 90.7 | | | $ | (4.6 | ) | | $ | (1.0 | )(a) | | $ | 27.1 | | | $ | 112.2 | | | | | | | | | | | | | | | | | | | | | | | | | 2021: Valuation Allowance for Deferred Tax Assets | | $ | 46.9 | | | $ | 86.2 |
| | $ | 2.8 | (a) | | $ | (45.2 | ) | | $ | 90.7 | |
| (a) | Foreign currency translation and other adjustments. |
MODINE MANUFACTURING COMPANY (THE “REGISTRANT”) (COMMISSION FILE NO. 1-1373)
TO 2023 ANNUAL REPORT ON FORM 10-K
Exhibit No. | | Description | | Incorporated Herein By Referenced To | | Filed Herewith | | | | | | | | | | Amended and Restated Articles of Incorporation, as amended. | | Exhibit 3.1 to Form 10-K for the fiscal year ended March 31, 2018 | | | | | | | | | | | | Bylaws, as amended. | | Exhibit 3.1 to Registrant’s Current Report on Form 8-K dated January 19, 2023 | | | | | | | | | | | | Form of Stock Certificate of the Registrant. | | Exhibit 4(a) to Form 10-K for the fiscal year ended March 31, 2003 (“2003 10-K”) | | | | | | | | | | | | Amended and Restated Articles of Incorporation, as amended. | | See Exhibit 3.1 hereto | | | | | | | | | | | | Amended and Restated Collateral Agency Intercreditor Agreement (the “Original Intercreditor Agreement”) dated as of August 12, 2010 among the Lenders (as defined therein), the Noteholders (as defined therein) and JPMorgan Chase Bank, N.A. as Collateral Agent. | | Exhibit 4.3 to Registrant’s Current Report on Form 8-K dated August 12, 2010 | | | | | | | | | | | | First Amendment to the Original Intercreditor Agreement, among the Lenders, the Note Holders and JPMorgan as Collateral Agent, pursuant to which the Lenders, the Note Holders and JPMorgan amended the Original Intercreditor Agreement. | | Exhibit 4.3 to Registrant’s Current Report on Form 8-K dated August 30, 2013 | | | | | | | | | | | | Credit Facility Agreement among Modine Holding GmbH, Modine Europe GmbH and Deutsche Bank AG dated as of April 27, 2012. | | Exhibit 4.10 to Registrant’s Form 10-K for the fiscal year ended March 31, 2012 | | | | | | | | | | | | Description of Registrant’s securities. | | | | X | | | | | | | | | | Fourth Amended and Restated Credit Agreement dated as of June 28, 2019. | | Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated June 28, 2019 | | | | | | | | | | | | Second Amended and Restated Note Purchase and Private Shelf Agreement dated as of August 6, 2019. | | Exhibit 4.1 to Registrant’s Form 10-Q for the third quarter ended December 31, 2019 (“December 31, 2019 10-Q”) | | | | | | | | | | | | First Amendment to Second Amended and Restated Note Purchase and Private Shelf Agreement dated as of January 31, 2020. | | Exhibit 4.2 to December 31, 2019 10-Q | | | | | | | | | | | | First Amendment to Fourth Amended and Restated Credit Agreement dated as of May 19, 2020. | | Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated May 19, 2020 (“May 19, 2020 8-K”) | | | | | | | | | | | | Second Amendment to Second Amended and Restated Note Purchase and Private Shelf Agreement dated as of May 19, 2020. | | Exhibit 4.2 to May 19, 2020 8-K | | |
| | Amendment No. 2 to Fourth Amended and Restated Credit Agreement dated as of May 18, 2021. | | Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated May 18, 2021 (“May 18, 2021 8-K”) | | | | | | | | | | | | Third Amendment to Second Amended and Restated Note Purchase and Private Shelf Agreement dated as of May 18, 2021. | | Exhibit 4.2 to May 18, 2021 8-K | | | | | | | | | | | | Fifth Amended and Restated Credit Agreement dated as of October 12, 2022. | | Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated October 12, 2022 | | | | | | | | | | | | Fourth Amendment to Second Amended and Restated Note Purchase and Private Shelf Agreement dated as of November 21, 2022. | | Exhibit 4.1 to Registrant’s Form 10-Q for the third quarter ended December 31, 2022 | | | | | | | | | | | | Director Emeritus Retirement Plan effective April 1, 1992 (and frozen as of July 1, 2000). | | Exhibit 10(a) to Registrant’s Form 10-K for the fiscal year ended March 31, 2002 | | | | | | | | | | | | Form of Change in Control and Termination Agreement (amended and restated) between the Registrant and officers other than Neil Brinker. | | Exhibit 10(f) to Registrant’s Form 10-K for the fiscal year ended March 31, 2004 | | | | | | | | | | | | Executive Supplemental Retirement Plan (as amended). | | Exhibit 10(f) to Registrant’s Form 10-K for the fiscal year ended March 31, 2000 | | | | | | | | | | | | Deferred Compensation Plan (as amended). | | Exhibit 10(y) to 2003 10-K | | | | | | | | | | | | 2008 Incentive Compensation Plan (Amended and Restated effective May 7, 2014). | | Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated July 17, 2014 | | | | | | | | | | | | Form of Fiscal 2023 Performance Cash Award Agreement. | | Exhibit 10.1 to the Registrant’s Form 10-Q for the first quarter ended June 30, 2022 (“June 30, 2022 10-Q”) | | | | | | | | | | | | Form of Fiscal 2023 Incentive Stock Option Award Agreement. | | Exhibit 10.2 to June 30, 2022 10-Q | | | | | | | | | | | | Form of Fiscal 2023 Non-Qualified Stock Option Award Agreement.. | | Exhibit 10.3 to June 30, 2022 10-Q | | | | | | | | | | | | Form of Fiscal 2023 Restricted Stock Unit Award Agreement.. | | Exhibit 10.4 to June 30, 2022 10-Q | | | | | | | | | | | | Form of Fiscal 2023 Modine Non-Employee Director Restricted Stock Unit Award Agreement with Deferral. | | Exhibit 10.6 to June 30, 2022 10-Q | | | | | | | | | | | | Form of Fiscal 2023 Modine Non-Employee Director Restricted Stock Unit Award Agreement without Deferral. | | Exhibit 10.7 to June 30, 2022 10-Q | | | | | | | | | | | | Change in Control Agreement dated as of June 4, 2021, by and between Modine Manufacturing Company and Neil D. Brinker. | | Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated June 4, 2021 | | | | | | | | | | | | Amendment No. 1 to Form of Change in Control and Termination Agreement (amended and restated) between the Registrant and Officers other than Neil Brinker. | | Exhibit 10.17 to Registrant’s Form 10-K for the fiscal year ended March 31, 2011 | | | | | | | | | | | | Supplemental Severance Policy. | | Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated October 17, 2011 | | |
| | 2017 Incentive Compensation Plan. | | Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated July 20, 2017 | | | | | | | | | | | | Transition and Separation Agreement between Thomas A. Burke and Modine Manufacturing Company effective as of August 4, 2020. | | Exhibit 10.6 to the Registrant’s Form 10-Q for the second quarter ended September 30, 2020 | | | | | | | | | | | | [Corrected] Offer Letter dated as of November 10, 2020, by and between the Company and Neil Brinker. | | Exhibit 10.1 to the Registrant’s Form 10-Q for the third quarter ended December 31, 2020 | | | | | | | | | | | | 2020 Incentive Compensation Plan (Amended and Restated effective July 21, 2022). | | Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated July 21, 2022 | | | | | | | | | | | | Form of Retention Letter, effective August 31, 2020, between the Company and each of Michael B. Lucareli, Scott L. Bowser and Sylvia A. Stein. | | Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated August 31, 2020 | | | | | | | | | | | | Offer Letter dated as of July 2, 2021, by and between the Company and Adrian Peace. | | Exhibit 10.1 to the Registrant’s Form 10-Q for the second quarter ended September 30, 2021 10-Q (“September 30, 2021 10-Q”) | | | | | | | | | | | | Offer Letter dated as of July 16, 2021, by and between the Company and Eric S. McGinnis. | | Exhibit 10.2 to September 30, 2021 10-Q | | | | | | | | | | | | First Amendment to Eric S. McGinnis Offer Letter. | | Exhibit 10.3 to September 30, 2021 10-Q | | | | | | | | | | | | Form of Retention Restricted Stock Award Agreement, effective October 19, 2022, between the Company and each of Brian J. Agen, Michael B. Lucareli, Eric S. McGinnis and Sylvia A. Stein. | | Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated October 19, 2022 | | | | | | | | | | | | List of subsidiaries of the Registrant. | | | | X | | | | | | | | | | Consent of PricewaterhouseCoopers LLP. | | | | X | | | | | | | | | | Consent of KPMG LLP. | | | | X | | | | | | | | | | Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer. | | | | X | | | | | | | | | | Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. | | | | X | | | | | | | | | | Section 1350 Certification of Neil D. Brinker, President and Chief Executive Officer. | | | | X | | | | | | | | | | Section 1350 Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. | | | | X | | | | | | | | 101.INS | | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). | | | | X | | | | | | | | 101.SCH | | Inline XBRL Taxonomy Extension Schema. | | | | X | | | | | | | | 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | | | | X | | | | | | | | 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document. | | | | X |
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document. | | | | X | | | | | | | | 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | | | | X | | | | | | | | 104 | | Cover page interactive data file (formatted as inline XBRL and contained in Exhibits 101). | | | | |
* | Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, the Registrant has omitted certain agreements with respect to long-term debt not exceeding 10% of consolidated total assets. The Registrant agrees to furnish a copy of any such agreements to the Securities and Exchange Commission upon request. |
** | Denotes management contract or executive compensation plan or arrangement required to be filed as an exhibit pursuant to Item 15 of Form 10-K. |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: May 26, 201625, 2023 | Modine Manufacturing Company | | | | | | By: | /s/ Thomas A. BurkeNeil D. Brinker | | | Neil D. Brinker, President | | | | Thomas A. Burke, President and Chief Executive Officer | | | | and Chief (Principal Executive Officer | | | (Principal Executive Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated.
/s/ Thomas A. BurkeNeil D. Brinker | | Neil D. Brinker | Thomas A. BurkeMay 25, 2023
| President, Chief Executive Officer and Director | | (Principal Executive Officer) | May 26, 2016
| | | | /s/ Michael B. Lucareli | | Michael B. Lucareli | May 25, 2023 | Executive Vice President, Finance and Chief Financial Officer | | (Principal Financial and Accounting Officer) | May 26, 2016
| | | | /s/ Marsha C. Williams | | Marsha C. Williams | DirectorMay 25, 2023
| Chairperson, Board of Directors | May 26, 2016
| | | | /s/ David J. AndersonEric D. Ashleman | | Eric D. Ashleman | David J. AndersonMay 25, 2023
| Director | |
| | | /s/ Suresh V. Garimella |
| Suresh V. Garimella | May 26, 201625, 2023 | Director | | | | | /s/ Charles P. CooleyKatherine C. Harper | | Katherine C. Harper | Charles P. CooleyMay 25, 2023 | Director | May 26, 2016
| | | | /s/ Suresh V. Garimella
Suresh V. Garimella
Director
| May 26, 2016
|
/s/ Larry O. Moore |
| Larry O. Moore | May 25, 2023 | Director | May 26, 2016
| | | | /s/ Christopher W. Patterson |
| Christopher W. Patterson | May 25, 2023 | Director | May 26, 2016
| | | | /s/ Christine Y. YanDavid J. Wilson | | David J. Wilson | Christine Y. YanMay 25, 2023
| Director | May 26, 2016
| | | | /s/ David G. Bills David G. Bills
Director
William A. Wulfsohn | May 26, 2016
|
MODINE MANUFACTURING COMPANY AND SUBSIDIARIES
(A Wisconsin Corporation)
SCHEDULE II ‑ VALUATION AND QUALIFYING ACCOUNTSFor the years ended March 31, 2016, 2015 and 2014
(In millions)
| | | | | | Additions | | | | | | | Description | | Balance at Beginning of Period | | | Charged (Benefit) to Costs and Expenses | | | Charged to Other Accounts | | | | Balance at End of Period | | | | | | | | | | | | | | | | | | 2016: Valuation Allowance for Deferred Tax Assets | | $ | 48.0 | | | $ | 1.5 | | | $ | 1.3 | | (a) | | $ | 50.8 | | | | | | | | | | | | | | | | | | | | | | 2015: Valuation Allowance for Deferred Tax Assets | | $ | 61.2 | | | $ | (6.8 | ) | | $ | (6.4 | ) | (a) | | $ | 48.0 | | | | | | | | | | | | | | | | | | | | | | 2014: Valuation Allowance for Deferred Tax Assets | | $ | 172.8 | | | $ | (113.1 | ) | | $ | 1.5 | | (a) | | $ | 61.2 | |
Notes:
| (a) | Foreign currency translation and other adjustments |
MODINE MANUFACTURING COMPANY
(THE “REGISTRANT”)
(COMMISSION FILE NO. 1-1373)
TO
2016 ANNUAL REPORT ON FORM 10-K
Exhibit No. | | Description | | Incorporated Herein By
Referenced To
| | Filed
Herewith
| William A. Wulfsohn | | | | | | May 25, 2023 | 3.1 | | Amended and Restated Articles of Incorporation, as amended. | | Exhibit 4.2 to Registrant’s Registration Statement on Form S-3 (333-161030) dated August 4, 2009 | Director | | | | | | /s/ Christine Y. Yan | | | |
| 3.2Christine Y. Yan | | Bylaws, as amended. | | Exhibit 3.1 to Registrant’s Current Report on Form 8-K dated February 10, 2015 | | May 25, 2023 | | | | | | | | 4.1 | | Form of Stock Certificate of the Registrant. | | Exhibit 4(a) to Form 10-K for the fiscal year ended March 31, 2003 ("2003 10-K") | | | | | | | | | | 4.2 | | Amended and Restated Articles of Incorporation, as amended. | | See Exhibit 3.1 hereto. | | | | | | | | | | 4.3** | | Note Purchase and Private Shelf Agreement (the “Original Note Purchase Agreement”) dated as of August 12, 2010 among the Registrant and the Series A Purchasers named therein of $125,000,000 6.83% Secured Senior Notes, Series A, due August 12, 2020 and $25,000,000 Private Shelf Facility and each Prudential Affiliate (as defined therein) that may become bound by certain provisions thereof. | | Exhibit 4.2 to Registrant’s Current Report on Form 8-K dated August 12, 2010 8-K (“August 12, 2010 8-K”) | | | | | | | | | | 4.4** | | Amended and Restated Collateral Agency Intercreditor Agreement (the “Original Intercreditor Agreement”) dated as of August 12, 2010 among the Lenders (as defined therein), the Noteholders (as defined therein) and JPMorgan Chase Bank, N.A. as Collateral Agent. | | Exhibit 4.3 to August 12, 2010 8-K | | | | | | | | | | 4.5** | | First Amendment to Note Purchase and Private Shelf Agreement and Waiver dated as of March 15, 2012, with Prudential Investment Management, Inc., The Prudential Insurance Company of America and Prudential Retirement Insurance and Annuity Company (collectively the “Noteholders”) pursuant to which the Company and the Noteholders amended the Original Note Purchase Agreement. | | Exhibit 4.2 to Registrant’s Current Report on Form 8-K dated March 15, 2012 8-K | | | | | | | | | | 4.6** | | Second Amendment to Note Purchase and Private Shelf Agreement dated as of April 20, 2012, with Prudential Investment Management, Inc., The Prudential Insurance Company of America and Prudential Retirement Insurance and Annuity Company (collectively the “Noteholders”) pursuant to which the Company and the Noteholders amended the Original Note Purchase Agreement, as amended. | | Exhibit 4.2 to Registrant’s Current Report on Form 8-K dated April 20, 2012 8-K | | | | | | | | | | 4.7** | | Third Amendment to Note Purchase and Private Shelf Agreement dated as of August 6, 2012, with Prudential Investment Management, Inc., The Prudential Insurance Company of America and Prudential Retirement Insurance and Annuity Company (collectively the “Noteholders”) pursuant to which the Company and the Noteholders amended the Original Note Purchase Agreement, as amended. | | Exhibit 4.2 to Registrant’s Current Report on Form 8-K dated August 6, 2012 8-K | Director | |
4.8** | | Second Amended and Restated Credit Agreement dated as of August 30, 2013, with JPMorgan Chase Bank, N.A., as Administrative Agent, LC Issuer, Swing Line Lender and as a Lender, and U.S. Bank, N.A. and Wells Fargo Bank, N.A. as Syndication Agents and as Lenders, BMO Harris Bank N.A., as Documentation Agent and as Lender and Associated Bank, N.A., Comerica Bank and Sovereign Bank as Lenders | | Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated August 30, 2013 (“August 30, 2013 8-K”) | | | | | | | | | | 4.9** | | Fourth Amendment to Note Purchase and Private Shelf Agreement (the “Fourth Note Purchase Amendment”) dated as of August 30, 2013, with Prudential Investment Management, Inc., The Prudential Insurance Company of America and Prudential Retirement Insurance and Annuity Company (collectively the “Note Holders”) pursuant to which the Company and the Note Holders amended the Original Note Purchase Agreement, as amended. | | Exhibit 4.2 to August 30, 2013 8-K | | | | | | | | | | 4.10** | | First Amendment to the Original Intercreditor Agreement, among the Lenders, the Note Holders and JPMorgan as Collateral Agent, pursuant to which the Lenders, the Note Holders and JPMorgan amended the Original Intercreditor Agreement. | | Exhibit 4.3 to August 30, 2013 8-K | | | | | | | | | | 4.11 | | Credit Facility Agreement among Modine Holding GmbH, Modine Europe GmbH and Deutsche Bank AG dated as of April 27, 2012. | | Exhibit 4.10 to Registrant’s Form 10-K for the fiscal year ended March 31, 2012 | | | | | | | | | | 10.1* | | Director Emeritus Retirement Plan effective April 1, 1992 (and frozen as of July 1, 2000). | | Exhibit 10(a) to Registrant’s Form 10-K for the fiscal year ended March 31, 2002 | | | | | | | | | | 10.2* | | Employment Agreement between the Registrant and Thomas A. Burke dated as of June 15, 2007. | | Exhibit 10.3 to Registrant’s Current Report on Form 8-K dated June 15, 2007 | | | | | | | | | | 10.3* | | Form of Amendment No. 1 to Employment Agreement entered into as of July 1, 2008 with Thomas A. Burke. | | Exhibit 10.1 to Registrant���s Current Report on Form 8-K dated July 1, 2008 | | | | | | | | | | 10.4* | | Form of Change in Control and Termination Agreement (amended and restated) between the Registrant and officers other than Thomas A. Burke. | | Exhibit 10(f) to Registrant’s Form 10-K for the year ended March 31, 2004 | | | | | | | | | | 10.5* | | Employment Agreement, dated July 1, 2014, between Modine Holding GmbH and Holger Schwab, effective as of July 1, 2015. | | Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated July 1, 2014 | | | | | | | | | | 10.6* | | Executive Supplemental Retirement Plan (as amended). | | Exhibit 10(f) to Registrant's Form 10-K for the fiscal year ended March 31, 2000 | | | | | | | | | | 10.7* | | Deferred Compensation Plan (as amended). | | Exhibit 10(y) to 2003 10-K | | | | | | | | | | 10.8* | | 2007 Incentive Compensation Plan. | | Appendix A to the Registrant's Proxy Statement dated June 18, 2007 | | | | | | | | | | 10.9* | | 2008 Incentive Compensation Plan92
(Amended and Restated effective May 7, 2014).
| | Exhibit 10.1 to Registrant's Current Report on Form 8-K dated July 17, 2014 | | |
10.10* | | Amendment No. 1 to Form of Change in Control and Termination Agreement (amended and restated) between the Registrant and Officers other than Thomas A. Burke. | | Exhibit 10.17 to Registrant's Form 10-K for the fiscal year ended March 31, 2011 | | | | | | | | | | 10.11* | | Supplemental Severance Policy. | | Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated October 17, 2011 | | | | | | | | | | 10.12* | | Form of Fiscal 2016 Modine Performance Stock Award Agreement | | Exhibit 10.1 to Form 10-Q for the first quarter ended June 30, 2015 ("June 30, 2015 10-Q") | | | | | | | | | | 10.13* | | Form of Fiscal 2016 Modine Incentive Stock Options Award Agreement | | Exhibit 10.2 to June 30, 2015 10-Q | | | | | | | | | | 10.14* | | Form of Fiscal 2016 Modine Restricted Stock Award Agreement | | Exhibit 10.3 to June 30, 2015 10-Q | | | | | | | | | | 10.15* | | Form of Fiscal 2016 Modine Non-Qualified Stock Option Award Agreement | | Exhibit 10.4 to June 30, 2015 10-Q | | | | | | | | | | | | List of subsidiaries of the Registrant. | | | | X | | | | | | | | | | Consent of independent registered public accounting firm. | | | | X | | | | | | | | | | Rule 13a-14(a)/15d-14(a) Certification of Thomas A. Burke, President and Chief Executive Officer. | | | | X | | | | | | | | | | Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Vice President, Finance and Chief Financial Officer. | | | | X | | | | | | | | | | Section 1350 Certification of Thomas A. Burke, President and Chief Executive Officer. | | | | X | | | | | | | | | | Section 1350 Certification of Michael B. Lucareli, Vice President, Finance and Chief Financial Officer. | | | | X | | | | | | | | 101.INS | | Instance Document | | | | X | | | | | | | | 101.SCH | | XBRL Taxonomy Extension Schema | | | | X | | | | | | | | 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | | | X | | | | | | | | 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | | | X | | | | | | | | 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | | | X | | | | | | | | 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | | | X |
* Denotes management contract or executive compensation plan or arrangement required to be filed as an exhibit pursuant to Item 15 of Form 10-K.
** Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, the Registrant has omitted certain agreements with respect to long-term debt not exceeding 10% of consolidated total assets. The Registrant agrees to furnish a copy of any such agreements to the Securities and Exchange Commission upon request.
s | | | % of sales | |
Year Ended March 31, 20162023 Compared with Year Ended March 31, 2015:2022
Fiscal 20162023 net sales decreased $143of $2,298 million were $248 million, or 12 percent, higher than the prior year, primarily due to higher sales volume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases. These increases were partially offset by a $111 million unfavorable impact of foreign currency exchange rates. Sales in the Performance Technologies and Climate Solutions segments increased $144 million and $101 million, respectively.
Fiscal 2023 cost of sales of $1,909 million increased $168 million, or 10 percent, primarily due to higher sales volume and higher raw material prices, which increased $34 million. These increases were partially offset by a $95 million favorable impact of foreign currency exchange rates. As a percentage of sales, cost of sales decreased 180 basis points to 83.1 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.
As a result of higher sales and lower cost of sales as a percentage of sales, fiscal 2023 gross profit increased $80 million and gross margin improved 180 basis points to 16.9 percent.
Fiscal 2023 SG&A expenses increased $19 million, yet decreased 30 basis points as a percentage of sales. The higher SG&A expenses were primarily driven by higher compensation-related expenses, which increased $20 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions. These increases were partially offset by an $8 million favorable impact of foreign currency exchange rates. In addition, strategic reorganization costs, costs associated with our review of strategic alternatives for our automotive businesses, and environmental charges related to a previously-closed manufacturing facility in the U.S., which are each recorded at Corporate, decreased $3 million, $2 million, and $2 million, respectively, during fiscal 2023 compared with the prior year.
Restructuring expenses of $5 million in fiscal 2023 decreased $19 million compared with the prior year, primarily due to lower severance-related expenses in the Performance Technologies segment.
The net impairment reversal of $56 million during fiscal 2022 primarily related to the liquid-cooled automotive business. In connection with the termination of the agreement to sell this business in the third quarter of fiscal 2022, we reversed a significant amount of previously-recorded impairment charges within the Performance Technologies segment.
We sold our Austrian air-cooled automotive business on April 30, 2021. As a result of the sale, we recorded a $7 million loss on sale at Corporate during fiscal 2022.
Operating income of $150 million during fiscal 2023 increased $31 million from the prior year, primarily due to loweran $80 million increase in gross profit, a $19 million decrease in restructuring expenses, and the absence of the $7 million loss on the sale of the Austrian air-cooled automotive business in the prior year. These drivers, which favorably impacted operating income in fiscal 2023, were partially offset by the absence of the $56 million net impairment reversal recorded in the prior year and higher SG&A expenses.
Interest expense in fiscal 2023 increased $5 million compared with the prior year, primarily due to unfavorable changes in interest rates. In addition, we amended and extended our U.S. credit agreement that provides for a multi-currency revolving credit facility and U.S. dollar- and euro- denominated term loans maturing in October 2027, along with shorter-duration swingline loans. In connection with this credit agreement modification, we recorded $1 million of costs as interest expense during fiscal 2023.
The benefit for income taxes was $28 million in fiscal 2023, compared with a provision for income taxes of $15 million in fiscal 2022. The $43 million change was primarily due to a $57 million income tax benefit recorded in the current year related to the reversal of the valuation allowance on certain deferred tax assets in the U.S., partially offset by the absence of a net $11 million income tax benefit related to valuation allowances on deferred tax assets in foreign jurisdictions in the prior year.
Year Ended March 31, 2022 Compared with Year Ended March 31, 2021
Fiscal 2022 net sales of $2,050 million were $242 million, or 13 percent, higher than the prior year, primarily due to higher sales volume in each of our segments, and favorable commercial pricing, including adjustments in response to raw material price increases. Sales in the Climate Solutions and Performance Technologies segments increased $180 million and $63 million, respectively.
Fiscal 2022 cost of sales of $1,741 million increased $226 million, or 15 percent, primarily due to higher raw material prices, which increased $148 million, and higher sales volume. In addition, cost of sales in fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic. These factors, which caused an increase in cost of sales compared with the prior year, were partially offset by lower depreciation expense in the Performance Technologies segment and improved operating efficiencies. As a percentage of sales, cost of sales increased 110 basis points to 84.9 percent.
As a result of higher sales and higher cost of sales as a percentage of sales, fiscal 2022 gross profit increased $16 million and gross margin declined 110 basis points to 15.1 percent.
Fiscal 2022 SG&A expenses increased $4 million. The increase in SG&A expenses was primarily due to higher compensation-related expenses, as the prior year was favorably impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19. In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3 million. These increases were partially offset by lower costs related to our Americasreview of strategic alternatives for the automotive businesses and Europe segments. Saleslower strategic reorganization costs, which decreased $4 million and $3 million, respectively. The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.
Restructuring expenses of $24 million in fiscal 2022 increased $11 million compared with the prior year, primarily due to higher severance-related expenses in the Performance Technologies segment, partially offset by lower severance-related expenses in the Climate Solutions segment.
In fiscal 2021, we recorded $167 million of impairment charges to write down the long-lived assets in the liquid-cooled and Austrian air-cooled automotive businesses when they were classified as held for sale. In fiscal 2022, we adjusted the long-lived assets in the liquid-cooled automotive business to the lower of carrying or fair value once they no longer met the held for sale classification criteria and, as a result, recorded a net impairment reversal of $56 million.
We sold our Austrian air-cooled automotive business on April 30, 2021. As a result of the sale, we recorded a $7 million loss on sale at Corporate during fiscal 2022.
Operating income of $119 million during fiscal 2022 represents an improvement of $217 million from the prior-year operating loss of $98 million. The operating income and operating loss during fiscal 2022 and 2021 included the significant impairment reversal and impairment charges within the Performance Technologies segment. In addition, as compared with the prior year, the fiscal 2022 operating income was favorably impacted by higher gross profit. Operating income was negatively impacted by higher restructuring expenses, the loss on sale of the Austrian air-cooled automotive business, and higher SG&A expenses.
The provision for income taxes was $15 million and $90 million in fiscal 2022 and 2021, respectively. The $75 million decrease was primarily due to the absence of $117 million of income tax charges recorded in fiscal 2021 to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11 million income tax benefit recorded in fiscal 2022 related to valuation allowances on deferred tax assets in foreign jurisdictions. These drivers, which decreased the provision for income taxes, were partially offset by the absence of income tax benefits totaling $47 million recorded in the prior year, including $38 million related to the impairment charges recorded for the held for sale automotive businesses and $9 million resulting from the allocation of the income tax provision between net earnings and other comprehensive income.
Segment Results of Operations
Effective April 1, 2022, we began managing the Company under two operating segments, Climate Solutions and Performance Technologies. Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management. This simplified segment structure allows us to better focus resources on targeted growth opportunities and better enables an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.
The Climate Solutions segment includes the previously-reported BHVAC and CIS segments, with the exception of CIS Coatings. The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS Coatings business.
The segment realignment had no impact on our consolidated financial position, results of operations, and cash flows. We have recast the segment financial information for fiscal 2022 and 2021 to conform to the fiscal 2023 presentation.
Climate Solutions
| | | Years ended March 31, | | | | | 2023 | | | 2022 | | | 2021 | | | (in millions) | | $’s | | | % of sales | | | $’s | | | % of sales | | | $’s | | | % of sales | | | Net sales | | $ | 1,012 | | | | 100.0 | % | | $ | 911 | | | | 100.0 | % | | $ | 731 | | | | 100.0 | % | | Cost of sales | | | 788 | | | | 77.9 | % | | | 744 | | | | 81.7 | % | | | 595 | | | | 81.3 | % | | Gross profit | | | 224 | | | | 22.1 | % | | | 166 | | | | 18.3 | % | | | 137 | | | | 18.7 | % | | Selling, general and administrative expenses | | | 97 | | | | 9.6 | % | | | 90 | | | | 9.9 | % | | | 82 | | | | 11.2 | % | | Restructuring expenses | | | 2 | | | | 0.2 | % | | | 2 | | | | 0.2 | % | | | 5 | | | | 0.7 | % | | Operating income | | $ | 124 | | | | 12.3 | % | | $ | 73 | | | | 8.1 | % | | $ | 50 | | | | 6.8 | % |
Year Ended March 31, 2023 Compared with Year Ended March 31, 2022
Climate Solutions net sales increased $101 million, or 11 percent, in fiscal 2023 compared with the prior year, primarily due to higher sales volume and favorable commercial pricing. These increases in our Europe segment were more thanpartially offset by a $76$52 million unfavorable impact of foreign currency exchange rate changes. In total, ourrates. Compared with the prior year, sales of data center cooling, heat transfer, and HVAC & refrigeration products increased $58 million, $33 million, and $11 million, respectively.
Climate Solutions cost of sales increased $44 million, or 6 percent, in fiscal 20162023, primarily due to higher sales were negatively affectedvolume, partially offset by a $110$44 million unfavorablefavorable impact of foreign currency exchange rate changes,rates. As a percentage of sales, cost of sales decreased 380 basis points to 77.9 percent, primarily associated withdue to the strengtheningfavorable impact of the U.S. dollar.higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher labor and inflationary costs.
GrossAs a result of higher sales and lower cost of sales as a percentage of sales, gross profit decreased $23increased $58 million to $224 million in fiscal 2016, yetand gross margin of 16.5 percent was consistentimproved 380 basis points to 22.1 percent.
Climate Solutions SG&A expenses increased $7 million compared with the prior year.year, yet decreased 30 basis points as a percentage of sales. The decreaseincrease in gross profitSG&A expenses was primarily due to a $14$5 million unfavorable impact of foreign currency exchange rate changes, $9 million of pension settlement losses,increase in compensation-related expenses, including commission expenses, and lower sales volumeincreases in the Americas segment,other general and administrative expenses that have been impacted by inflationary market conditions. These increases were 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 initiatives and a $10$4 million favorable impact of foreign currency exchange rate changes.
Restructuring expenses increased $12totaling $2 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 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 profit decreased $9 million, yet gross margin increased 80 basis points to 17.1 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 million favorable impact of foreign currency exchange rate changes. Fiscal 2015 SG&A expenses increased $3 million from the prior year, primarily due to the $3 million charge for the legal matter in fiscal 2015.
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, we recorded $3 million of restructuring expenses, primarily related to severance expenses in Brazil, to better align our cost structure with the market conditions in Brazil, and equipment transfer costs related to the closure of our McHenry, Illinois manufacturing facility, which we completed during fiscal 2016. We also recorded an $8 million goodwill impairment charge during fiscal 2015, primarily due to a decline in the financial outlook for Brazil.
Operating income of $36 million in fiscal 2016 increased $3 million compared with the prior year, primarily due to lower SG&A expenses and the absence of the goodwill impairment charge in the prior year, partially offset by lower gross profit and higher restructuring expenses. Operating income of $33 million in fiscal 2015 decreased $17 million 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 million2023 were consistent with the prior year as higher engineering and development costs were offset by a favorable impactprimarily consisted of foreign currency exchange rate changes.severance-related expenses.
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 $2 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 $132023 increased $51 million compared with the prior year, primarily due to an increase in restructuring expenses and impairment charges and the absence of a $3$124 million, gain on the sale of a wind tunnel in the prior year, partially offset by lower SG&A expenses. Operating income of $26 million 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, primarily due to lower sales volume to off-highway customers in China and Korea and a $4 million unfavorable impact of foreign currency exchange rate changes, partially offset by higher sales volume to automotive customers in China and increased overall sales in India. Sales increased $9 million, or 13 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 2016 compared with the prior year, primarily due to favorable sales mix. Gross profit increased $3 million and gross margin increased 170 basis points to 14.2 percent in fiscal 2015 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 with a joint venture that we formed in fiscal 2016. See Note 3 to the Notes to Consolidated Financial Statements for additional information on this joint venture. Fiscal 2015 SG&A expenses were consistent with the prior year, yet decreased as a percentage of sales.
Operating income of $1 million in fiscal 2016 increased $1 million compared with the prior year, primarily due to lower SG&A expenses. Operating income of less than $1 million in fiscal 2015 represented a $3 million improvement compared with the operating loss in the prior year, and was primarily due to higher gross profit on increased sales volume.
| | | 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 net sales decreased $5 million, or 3 percent, in fiscal 2016 compared with the prior year, primarily due to a $6 million unfavorable impact of foreign currency exchange rate changes and lower sales at our businesses in the U.K., as unfavorable currency conditions resulted in increased competition from other mainland European suppliers, partially offset by increased ventilation product sales in North America. Sales increased $40 million, or 27 percent, in fiscal 2015 compared with fiscal 2014, primarily due to a $23 million increase in sales at our businesses in the U.K. 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 2015 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 million compared with the prior year, primarily due to lower gross profit and higher SG&A expenses. Operating income of $19 million in fiscal 2015 increased $10 million compared with the prior year, primarily due to higher gross profit, partially offset by higher SG&A expenses.
Year Ended March 31, 2022 Compared with Year Ended March 31, 2021
Climate Solutions net sales increased $180 million, or 25 percent, in fiscal 2022 compared with the prior year, primarily due to higher sales volume and, to a lesser extent, favorable commercial pricing, including adjustments in response to raw material price increases. Sales of heat transfer, HVAC & refrigeration, and data center cooling products increased $101 million, $46 million, and $32 million, respectively.
Climate Solutions cost of sales increased $149 million, or 25 percent, in fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased $67 million. As a percentage of sales, cost of sales increased 40 basis points to 81.7 percent, primarily due to higher material costs, partially offset by favorable impacts of higher sales volume and improved operating efficiencies.
As a result of higher sales and higher cost of sales as a percentage of sales, gross profit increased $29 million and gross margin declined 40 basis points to 18.3 percent.
Climate Solutions SG&A expenses increased $8 million compared with the prior year, yet decreased 130 basis points as a percentage of sales. The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased $6 million and included higher commission expenses.
Restructuring expenses during fiscal 2022 decreased $3 million, primarily due to lower severance expenses. The fiscal 2022 severance expenses primarily related to targeted headcount reductions in Europe and China. The fiscal 2021 severance expenses primarily related to plant consolidation activities in China and targeted headcount reductions in North America.
Operating income in fiscal 2022 of $73 million increased $23 million, primarily due to higher gross profit, partially offset by higher SG&A expenses.
Performance Technologies
| | | Years ended March 31, | | | | | 2023 | | | 2022 | | | 2021 | | | (in millions) | | $’s | | | % of sales | | | $’s | | | % of sales | | | $’s | | | % of sales | | | Net sales | | $ | 1,316 | | | | 100.0 | % | | $ | 1,172 | | | | 100.0 | % | | $ | 1,109 | | | | 100.0 | % | | Cost of sales | | | 1,150 | | | | 87.4 | % | | | 1,030 | | | | 87.9 | % | | | 952 | | | | 85.8 | % | | Gross profit | | | 166 | | | | 12.6 | % | | | 142 | | | | 12.1 | % | | | 157 | | | | 14.2 | % | | Selling, general and administrative expenses | | | 98 | | | | 7.4 | % | | | 99 | | | | 8.4 | % | | | 93 | | | | 8.4 | % | | Restructuring expenses | | | 3 | | | | 0.2 | % | | | 22 | | | | 1.9 | % | | | 7 | | | | 0.6 | % | | Impairment charges (reversals) - net | | | - | | | | - | | | | (56 | ) | | | -4.8 | % | | | 167 | | | | 15.0 | % | | Operating income (loss) | | $ | 66 | | | | 5.0 | % | | $ | 77 | | | | 6.6 | % | | $ | (109 | ) | | | -9.8 | % |
Year Ended March 31, 2023 Compared with Year Ended March 31, 2022
Performance Technologies net sales increased $144 million, or 12 percent, in fiscal 2023 compared with the prior year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases. These increases were partially offset by a $59 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, the absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021. Sales of air-cooled, liquid-cooled, and advanced solutions products increased $86 million, $36 million, and $25 million, respectively.
Performance Technologies cost of sales increased $120 million, or 12 percent, primarily due to higher sales volume and higher raw material prices, which increased $29 million. In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales. During fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business until they reverted back to held and used classification during the third quarter of fiscal 2022. These increases were partially offset by a $52 million favorable impact of foreign currency exchange rates. As a percentage of sales, cost of sales decreased 50 basis points to 87.4 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher material, labor and inflationary costs.
As a result of higher sales and lower cost of sales as a percentage of sales, gross profit increased $24 million and gross margin improved 50 basis points to 12.6 percent.
Performance Technologies SG&A expenses decreased $1 million compared with the prior year. As a percentage of sales, SG&A expenses decreased by 100 basis points. The decrease in SG&A expenses was primarily due to a $4 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, partially offset by higher general and administrative expenses that have been impacted by inflationary market conditions.
Restructuring expenses during fiscal 2023 totaled $3 million, a decrease of $19 million compared with the prior year. This decrease was primarily driven by lower severance expenses in Europe for targeted headcount reductions.
The net impairment reversal of $56 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business. See Note 2 of the Notes to Consolidated Financial Statements for further information.
Operating income in fiscal 2023 decreased $11 million to $66 million, primarily due to the absence of the significant net impairment reversal recorded in the prior year, partially offset by higher gross profit and lower restructuring expenses.
Year Ended March 31, 2022 Compared with Year Ended March 31, 2021
Performance Technologies net sales increased $63 million, or 6 percent, in fiscal 2022 compared with the prior year, primarily due to favorable commercial pricing, including adjustments in response to raw material price increases, and to a lesser extent, higher sales volume. In regard to the higher sales volume, sales in the prior year were negatively impacted by the COVID-19 pandemic in fiscal 2021. Sales increased in fiscal 2022 to off-highway and commercial vehicle customers, as those underlying markets recovered. Sales to automotive customers, however, decreased in fiscal 2022, primarily due to $58 million of lower sales from our Austrian air-cooled automotive business, which we sold in the first quarter of fiscal 2022, and the negative impacts of the semiconductor chip shortage on the global automotive market. Compared with the prior year, sales of air-cooled and advanced solutions products increased $52 million and $21 million, respectively. Sales of liquid-cooled products decreased $11 million.
Performance Technologies cost of sales increased $78 million, or 8 percent, primarily due to higher raw material prices, which increased $81 million, and to a lesser extent, higher sales volume. These drivers, which increased cost of sales, were partially offset by lower depreciation expenses in the segment’s automotive businesses, which decreased $9 million. We ceased depreciating the property, plant and equipment assets within the liquid-cooled and Austrian air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021. Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business. As a percentage of sales, cost of sales increased 210 basis points to 87.9 percent, primarily due to the higher material prices.
As a result of higher sales and higher cost of sales as a percentage of sales, gross profit decreased $15 million and gross margin declined 210 basis points to 12.1 percent.
Performance Technologies SG&A expenses increased $6 million compared with the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $7 million, partially offset by lower development and other administrative costs.
Restructuring expenses during fiscal 2022 totaled $22 million, an increase of $15 million compared with the prior year. The increase was primarily driven by higher severance expenses in Europe related to targeted headcount reductions.
The fiscal 2022 net impairment reversal of $56 million primarily related to assets in our liquid-cooled automotive business. We remeasured the previously impaired long-lived assets within the liquid-cooled automotive business to the lower of their carrying or fair value once they were no longer held for sale. The fiscal 2021 impairment charges totaling $167 million related to assets in the liquid-cooled and Austrian air-cooled automotive businesses, which were first classified as held for sale in fiscal 2021. See Note 2 of the Notes to Consolidated Financial Statements for further information.
Operating income of $77 million during fiscal 2022 represents a $186 million improvement from the prior-year operating loss of $109 million. The operating income and operating loss during fiscal 2022 and 2021 were largely driven by the significant net impairment reversal and impairment charges, respectively. In addition, as compared with the prior year, operating income was unfavorably impacted by lower gross profit and higher 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, 20162023 of $69$67 million, and an available borrowing capacity of $207$270 million under lines ofour revolving credit provided by banks in the United States and abroad.facility. Given our extensive international operations, $49approximately $63 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 long-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 $42 million as of March 31, 2023. As a result of funding relief provisions within the American Rescue Plan Act of 2021, we do not expect to encounter, any difficulty meeting the liquidity requirements ofmake cash contributions to our global operations.U.S. pension plans during fiscal 2024.
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 20162023 was $72$108 million, an increase of $8$96 million from $64$12 million in the prior year. This increase in operating cash flow was primarily due to the favorable impact of higher earnings and favorable net changes in working capital, includingas compared with the prior year. While inventories have increased $44 million from the prior year, the increase has been less significant than the increase in the prior year. In fiscal 2023, the Company increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases. In fiscal 2022, the higher inventory levels largely resulted from increased raw material prices and impacts from global supply constraints and challenges, which continued to impact our businesses in fiscal 2023. In addition, the favorable changes in working capital include lower payments for incentive compensation payments duringand lower pension plan contributions in fiscal 2016 and2023, as compared with the timing of value-added tax payments.prior year.
Net cash provided by operating activities in fiscal 20152022 was $64$12 million, a decrease of $41$138 million from $105$150 million in the prior year. This decrease in operating cash flow was primarily due to unfavorable net changes in working capital, including higher inventory and accounts receivable levels and higher payments for incentive compensation payments during fiscal 2015 relatedand employee benefits as compared with the prior year. Inventory increased $61 million from March 31, 2021 to fiscal 2014 performance, and the timing of customer-owned tooling reimbursements.March 31, 2022.
Capital Expenditures
Capital expenditures of $63$51 million during fiscal 20162023 increased $5$11 million compared with fiscal 2015. In fiscal 2016, our2022. Our capital spending primarily occurredin fiscal 2023 in the AmericasPerformance Technologies and EuropeClimate Solutions segments which totaled $27$25 million and $25$24 million, respectively. Capital projectsexpenditures in fiscal 2016 includedthe Performance Technologies segment include tooling and equipment purchases in conjunction with new and renewal programs with customers.
At March 31, 2016, our capital expenditure commitments totaled $21 million. Significant commitments included tooling and equipment expenditures for new and renewal programs with customers Capital spending in the Americas and Europe segments.Climate Solutions segment include investments supporting our strategic growth initiatives, including expanding our data center business.
Dividends
We did not pay dividends in fiscal 2016, 2015, or 2014. We currently do not intend to pay dividends in fiscal 2017.
Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275 million revolving credit facility and term loan facilities maturing in October 2027. This credit agreement modified our then existing $250 million revolver and term loan facilities, which would have matured in June 2024.
Our total debt outstanding increased $14decreased $25 million to $163$353 million at March 31, 2016,2023 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 2023.
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 and an interest expense coverage ratio covenant, which are discussed further below. Indebtedness under our credit agreements is secured by liens on substantially all domestic assets. These agreements further require compliance with various covenants that may limit our ability to incur additional indebtedness; grant liens; make investments, loans, or guarantees; engage in certain transactions with affiliates; or make restricted payments including dividends. Also, the credit agreements may require prepayments in the event of certain asset sales.
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 leverage ratio for the four fiscal quarters ended As of March 31, 2016 was 1.2, which was below the maximum permitted ratio of 3.25. Our interest expense coverage ratio for the four fiscal quarters ended March 31, 2016 was 10.5, which exceeded the minimum requirement of 3.0. We2023, we were in compliance with our debt covenants as of March 31, 2016 andcovenants. We expect to remain in compliance with our debt covenants during fiscal 20172024 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 termscredit agreements.
Share Repurchase Program
During fiscal 2023, we repurchased $7 million of our debt 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 ascommon stock. As of March 31, 2016. We are unable2023, we had $45 million of authorized share repurchases remaining under our current repurchase program, which expires in November 2024. Our decision whether and to determine the ultimate timingwhat extent to repurchase additional shares depends on a number 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.factors, including business conditions, other cash priorities, and stock price.
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 significantlymaterially impact our financial statements 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 toward 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. WhenIn the event 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.charge. 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$315 million and $81 million, respectively, at March 31, 2016.2023. 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 Climate Solutions 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 2016,2022, we recorded a $10net impairment reversal of $56 million, impairment chargeprimarily related to a manufacturing facilityassets that were held for sale in Germany. Seethe Performance Technologies segment. In fiscal 2021, we recorded $167 million of impairment charges to write down the long-lived assets in the liquid- and air-cooled automotive businesses when they were classified as held for sale. In fiscal 2022, we adjusted the long-lived assets in the liquid-cooled automotive business to the lower of carrying or fair value when they no longer met the held for sale classification criteria. See Note 62 of the Notes to the Consolidated Financial Statements for additional information.
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. Goodwill resulting from recent acquisitions generally represents 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 theand risk-adjusted discount rate, business trends and market conditions.rates. 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-specificcountry- and business-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 continued inflationary market conditions, including the impacts associated with the military conflict in Ukraine and 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, 2023, our goodwill totaled $166 million related to our Climate Solutions and Performance Technologies segments. We conducted our annual assessment for goodwill impairment during the fourth quartertests as of fiscal 2016March 31, 2023 by applying a fair value-based test and determined the fair value of ourthe reporting units substantiallyin each of our operating segments exceeded their respective book values.value. A 10 percent decrease in the estimated fair value of each reporting unit would not have resulted in a different conclusion. 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 million at March 31, 2016, 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, 2016,2023, our pension liabilities totaled $120$42 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 benefit cost. Our domestic pension expenses. Currently,plans are closed to new participants; therefore, participants in our domestic pensionthese 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 fiscal 20162023 and 20152022 was 8.0 percent.7.0 percent and 7.5 percent, respectively. For fiscal 2017,2024, we have also assumed a rate of 8.06.5 percent. The impactA change of a 25 basis point decreasepoints in the expected rate of return on assets would result in an increase of $0.4 million inimpact our fiscal 20172024 pension expense.expense by less than $1 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 2016,2023 and 2022, for purposes of determining pension expense, we used a discount rate of 4.13.9 and 3.2 percent, compared with 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 affectedfor our 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 20172024 pension expense and projected benefit obligation by less than $0.1 million.$1 million and approximately $4 million, respectively.
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-jurisdictionlegal entity-by-legal entity 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 asincluding environmental remediation costs, product warranties, self-insurance reserves, uncollectible accounts receivable,costs, 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 19Notes 15 and 20 of the Notes to Consolidated Financial Statements for additional information regarding product warranties and contingencies and litigation. litigation, respectively.
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 potential adverse developments or disruptions in the global economy and financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the military conflict between Russia and Ukraine;
| · | 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 |
The impact of other 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 foreign currency exchange rate fluctuations; increases in interest rates; recession and recovery therefrom; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade that have been or may be implemented in the U.S. or abroad;
| · | 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. |
The impact of potential further 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, including through our quotation process or through contract provisions for prospective price adjustments, as well as the inherent lag in timing of such contract provisions;
Our ability to mitigate increased labor costs and labor shortages;
The impact of public health threats, such as COVID-19, on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; and
The impact of current and future environmental laws and regulations on our business and the businesses of our customers, including our ability to take advantage of opportunities to supply alternative new technologies to meet environmental and/or energy standards and objectives.
Operational Risks:
| · | The overall health and 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; |
34The impact of problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;
The overall health of and price-reduction pressure from our vehicular customers in light of economic and market-specific factors, the potential lower overall win rate for sales programs with contractual price reductions as a result of pricing strategies to ensure satisfactory profit margins for the duration of the programs, and the potential impact on us from any deterioration in the stability or performance of any of our major customers;
| · | Our ability to effectively 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 maintain current customer relationships and compete effectively for new business, including our ability to achieve profit margins acceptable to us by offsetting or otherwise addressing any cost increases associated with supply chain challenges and inflationary market conditions;
| · | Our ability to complete the transition of our Washington, Iowa production to other facilities efficiently and effectively; |
The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims;
| · | Costs and other effects of the remediation of environmental contamination; |
The impact of delays or modifications initiated by major customers with respect to program launches, product applications or requirements;
| · | 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; |
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;
| · | Work stoppages or interference at our facilities or those of our major customers and/or suppliers; and |
Our ability to effectively and efficiently manage our cost structure in response to sales volume increases or decreases and to complete restructuring activities and realize the anticipated benefits of those activities;
| · | Costs and other effects of unanticipated litigation or claims, and the constant pressures associated with healthcare and insurance costs. |
Costs and other effects of the investigation and remediation of environmental contamination; including when related to the actions or inactions of others and/or facilities over which we have no control;
Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, in light of tight global labor markets;
Our ability to protect our proprietary information and intellectual property from theft or attack by internal or external sources;
The impact of a 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 realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles to our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;
Our ability to identify and execute on organic growth opportunities and acquisitions, and to efficiently and successfully integrate acquired businesses;
Our ability to successfully execute strategies to reduce costs and improve operating margins; and
The potential impacts from 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 infor our Asia business segment,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 increases in interest rates in relation to our variable-rate debt obligations; | · | 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. |
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 2023, we recorded a net gain 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, more than2023, approximately 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 2016,2023, changes in foreign currencies negativelycurrency exchange rates unfavorably impacted our sales by $110$111 million; however, the impact on our operating income was only $4$7 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 2016,2023, there would not have been a material impact on our fiscal 20162023 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, including swingline borrowings, is variable and is currently based primarily on a variable interest rate of London Interbank Offered Rate (“LIBOR”)either SOFR or EURIBOR, plus 125137.5 to 225175 basis points, depending on our leverage ratio. WeAs a result, we are subject to risk of fluctuations in LIBORSOFR 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.
As of March 31, 2023, our outstanding borrowings on variable-rate term loans totaled $216 million. There were no outstanding borrowings outstanding under theon our revolving credit facility as of March 31, 2016.2023. Based onupon our outstanding debt with variable interest rates at March 31, 2016,2023, a 100 basis100-basis point increase in interest rates would increase our annual interest expense in fiscal 20172024 by less than $1approximately $2 million.
Commodity Price and Supply Risk
We are dependent uponTo produce the supply ofproducts we sell, we purchase raw materials and supplies in the production process and, from time to time, enter into firm purchase commitments forincluding aluminum, copper, nickel,steel and stainless steel (nickel), refrigerants, and gases such as natural gas. gas, helium, and nitrogen. In addition, we also purchase components and parts that are integrated into our end products.
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 agreementsrisk primarily by adjusting product pricing in response to applicable price increases. Our contracts with certain vehicular customers contain provisions 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 marketsexclude additional cost elements, such as related premiums and are influenced by similar market and general economic factors. fabrication. 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 offsettinginstances where the risk associatedis not covered contractually, we seek to adjust product pricing in response to price increases, including through our quotation process and through price list increases.
In fiscal 2023, we continued to experience a significant increase in raw material prices and price increases on other goods and services in connection with a downturn in any of the marketsglobal supply chain challenges and inflationary market conditions. In response, we serve. However, risk associated with market downturns, such as the global downturn experienced in fiscal 2009 and fiscal 2010, isimplemented selling price increases for our products. Nevertheless, we are still present.
We monitor economic conditions in the U.S., in our foreign markets and elsewhere. As 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 examples of new and emerging markets for us include those related to waste heat recovery, coils, and the Chinese and Indian markets. Our investment in these areas is subject to the risks associatedrisk of further price increases on commodities, components, and other goods and services that we purchase.
Regarding supply risk in light of current supply chain challenges, we are engaged with business integration, technological success, customerour suppliers to ensure availability of purchased commodities and market acceptance,components and we have added key suppliers to our ability to meetsupply base during the demandslast year. However, we are still dependent upon limited sources of supply for certain components used in the manufacture 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. We(nickel). Even with this expanded supply base, we are exposed to the risk of suppliers of certain raw materials not being able or willing to meet strong customer demand, as they may not increase their output capacity as quickly as customers increase their orders, the impact of trade laws and oftariffs, and increased prices being charged by raw material suppliers.
In addition, weWe also 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, 2023, 37 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, data center cooling, and 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 current inflationary market conditions.
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, 2023; |
| • | 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 price reduction pressure applied by OEM customers. If contractual price downs are unavoidable, we contemplate them in our overall strategy and adjust pricing as necessary to provide profit margins that are acceptable to us.
Economic and Market Risk
Economic risk represents the possibility of loss resulting from economic instability in certain areas of the world, such as that caused by geopolitical uncertainly or pandemics, or downturns in markets in which we operate. We sell a broad range of thermal solution systems to customers operating in diverse markets, including the commercial, industrial, and building HVAC&R and commercial vehicle, off-highway, and automotive and light vehicle markets.
Considering our global presence, we also encounter risks imposed by potential trade restrictions, including tariffs, embargoes, sanctions, 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 examples of new and emerging markets for us include those related to electric vehicles, data centers, indoor air quality, and aftermarket coatings. Our investments in these areas are subject to the risks associated with technological success, customer and market acceptance, and our ability to meet the demands byof our customers for decreases in the price of our products. We attempt to offset this risk with firm agreements with our customers whenever possible, butas these agreements often contain provisions for future price reductions. In addition, customers occasionally link price reductions to future program awards, and we must assess the overall implications of such requests on a case-by-case basis.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. We periodically designate certain commodity forward contracts as cash flow hedges for accounting purposes. 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 2016, 2015,2023, 2022, and 2014, expenses2021, net gains and losses recognized in cost of sales related to commodity derivativeforward contracts totaled less thanwere approximately $1 million or less 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 and designate certain hedges of forecasted transactions as cash flow hedges for accounting purposes. 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 2023, 2022, and 2021, net gains and losses recognized in sales and cost of sales related to foreign currency forward contracts were $1 million or less 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, 2016,2023, all counterparties had a sufficient long-term credit rating.
| 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. |
MODINE MANUFACTURING COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended March 31, 2016, 20152023, 2022 and 20142021 (In millions, except per share amounts)
| | | 2016 | | 2015 | | 2014 | | Net sales | | $ | 1,352.5 | | | $ | 1,496.4 | | | $ | 1,477.6 | | | Cost of sales | | | 1,129.0 | | | | 1,249.9 | | | | 1,239.4 | | | Gross profit | | | 223.5 | | | | 246.5 | | | | 238.2 | | | Selling, general and administrative expenses | | | 204.5 | | | | 184.5 | | | | 181.7 | | | Restructuring expenses | | | 16.6 | | | | 4.7 | | | | 16.1 | | | Impairment charges | | | 9.9 | | | | 7.8 | | | | 3.2 | | | Gain on sale of wind tunnel | | | - | | | | (3.2 | ) | | | - | | | Operating (loss) income | | | (7.5 | ) | | | 52.7 | | | | 37.2 | | | Interest expense | | | (11.1 | ) | | | (11.7 | ) | | | (12.4 | ) | | 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 | | | | - | | | Net (loss) earnings | | | (1.0 | ) | | | 22.8 | | | | 131.9 | | | Net earnings attributable to noncontrolling interest | | | (0.6 | ) | | | (1.0 | ) | | | (1.5 | ) | | Net (loss) earnings attributable to Modine | | $ | (1.6 | ) | | $ | 21.8 | | | $ | 130.4 | | | | | | | | | | | | | | | | | (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 | | | Diluted | | $ | (0.03 | ) | | $ | 0.45 | | | $ | 2.72 | | | | | | | | | | | | | | | | | Weighted-average shares outstanding: | | | | | | | | | | | | | | Basic | | | 47.3 | | | | 47.2 | | | | 46.9 | | | Diluted | | | 47.3 | | | | 47.8 | | | | 47.6 | |
| | 2023 | | | 2022 | | | 2021 | | | Net sales | | $ | 2,297.9 | | | $ | 2,050.1 | | | $ | 1,808.4 | | | Cost of sales | | | 1,908.5 | | | | 1,740.8 | | | | 1,515.0 | | | Gross profit | | | 389.4 | | | | 309.3 | | | | 293.4 | | | Selling, general and administrative expenses | | | 234.0 | | | | 215.1 | | | | 210.9 | | | Restructuring expenses | | | 5.0 | | | | 24.1 | | | | 13.4 | | | Impairment charges (reversals) – net | | | - | | | | (55.7 | ) | | | 166.8 | | | Loss on sale of assets | | | - | | | | 6.6 | | | | - | | | Operating income (loss) | | | 150.4 | | | | 119.2 | | | | (97.7 | ) | | Interest expense | | | (20.7 | ) | | | (15.6 | ) | | | (19.4 | ) | | Other expense – net | | | (4.4 | ) | | | (2.1 | ) | | | (2.2 | ) | | Earnings (loss) before income taxes | | | 125.3 | | | | 101.5 | | | | (119.3 | ) | | Benefit (provision) for income taxes | | | 28.3 | | | | (15.2 | ) | | | (90.2 | ) | | Net earnings (loss) | | | 153.6 | | | | 86.3 | | | | (209.5 | ) | | Net earnings attributable to noncontrolling interest | | | (0.5 | ) | | | (1.1 | ) | | | (1.2 | ) | | Net earnings (loss) attributable to Modine | | $ | 153.1 | | | $ | 85.2 | | | $ | (210.7 | ) | | | | | | | | | | | | | | | | Net earnings (loss) per share attributable to Modine shareholders: | | | | | | | | | | | | | | Basic | | $ | 2.93 | | | $ | 1.64 | | | $ | (4.11 | ) | | Diluted | | $ | 2.90 | | | $ | 1.62 | | | $ | (4.11 | ) | | | | | | | | | | | | | | | | Weighted-average shares outstanding: | | | | | | | | | | | | | | Basic | | | 52.3 | | | | 52.0 | | | | 51.3 | | | Diluted | | | 52.8 | | | | 52.5 | | | | 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, 20152023, 2022 and 20142021 (In millions)
| | | 2016 | | 2015 | | 2014 | | Net (loss) earnings | | $ | (1.0 | ) | | $ | 22.8 | | | $ | 131.9 | | | Other comprehensive income (loss): | | | | | | | | | | | | | | Foreign currency translation | | | 4.6 | | | | (68.2 | ) | | | 9.7 | | | 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 | | | Total other comprehensive income (loss) | | | 24.3 | | | | (94.9 | ) | | | 24.7 | | | | | | | | | | | | | | | | | Comprehensive income (loss) | | | 23.3 | | | | (72.1 | ) | | | 156.6 | | | Comprehensive income attributable to noncontrolling interest | | | (0.5 | ) | | | (0.8 | ) | | | (1.7 | ) | | Comprehensive income (loss) attributable to Modine | | $ | 22.8 | | | $ | (72.9 | ) | | $ | 154.9 | |
| | 2023 | | | 2022 | | | 2021 | | | Net earnings (loss) | | $ | 153.6 | | | $ | 86.3 | | | $ | (209.5 | ) | | Other comprehensive income (loss): | | | | | | | | | | | | | | Foreign currency translation | | | (18.9 | ) | | | (8.3 | ) | | | 30.9 | | Defined benefit plans, net of income taxes of $1.1, $0 and $10.4 million | | | 6.7 | | | | 19.7 | | | | 30.1 | | Cash flow hedges, net of income taxes of $0, $0 and $0.6 million | | | 0.1 | | | | 0.1 | | | | 1.6 | | | Total other comprehensive income (loss) | | | (12.1 | ) | | | 11.5 | | | | 62.6 | | | | | | | | | | | | | | | | | Comprehensive income (loss) | | | 141.5 | | | | 97.8 | | | | (146.9 | ) | | Comprehensive income attributable to noncontrolling interest | | | - | | | | (0.9 | ) | | | (1.7 | ) | | Comprehensive income (loss) attributable to Modine | | $ | 141.5 | | | $ | 96.9 | | | $ | (148.6 | ) |
The notes to consolidated financial statements are an integral part of these statements.
MODINE MANUFACTURING COMPANY CONSOLIDATED BALANCE SHEETS March 31, 20162023 and 20152022 (In millions, except per share amounts)
| | | 2016 | | 2015 | ASSETS | | | | | | | | Cash and cash equivalents | | $ | 68.9 | | | $ | 70.5 | | | Trade accounts receivable – net | | | 189.1 | | | | 192.9 | | | Inventories | | | 111.0 | | | | 107.7 | | | Other current assets | | | 43.5 | | | | 79.7 | | | Total current assets | | | 412.5 | | | | 450.8 | | | Property, plant and equipment – net | | | 338.6 | | | | 322.1 | | | Intangible assets – net | | | 8.2 | | | | 9.9 | | | Goodwill | | | 15.8 | | | | 16.2 | | | Deferred income taxes | | | 123.1 | | | | 115.4 | | | Other noncurrent assets | | | 22.7 | | | | 16.5 | | | Total assets | | $ | 920.9 | | | $ | 930.9 | | | | | | | | | | | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | | | Short-term debt | | $ | 28.6 | | | $ | 18.6 | | | Long-term debt – current portion | | | 8.5 | | | | 0.5 | | | Accounts payable | | | 142.4 | | | | 152.0 | | | Accrued compensation and employee benefits | | | 58.6 | | | | 56.7 | | | Other current liabilities | | | 35.5 | | | | 83.0 | | | Total current liabilities | | | 273.6 | | | | 310.8 | | | Long-term debt | | | 125.5 | | | | 129.6 | | | Deferred income taxes | | | 4.2 | | | | 3.1 | | | Pensions | | | 118.6 | | | | 110.4 | | | Other noncurrent liabilities | | | 16.3 | | | | 16.4 | | | Total liabilities | | | 538.2 | | | | 570.3 | | | 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 | | | Additional paid-in capital | | | 185.6 | | | | 180.6 | | | Retained earnings | | | 358.2 | | | | 359.8 | | | Accumulated other comprehensive loss | | | (174.2 | ) | | | (198.6 | ) | | Treasury stock, at cost, 1.6 million and 0.7 million shares | | | (24.0 | ) | | | (16.2 | ) | | Total Modine shareholders' equity | | | 376.2 | | | | 356.0 | | | Noncontrolling interest | | | 6.5 | | | | 4.6 | | | Total equity | | | 382.7 | | | | 360.6 | | | Total liabilities and equity | | $ | 920.9 | | | $ | 930.9 | |
| | 2023 | | | 2022 | | | ASSETS | | | | | | | | Cash and cash equivalents | | $ | 67.1 | | | $ | 45.2 | | | Trade accounts receivable – net | | | 398.0 | | | | 367.5 | | | Inventories | | | 324.9 | | | | 281.2 | | | Other current assets | | | 56.4 | | | | 63.7 | | | Total current assets | | | 846.4 | | | | 757.6 | | | Property, plant and equipment – net | | | 314.5 | | | | 315.4 | | | Intangible assets – net | | | 81.1 | | | | 90.3 | | | Goodwill | | | 165.6 | | | | 168.1 | | | Deferred income taxes | | | 83.7 | | | | 27.2 | | | Other noncurrent assets | | | 74.6 | | | | 68.4 | | | Total assets | | $ | 1,565.9 | | | $ | 1,427.0 | | | | | | | | | | | | | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | | Short-term debt | | $ | 3.7 | | | $ | 7.7 | | | Long-term debt – current portion | | | 19.7 | | | | 21.7 | | | Accounts payable | | | 332.8 | | | | 325.8 | | | Accrued compensation and employee benefits | | | 89.8 | | | | 85.1 | | | Other current liabilities | | | 61.1 | | | | 54.2 | | | Total current liabilities | | | 507.1 | | | | 494.5 | | | Long-term debt | | | 329.3 | | | | 348.4 | | | Deferred income taxes | | | 4.8 | | | | 5.9 | | | Pensions | | | 40.2 | | | | 47.2 | | | Other noncurrent liabilities | | | 84.9 | | | | 72.9 | | | Total liabilities | | | 966.3 | | | | 968.9 | | | Commitments and contingencies (see Note 20) | | |
| | | |
| | | 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 55.4 million and 54.8 million shares | | | 34.6 | | | | 34.2 | | | Additional paid-in capital | | | 270.8 | | | | 261.6 | | | Retained earnings | | | 497.5 | | | | 344.4 | | | Accumulated other comprehensive loss | | | (161.1 | ) | | | (149.5 | ) | Treasury stock, at cost, 3.3 million and 2.8 million shares | | | (49.0 | ) | | | (40.0 | ) | | Total Modine shareholders’ equity | | | 592.8 | | | | 450.7 | | | Noncontrolling interest | | | 6.8 | | | | 7.4 | | | Total equity | | | 599.6 | | | | 458.1 | | | Total liabilities and equity | | $ | 1,565.9 | | | $ | 1,427.0 | |
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, 20152023, 2022 and 20142021 (In millions)
| | | 2016 | | 2015 | | 2014 | | Cash flows from operating activities: | | | | | | | | | | | Net (loss) earnings | | $ | (1.0 | ) | | $ | 22.8 | | | $ | 131.9 | | | Adjustments to reconcile net (loss) earnings to net cash provided by operating activities: | | | | | | | | | | | | | | Depreciation and amortization | | | 50.2 | | | | 51.6 | | | | 58.1 | | | Insurance proceeds from Airedale fire | | | 5.9 | | | | 12.9 | | | | 16.9 | | | Impairment charges | | | 9.9 | | | | 7.8 | | | | 3.2 | | | 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 | | | Deferred income taxes | | | (18.8 | ) | | | 5.9 | | | | (116.1 | ) | | Stock-based compensation expense | | | 4.9 | | | | 4.0 | | | | 3.6 | | | Other – net | | | (0.3 | ) | | | (0.7 | ) | | | (0.5 | ) | | Changes in operating assets and liabilities, excluding acquisitions: | | | | | | | | | | | | | | Trade accounts receivable | | | 8.0 | | | | (0.1 | ) | | | (18.2 | ) | | Inventories | | | (2.7 | ) | | | (4.2 | ) | | | (0.1 | ) | | Accounts payable | | | (9.9 | ) | | | (2.4 | ) | | | 15.2 | | | Accrued compensation and employee benefits | | | 0.8 | | | | (5.3 | ) | | | 17.5 | | | Other assets | | | (14.5 | ) | | | (24.5 | ) | | | 2.1 | | | Other liabilities | | | (5.6 | ) | | | (4.5 | ) | | | (14.9 | ) | | Net cash provided by operating activities | | | 72.4 | | | | 63.5 | | | | 104.5 | | | | | | | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | | | | | | Expenditures for property, plant and equipment | | | (62.8 | ) | | | (58.3 | ) | | | (53.1 | ) | | 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 | | | Purchases of short-term investments | | | (2.7 | ) | | | (5.2 | ) | | | - | | | Proceeds from maturities of short-term investments | | | 2.1 | | | | 2.4 | | | | - | | | Other – net | | | 0.9 | | | | 0.8 | | | | - | | | Net cash used for investing activities | | | (77.8 | ) | | | (57.2 | ) | | | (41.5 | ) | | | | | | | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | | | | | | Borrowings of debt | | | 38.0 | | | | 36.4 | | | | 152.6 | | | Repayments of debt | | | (27.1 | ) | | | (50.9 | ) | | | (152.4 | ) | | Purchases of treasury stock under share repurchase program | | | (6.9 | ) | | | - | | | | - | | | Financing fees paid | | | - | | | | (0.1 | ) | | | (0.9 | ) | | Dividend paid to noncontrolling interest | | | (0.9 | ) | | | - | | | | (0.5 | ) | | Other – net | | | (0.4 | ) | | | - | | | | (0.3 | ) | | Net cash provided by (used for) financing activities | | | 2.7 | | | | (14.6 | ) | | | (1.5 | ) | | | | | | | | | | | | | | | | Effect of exchange rate changes on cash | | | 1.1 | | | | (8.4 | ) | | | 1.9 | | | 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 | |
| | 2023 | | | 2022 | | | 2021 | | | Cash flows from operating activities: | | | | | | | | | | | Net earnings (loss) | | $ | 153.6 | | | $ | 86.3 | | | $ | (209.5 | ) | | Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: | | | | | | | | | | | | | | Depreciation and amortization | | | 54.5 | | | | 54.8 | | | | 68.6 | | | Impairment charges (reversals) – net | | | - | | | | (55.7 | ) | | | 166.8 | | | Loss on sale of assets | | | - | | | | 6.6 | | | | - | | | Stock-based compensation expense | | | 6.6 | | | | 5.7 | | | | 6.3 | | | Deferred income taxes | | | (59.6 | ) | | | (3.8 | ) | | | 67.9 | | | Other – net | | | 4.8 | | | | 3.1 | | | | 6.3 | | | Changes in operating assets and liabilities: | | | | | | | | | | | | | | Trade accounts receivable | | | (40.7 | ) | | | (55.6 | ) | | | (17.1 | ) | | Inventories | | | (49.4 | ) | | | (70.7 | ) | | | (5.0 | ) | | Accounts payable | | | 10.2 | | | | 55.1 | | | | 44.0 | | | Accrued compensation and employee benefits | | | 6.4 | | | | 9.8 | | | | 15.7 | | | Other assets | | | 19.6 | | | | (2.4 | ) | | | 27.5 | | | Other liabilities | | | 1.5 | | | | (21.7 | ) | | | (21.7 | ) | | Net cash provided by operating activities | | | 107.5 | | | | 11.5 | | | | 149.8 | | | | | | | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | | | | | | Expenditures for property, plant and equipment | | | (50.7 | ) | | | (40.3 | ) | | | (32.7 | ) | | Proceeds from (payments for) dispositions of assets | | | 0.3 | | | | (7.6 | ) | | | 0.7 | | | Disbursements for loan origination (see Note 1) | | | - | | | | (4.7 | ) | | | - | | | Proceeds from maturities of short-term investments | | | 3.4 | | | | 3.6 | | | | 3.4 | | | Purchases of short-term investments | | | (3.4 | ) | | | (3.9 | ) | | | (3.6 | ) | | Other – net | | | - | | | | 1.9 | | | | 0.9 | | | Net cash used for investing activities | | | (50.4 | ) | | | (51.0 | ) | | | (31.3 | ) | | | | | | | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | | | | | | Borrowings of debt | | | 374.3 | | | | 351.8 | | | | 32.7 | | | Repayments of debt | | | (403.4 | ) | | | (306.7 | ) | | | (183.6 | ) | | Borrowings (repayments) on bank overdraft facilities – net | | | 3.0 | | | | (4.3 | ) | | | 3.6 | | Purchase of treasury stock under share repurchase program
| | | (7.3 | ) | | | - | | | | - | | | Dividend paid to noncontrolling interest | | | (0.6 | ) | | | (0.9 | ) | | | - | | | Financing fees paid | | | (0.6 | ) | | | (0.2 | ) | | | (0.8 | ) | | Other – net | | | 1.3 | | | | (0.5 | ) | | | 3.0 | | | Net cash (used for) provided by financing activities | | | (33.3 | ) | | | 39.2 | | | | (145.1 | ) | | | | | | | | | | | | | | | | Effect of exchange rate changes on cash | | | (2.0 | ) | | | (0.4 | ) | | | 1.4 | | | Net increase (decrease) in cash, cash equivalents and restricted cash | | | 21.8 | | | | (0.7 | ) | | | (25.2 | ) | | Cash, cash equivalents and restricted cash – beginning of year | | | 45.4 | | | | 46.1 | | | | 71.3 | | | Cash, cash equivalents and restricted cash – end of year | | $ | 67.2 | | | $ | 45.4 | | | $ | 46.1 | |
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, 20152023, 2022 and 20142021 (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 comprehensive | | | Treasury stock, at | | | Non- controlling | | | | | | | Shares | | | Amount | | | capital | | | earnings | | | loss | | | cost | | | interest | | | Total | | | Balance, March 31, 2020 | | | 53.4 | | | $ | 33.3 | | | $ | 245.1 | | | $ | 469.9 | | | $ | (223.3 | ) | | $ | (37.1 | ) | | $ | 5.7 | | | $ | 493.6 | | | Net (loss) earnings | | | - | | | | - | | | | - | | | | (210.7 | ) | | | - | | | | - | | | | 1.2 | | | | (209.5 | ) | Other comprehensive income
| | | - | | | | - | | | | - | | | | - | | | | 62.1 | | | | - | | | | 0.5 | | | | 62.6 | | | Stock options and awards | | | 0.9 | | | | 0.6 | | | | 3.6 | | | | - | | | | - | | | | - | | | | - | | | | 4.2 | | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1.1 | ) | | | - | | | | (1.1 | ) | | Stock-based compensation expense | | | - | | | | - | | | | 6.3 | | | | - | | | | - | | | | - | | | | - | | | | 6.3 | | Balance, March 31, 2021 | | | 54.3 | | | | 33.9 | | | | 255.0 | | | | 259.2 | | | | (161.2 | ) | | | (38.2 | ) | | | 7.4 | | | | 356.1 | | | Net earnings | | | - | | | | - | | | | - | | | | 85.2 | | | | - | | | | - | | | | 1.1 | | | | 86.3 | | Other comprehensive income (loss)
| | | - | | | | - | | | | - | | | | - | | | | 11.7 | | | | - | | | | (0.2 | ) | | | 11.5 | | | Stock options and awards | | | 0.5 | | | | 0.3 | | | | 0.9 | | | | - | | | | - | | | | - | | | | - | | | | 1.2 | | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1.8 | ) | | | - | | | | (1.8 | ) | | Stock-based compensation expense | | | - | | | | - | | | | 5.7 | | | | - | | | | - | | | | - | | | | - | | | | 5.7 | | Dividend paid to noncontrolling interest
| | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.9 | ) | | | (0.9 | ) | Balance, March 31, 2022 | | | 54.8 | | | | 34.2 | | | | 261.6 | | | | 344.4 | | | | (149.5 | ) | | | (40.0 | ) | | | 7.4 | | | | 458.1 | | | Net earnings | | | - | | | | - | | | | - | | | | 153.1 | | | | - | | | | - | | | | 0.5 | | | | 153.6 | | | Other comprehensive loss | | | - | | | | - | | | | - | | | | - | | | | (11.6 | ) | | | - | | | | (0.5 | ) | | | (12.1 | ) | | Stock options and awards | | | 0.6 | | | | 0.4 | | | | 2.6 | | | | - | | | | - | | | | - | | | | - | | | | 3.0 | | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (9.0 | ) | | | - | | | | (9.0 | ) | | Stock-based compensation expense | | | - | | | | - | | | | 6.6 | | | | - | | | | - | | | | - | | | | - | | | | 6.6 | | | Dividend paid to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.6 | ) | | | (0.6 | ) | Balance, March 31, 2023 | | | 55.4 | | | $ | 34.6 | | | $ | 270.8 | | | $ | 497.5 | | | $ | (161.1 | ) | | $ | (49.0 | ) | | $ | 6.8 | | | $ | 599.6 | |
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 and environmentally responsible thermal management systems and components, bringing heating and cooling technologyproducts and solutions to diversified global markets and customers in a wide array of commercial, industrial, and building heating, ventilating, air conditioning, and refrigeration (“HVAC&R”) markets. TheIn 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 radiatorsi) heat transfer; ii) HVAC & refrigeration; iii) data center cooling; iv) air-cooled; v) liquid-cooled; and radiator cores, condensers, oil coolers,vi) advanced solutions.
Disposition of Austrian Air-cooled Automotive Business in Fiscal 2022 On April 30, 2021, the Company sold its Austrian air-cooled automotive business to Schmid Metall GmbH. As a result of this transaction, the Company recorded a loss of $6.6 million during fiscal 2022, which included the write-off of $1.7 million of net actuarial losses related to its pension plan. The Company reported this loss within the loss on sale of assets line on the consolidated statement of operations. Upon transaction closing, $5.9 million of cash within the business transferred to the buyer. Later in fiscal 2022, the Company paid the buyer $2.4 million upon the finalization of a purchase price adjustment for net working capital and certain other items. Financial results of this business, prior to the disposition, are reported within the Performance Technologies segment. See Note 2 for information regarding the accounting for this business while it was held for sale. Net sales of this business were $63.0 million in fiscal 2021.
In connection with the sale of this business, the Company provided the buyer with a 5-year, €4.0 million loan facility. Borrowings under the agreement currently bear interest at 5.4 percent. During fiscal 2022, the Company disbursed €4.0 million ($4.7 million) to the buyer under this facility. At both March 31, 2023 and 2022, the Company recorded the loan receivable within other noncurrent assets on its consolidated balance sheet because the Company expects to receive the principal repayment more than twelve months from the balance sheet date.
Disposition of Previously-Closed Facility in Fiscal 2022 During fiscal 2022, the Company sold a previously-closed manufacturing facility in the U.S. and received net cash proceeds of $0.7 million. As a result of the sale, the Company recorded an impairment charge air coolers, heat-transfer modulesof $0.3 million within the Climate Solutions segment to write down the property to fair value less costs to sell.
Chief Executive Officer (“CEO”) Transition in Fiscal 2021 In August 2020, Thomas A. Burke stepped down from his position as President and assemblies, exhaust gas recirculationCEO. 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 (“EGR”SG&A”) coolers, building heating, ventilatingexpenses at Corporate, primarily consisted of severance and air conditioning (“HVAC”) equipment,benefit-related expenses based upon the terms of Mr. Burke’s transition and coils.separation agreement and costs directly associated with the CEO search, partially offset by the impact of Mr. Burke’s forfeited stock-based compensation awards. 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 toward 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, 2023 and 2022, the allowance for credit losses was $2.2 million and $1.7 million, respectively. The changes to the Company’s allowance for credit losses during fiscal 2023 and 2022 were not material and primarily consisted of current-period provisions, write-offs charged against the allowance, recoveries collected, and foreign currency translation.
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 2009,2023, 2022, and 2021, the Company sold its Electronics Cooling business. The buyer financed a portion$150.6 million, $126.4 million, and $88.7 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,2023, 2022, and 2021, the Company recorded a gain of $0.9costs totaling $1.2 million, ($0.6$0.3 million, after income taxes) during fiscal 2015.
Assets held for sale: The Company considers assetsand $0.2 million, respectively, related 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, 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 uncollectibleselling 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.in the consolidated statements of operations.
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 million and $18.7 million, respectively. In certain instances, 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.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, 2023 and 2022, Company-owned tooling totaled $17.1 million and $18.3 million, respectively.
In certain instances, tooling is owned by the customer. 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, 2023 and 2022, customer-owned tooling receivables totaled $10.9 million and $12.3 million, respectively.
Stock-based Compensation The Company recognizes stock-based compensation using the fair value method. Accordingly, compensation expense for stock options, restricted stock and performance-based stock awards is calculated based upon the fair value of the instruments at the time of grant and is recognized as expense over the respective vesting periods. See Note 5 for additional information.
Research and Development The Company expenses research and development costs as incurred within SG&A expenses. During fiscal 2023, 2022, and 2021, research and development costs totaled $44.0 million, $50.3 million, and $46.3 million, respectively.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Shipping and handling costs: The Company records shipping and handling costs incurred upon the shipment of products to its OEM customers in cost of sales, and related amounts billed to these customers in net sales. The Company records shipping and handling costs incurred upon 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.
Research and development: The Company expenses research and development costs as incurred within SG&A expenses. For the years ended March 31, 2016, 2015, and 2014, research and development costs charged to operations totaled $61.1 million, $62.0 million, and $61.7 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. Restricted stock award recipients have a non-forfeitable right to receive dividends declared by the Company. Therefore, these restricted stock awards are 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 amount of those un-presented checks is included in accounts payable.
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, 20162023 and 2015,2022, the Company’s short-term investments totaled $3.3$3.5 million and $2.8$3.7 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.
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 $13.6 million, $9.0 million, and $7.9 million were accrued within accounts payable at March 31, 2023, 2022 and 2021, respectively.
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 manufacturing and information technology equipment and vehicles. The Company recognizes right-of-use (“ROU”) assets and lease liabilities at the lease 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.2023 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 classifies an asset as held for sale when (i) 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; (ii) the asset is available for immediate sale in its present condition; (iii) an active program to locate a buyer and other actions required to complete the sale have been initiated; (iv) the sale of the asset is expected to be completed within one year; and (v) it is unlikely that significant changes will be made to the plan. Upon classification as held for sale, the Company records the carrying value of the asset at the lower of its carrying value or its estimated fair value, less costs to sell. In addition, the Company ceases to record depreciation for assets held for sale. 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.cost of sales or SG&A expenses. 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 guidanceSupplemental Cash Flow Information
| | Years ended March 31, | | | | | 2023 | | | 2022 | | | 2021 | | | Interest paid | | $ | 18.4 | | | $ | 14.1 | | | $ | 17.9 | | | Income taxes paid | | | 31.9 | | | | 21.8 | | | | 19.7 | |
See Note 16 for supplemental cash flow information related 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.leases.
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)
New Accounting Guidance
Supplier Finance Programs
In May 2014,September 2022, the FASBFinancial Accounting Standards Board (“FASB”) issued new guidance that outlines a comprehensive model for entitieswill require companies that use supplier finance programs 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 new guidance also includes a cohesive set of disclosure requirements intended to provide users of financial statements with comprehensivedisclose information about revenue arising from contracts with customers. Thisthe programs, including key terms, outstanding obligations under such programs and where outstanding amounts are presented within their financial statements. In addition, a roll forward of obligations under supplier finance programs will be required annually. The new guidance is effective for the Company’s first quarterfiscal 2024 financial statements, with the exception of fiscal 2019.the roll forward disclosure requirement, which will become effective one year later. The Company is currently evaluating the impact thisnew disclosures, but does not expect the guidance will have a material impact 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 | |
Income Tax Simplification
Note 2: | Airedale Facility Fire |
On September 6, 2013, a fire caused significant destructionIn December 2019, the FASB issued new guidance designed to simplify the accounting for income taxes. The new guidance eliminated certain exceptions related to the Company’s Airedale manufacturing facilityapproach for intraperiod tax allocations and offices in Rawdon (Leeds), United Kingdom.the methodology for deferred tax liabilities. The Company reports Airedale’s financial results within the Building HVAC segment. There were no injuries caused by the fire.adopted this guidance as of April 1, 2021. The Rawdon facility, which is leased, was used to manufacture cooling products and solutions foradoption did not have a variety of applications, including data centers, clean rooms, retail, leisure and process cooling. The Company suspended operations at the Rawdon site 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 date 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, the Company recorded a $9.5 million gain within other income related to an insurance settlement 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 inmaterial impact on the Company’s consolidated financial statements.
Credit Losses In June 2016, the 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 modified the credit loss model to measure and recognize credit losses based upon expected losses rather than incurred losses. The Company adopted this guidance as of April 1, 2020. The adoption did not have a material impact on the Company’s consolidated balance sheets, statements of operations or statements of cash flows.
Note 2: Assets Held for Sale
On February 28, 2014,November 2, 2020, the Company acquired 100 percentsigned a definitive agreement to sell its liquid-cooled automotive business to Dana Incorporated (“Dana”). Beginning at that time, the Company classified this business as held for sale and ceased recording depreciation expense for its long-lived assets. On October 25, 2021, the Company announced that it agreed with Dana to terminate the sale agreement. Both companies had been actively engaged in the regulatory review process in Germany for many months and agreed that it was no longer in the best interest of either party to pursue the sale transaction further.
In connection with the termination of the sharessale agreement, the Company determined that the liquid-cooled automotive business no longer met the requirements to be classified as held for sale. As a result, the Company remeasured the long-lived assets reverting back to held and used classification at the lower of Barkell Limitedtheir (i) carrying value, as if held for sale classification had not been met; or (ii) fair value at the date of Consett, United Kingdomthe decision not to sell and reversed $57.2 million of held for cash considerationsale impairment charges during the third quarter of $7.8 million, netfiscal 2022. The long-lived assets primarily consisted 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 assets and were fully impaired while classified as held for sale. For purposes of $2.0 million;the remeasurement, the Company engaged third-party valuation specialists to assist in estimating the fair values of the assets. The Company primarily used the market and working capital netcost valuation approaches and utilized third-party information from various industry-accepted sources, including applicable government-published statistics and data from appraisal and resale service providers. The market approach focused on prices for comparable assets in arm’s length transactions. For land and building assets, for example, sales of similar properties near the Company’s facilities were analyzed. For machinery and equipment assets, the Company referenced available third-party information regarding the selling prices of similar equipment. The cost approach focused on the amount for which an asset could be replaced or reproduced. The cost of an asset was then adjusted downward based on various factors including, but not limited to, age, location, and physical condition. After estimating the fair values of the assets reverting back to held and used classification, the Company compared the fair value for each asset to its carrying value. Carrying value represented each asset’s carrying value before the initial impairment charge, reduced for depreciation that would have been recorded if the asset had not been classified as held for sale. The Company then adjusted each asset to the lower of fair value or carrying value, resulting in the reversal of $57.2 million of previous impairment charges. In addition, the Company resumed depreciating the property, plant and equipment assets of $1.1 million. Acquired technology consiststhe liquid-cooled automotive business based on the remeasured asset values during the third quarter 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.fiscal 2022.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The results$57.2 million held for sale impairment reversal during the third quarter of operationsfiscal 2022 was partially offset by $1.2 million of net held for sale impairment charges recorded earlier in fiscal 2022. At both June 30, 2021 and September 30, 2021, while the liquid-cooled automotive business was held for sale, the Company reassessed its fair value less costs to sell. As a result of these acquired businesses are includedevaluations, the Company recorded a total of $8.6 million of impairment charges during the first and second quarters of fiscal 2022. These impairment charges reduced the net carrying value of property, plant and equipment additions during each quarter to zero. In addition, in connection with a modification of the sale perimeter in the first quarter of fiscal 2022, the Company determined that certain manufacturing operations no longer met the requirements to be classified as held for sale. As a result, the Company reversed $7.4 million of previous impairment charges to adjust the long-lived assets within the asset groups impacted by the sale perimeter change to their estimated fair value. The Company’s determination of fair value for the long-lived assets within the businesses impacted by the sale perimeter change in the first quarter involved judgement and the use of significant estimates and assumptions, including assumptions regarding future revenue projections and operating profit margins and risk-adjusted discount rates.
When the liquid-cooled automotive business was initially classified as held for sale during the third quarter of fiscal 2021, the Company assessed the disposal group’s fair value less costs to sell and reduced the net carrying value of the disposal group’s long-lived assets to zero. During fiscal 2021, the Company recorded impairment charges totaling $138.3 million related to the long-lived assets within the liquid-cooled automotive business.
Also during fiscal 2021, the Company signed a definitive agreement to sell its Austrian air-cooled automotive business to Schmid Metall GmbH. Upon classification as held for sale, the Company estimated an implied loss in excess of the carrying value of the disposal group’s long-lived assets, which primarily consisted of property, plant and equipment assets. As a result, the Company recorded a $26.8 million impairment charge related to this business, reducing the carrying value of the disposal group’s long-lived assets to zero. In addition, the Company recorded an impairment charge of $1.7 million related to other equipment within the Performance Technologies segment. See Note 1 for additional information regarding the accounting for the sale of the Austrian air-cooled automotive business, which was completed in fiscal 2022.
The Company reported the impairment charges and reversals during fiscal 2022 and 2021 within the impairment charges (reversals) line on the consolidated statements of operations since the dates of acquisition. operations.
Note 3: Revenue Recognition
The Company did not present pro forma financial informationgenerates 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 the effect of these acquisitions is not materialit 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 the 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:
Climate Solutions The Climate Solutions segment principally generates revenue from selling heat transfer products, heating, ventilating, air conditioning, and refrigeration (“HVAC & refrigeration”) products, and data center cooling solutions.
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 practical limitations, the Climate Solutions 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.
Ventilation and air conditioning products are highly-specified to a customer’s needs; the majority of the underlying sales contracts do not provide the Company with an enforceable right to payment for performance completed to date. As a result, the Climate Solutions segment recognizes revenue for the majority of its products at the time control is transferred to the customer based upon shipping terms, which is generally upon shipment.
For the sale of heat transfer products, refrigeration products, and data center cooling solutions, 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 Climate Solutions segment recognizes revenue for these products primarily at the time control is transferred to the customer based upon shipping terms, which is generally upon shipment.
For sales to customers whose contract cancellation terms provide an enforceable right to payment, the Climate Solutions segment recognizes revenue over time based upon its estimated progress toward satisfaction of the performance obligations. The segment measures progress by evaluating the production status toward completion of ordered products not yet shipped to its customers.
Performance Technologies The Performance Technologies segment provides products and solutions that enhance the performance of customer applications. The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications. Air-cooled products include radiators, charge air coolers, condensers, and engine cooling modules. Liquid-cooled products include engine oil coolers, charge air coolers, condensers, and exhaust gas recirculation coolers. In addition, the Performance Technologies segment provides advanced solutions, which are designed to improve battery range and vehicle life, to zero-emission and hybrid commercial vehicle, automotive, bus and specialty vehicle customers. These solutions include battery thermal management systems, electronics cooling packages, and battery chillers. The advanced solutions provided by the segment also include coating products and application services that extend the life of equipment and components by protecting against corrosion.
While the Performance Technologies segment provides 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 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, the Performance Technologies segment recognizes revenue primarily at the time control is transferred to the customer based upon shipping terms, which is generally upon shipment.
In regard to the Performance Technologies 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 toward satisfaction of the performance obligations. The Performance Technologies segment measures progress by evaluating the production status of ordered products not yet shipped to the customer.
For sales of coatings products, in which the customers control the equipment being enhanced by the coating application, the Performance Technologies segment recognizes revenue over time based upon its estimated progress toward satisfaction of the performance obligations. The segment measures progress by evaluating the production status toward completion of ordered products or services not yet shipped to its customers.
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.
Disaggregation of Revenue The tables below present revenue for each of the Company’s operating segments, Climate Solutions and Performance Technologies. Each segment’s revenue is disaggregated by product group, by geographic location and based upon the timing of revenue recognition.
Effective April 1, 2022, the Company began managing its operations or financial position.under two operating segments, Climate Solutions and Performance Technologies. The Climate Solutions segment includes the previously-reported Building HVAC Systems (“BHVAC”) and the Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings. The Performance Technologies segment includes the previously-reported Heavy Duty Equipment (“HDE”) and Automotive segments and the CIS Coatings business. See Note 22 for additional information regarding the Company’s operating segments. The disaggregated revenue information presented in the tables below for fiscal 2022 and 2021 has been recast to be comparable with the fiscal 2023 presentation.
| | | Year ended March 31, 2023 | | | | Climate Solutions | | | Performance Technologies | | | Segment Total | | | Product groups: | | | | | | | | | | | Heat transfer | | $ | 521.2 | | | $ | - | | | $ | 521.2 | | | HVAC & refrigeration | | | 336.3 | | | | - | | | | 336.3 | | | Data center cooling | | | 154.0 | | | | - | | | | 154.0 | | | Air-cooled | | | - | | | | 658.6 | | | | 658.6 | | | Liquid-cooled | | | - | | | | 483.9 | | | | 483.9 | | | Advanced solutions | | | - | | | | 143.9 | | | | 143.9 | | | Inter-segment sales | | | 0.4 | | | | 29.8 | | | | 30.2 | | | Net sales | | $ | 1,011.9 | | | $ | 1,316.2 | | | $ | 2,328.1 | | | | | | | | | | | | | | | | | Geographic location: | | | | | | | | | | | | | | Americas | | $ | 580.9 | | | $ | 702.0 | | | $ | 1,282.9 | | | Europe | | | 406.0 | | | | 408.5 | | | | 814.5 | | | Asia | | | 25.0 | | | | 205.7 | | | | 230.7 | | | Net sales | | $ | 1,011.9 | | | $ | 1,316.2 | | | $ | 2,328.1 | | | | | | | | | | | | | | | | | Timing of revenue recognition: | | | | | | | | | | | | | | Products transferred at a point in time | | $ | 959.8 | | | $ | 1,242.3 | | | $ | 2,202.1 | | | Products transferred over time | | | 52.1 | | | | 73.9 | | | | 126.0 | | | Net sales | | $ | 1,011.9 | | | $ | 1,316.2 | | | $ | 2,328.1 | |
| | | Year ended March 31, 2022 | | | | | | | | | | Segment Total | | | Product groups: | | | | | | | | | | | Heat transfer | | $ | 488.3 | | | $ | - | | | $ | 488.3 | | | HVAC & refrigeration | | | 325.5 | | | | - | | | | 325.5 | | | Data center cooling | | | 96.3 | | | | - | | | | 96.3 | | | Air-cooled | | | - | | | | 572.3 | | | | 572.3 | | | Liquid-cooled | | | - | | | | 448.3 | | | | 448.3 | | | Advanced solutions | | | - | | | | 119.4 | | | | 119.4 | | | Inter-segment sales | | | 0.4 | | | | 32.4 | | | | 32.8 | | | Net sales | | $ | 910.5 | | | $ | 1,172.4 | | | $ | 2,082.9 | | | | | | | | | | | | | | | | | Geographic location: | | | | | | | | | | | | | | Americas | | $ | 485.9 | | | $ | 585.6 | | | $ | 1,071.5 | | | Europe | | | 396.7 | | | | 375.7 | | | | 772.4 | | | Asia | | | 27.9 | | | | 211.1 | | | | 239.0 | | | Net sales | | $ | 910.5 | | | $ | 1,172.4 | | | $ | 2,082.9 | | | | | | | | | | | | | | | | | Timing of revenue recognition: | | | | | | | | | | | | | | Products transferred at a point in time | | $ | 889.3 | | | $ | 1,093.7 | | | $ | 1,983.0 | | | Products transferred over time | | | 21.2 | | | | 78.7 | | | | 99.9 | | | Net sales | | $ | 910.5 | | | $ | 1,172.4 | | | $ | 2,082.9 | |
| | | Year ended March 31, 2021 | | | | | | | | | | Segment Total | | | Product groups: | | | | | | | | | | | Heat transfer | | $ | 386.9 | | | $ | - | | | $ | 386.9 | | | HVAC & refrigeration | | | 279.7 | | | | - | | | | 279.7 | | | Data center cooling | | | 64.5 | | | | - | | | | 64.5 | | | Air-cooled | | | - | | | | 520.3 | | | | 520.3 | | | Liquid-cooled | | | - | | | | 458.9 | | | | 458.9 | | | Advanced solutions | | | - | | | | 98.1 | | | | 98.1 | | | Inter-segment sales | | | 0.1 | | | | 31.5 | | | | 31.6 | | | Net sales | | $ | 731.2 | | | $ | 1,108.8 | | | $ | 1,840.0 | | | | | | | | | | | | | | | | | Geographic location: | | | | | | | | | | | | | | Americas | | $ | 379.7 | | | $ | 472.0 | | | $ | 851.7 | | | Europe | | | 307.0 | | | | 411.1 | | | | 718.1 | | | Asia | | | 44.5 | | | | 225.7 | | | | 270.2 | | | Net sales | | $ | 731.2 | | | $ | 1,108.8 | | | $ | 1,840.0 | | | | | | | | | | | | | | | | | Timing of revenue recognition: | | | | | | | | | | | | | | Products transferred at a point in time | | $ | 722.7 | | | $ | 1,044.7 | | | $ | 1,767.4 | | | Products transferred over time | | | 8.5 | | | | 64.1 | | | | 72.6 | | | Net sales | | $ | 731.2 | | | $ | 1,108.8 | | | $ | 1,840.0 | |
Contract Balances Contract assets and contract liabilities from contracts with customers were as follows:
| | March 31, 2023 | | | March 31, 2022 | | | Contract assets | | $ | 19.3 | | | $ | 26.8 | | | Contract liabilities | | | 21.5 | | | | 11.8 | |
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 $7.5 million decrease in contract assets during fiscal 2023 primarily resulted from a decrease in contract assets for revenue recognized over time.
Contract liabilities, included within other current liabilities in the consolidated balance sheets, consist of payments received in advance of satisfying performance obligations under customer contracts, including contracts for customer-owned tooling. The $9.7 million increase in contract liabilities during fiscal 2023 primarily resulted from payments received in advance of the Company’s satisfaction of performance obligations.
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. |
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 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, 2023 and 2022, the fair values of the investments and obligations for the Company’s trading securities and deferred compensation obligationsplans each totaled $3.2$2.3 million and $3.0$2.9 million, at March 31, 2016 and 2015, respectively. The fair value of the Company’s long-term debt is disclosed in Note 16.
Plan assets related to the Company’s pension plans were classified as follows:
| | | March 31, 2016 | | | | | Level 1 | | | Level 2 | | | Total | | | | | | | | | | | | | | Money market investments | | $ | - | | | $ | 5.8 | | | $ | 5.8 | | | Common stocks | | | 23.7 | | | | 1.3 | | | | 25.0 | | | Corporate bonds | | | - | | | | 8.4 | | | | 8.4 | | | Pooled equity funds | | | 48.7 | | | | 7.3 | | | | 56.0 | | | Pooled fixed-income funds | | | 26.3 | | | | - | | | | 26.3 | | | U.S. government and agency securities | | | - | | | | 18.4 | | | | 18.4 | | | Other | | | 0.4 | | | | 1.2 | | | | 1.6 | | | Total | | $ | 99.1 | | | $ | 42.4 | | | $ | 141.5 | |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Plan assets related to the Company’s pension plans were classified as follows:
| | | 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 | |
| | March 31, 2023 | | | | | Level 1 | | | Level 2 | | | Total | | | | | | | | | | | | | | Money market investments | | $ | - | | | $ | 1.9 | | | $ | 1.9 | | | Pooled equity funds | | | 34.9 | | | | - | | | | 34.9 | | | Other | | | - | | | | 0.4 | | | | 0.4 | | | Fair value excluding investments measured at net asset value | | | 34.9 | | | | 2.3 | | | | 37.2 | | | Investments measured at net asset value | | | | | | | | | | | 116.1 | | | Total fair value | | | | | | | | | | $ | 153.3 | |
| | March 31, 2022 | | | | | Level 1 | | | Level 2 | | | Total | | | | | | | | | | | | | | Money market investments | | $ | - | | | $ | 2.2 | | | $ | 2.2 | | | Fixed income securities | | | - | | | | 9.1 | | | | 9.1 | | | Pooled equity funds | | | 40.4 | | | | - | | | | 40.4 | | | U.S. government and agency securities | | | - | | | | 11.8 | | | | 11.8 | | | Other | | | 0.1 | | | | 1.4 | | | | 1.5 | | | Fair value excluding investment measured at net asset value | | | 40.5 | | | | 24.5 | | | | 65.0 | | | Investments measured at net asset value | | | | | | | | | | | 114.9 | | | Total fair value | | | | | | | | | | $ | 179.9 | |
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, 20162023 and 2015,2022, the Company held no Level 3 assets within its pension plans.
Assets heldAs a practical expedient, the Company valued certain investments, including pooled equity, fixed income and real estate funds, 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 investment fund may be redeemed quarterly with a 90-day notice period. 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 Note 6 for additional information.prices different than the NAV per unit.
Note 5: | 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 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 2023 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 2023, 2022, and 2021. At present, the Company accomplishes the fulfillment of equity-based grants through the issuance of new common shares. As of March 31, 2016,2023, approximately 3.32.2 million shares authorized under the Amended and Restated 2020 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$6.6 million $4.0, $5.7 million, and $3.6$6.3 million in fiscal 2016, 2015,2023, 2022, and 2014,2021, respectively.
Stock Options:Options The Company recorded $0.9$1.2 million $0.9, $1.1 million, and $0.8$0.9 million of compensation expense related to stock options in fiscal 2016, 2015,2023, 2022, and 2014,2021, respectively. The grant date fair value of stock options that vested during fiscal 2016, 2015,2023, 2022, and 20142021, was $0.9$1.0 million $0.9, $0.9 million, and $0.8$1.3 million, respectively. As of March 31, 2016,2023, the total compensation expense not yet recognized related to non-vested stock options was $2.0$2.3 million and the weighted-average period in which the remaining expense is expected to be recognized was 2.52.1 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, | | | | | 2023 | | | 2022 | | | 2021 | | | Fair value of options | | $ | 6.99 | | | $ | 8.79 | | | $ | 3.46 | | | Expected life of awards in years | | | 6.0 | | | | 6.1 | | | | 6.1 | | | Risk-free interest rate | | | 3.0 | % | | | 1.1 | % | | | 0.4 | % | | Expected volatility of the Company’s stock | | | 57.8 | % | | | 56.5 | % | | | 54.1 | % | | 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. OutstandingBased upon the terms of the fiscal 2023 annual awards, stock options grantedvest 33 percent, 33 percent, and 34 percent per year for three years, respectively. Stock option grants preceding the fiscal 2023 grant vest 25 percent annuallyper year for four years. The Company used a pre-vesting forfeiture rate of 2.5 percent as an estimate of expected forfeitures prior to completing the required service period.
A summary of stock option activity for fiscal 20162023 was as follows:
| | | Shares | | Weighted-average exercise price | | | Weighted-average remaining contractual term (years) | | | Aggregate intrinsic value | | | Outstanding, beginning | | | 1.5 | | | $ | 11.99 | | | | | | | | | Granted | | | 0.2 | | | | 11.39 | | | | | | | | | Exercised | | | (0.1 | ) | | | 5.82 | | | | | | | | | Forfeited or expired | | | (0.1 | ) | | | 27.33 | | | | | | | | | Outstanding, ending | | | 1.5 | | | $ | 10.82 | | | | 5.3 | | | $ | 3.0 | | | | | | | | | | | | | | | | | | | | | Exercisable, March 31, 2016 | | | 1.1 | | | $ | 10.41 | | | | 4.3 | | | $ | 3.0 | |
| | Shares | | | Weighted-average exercise price | | | Weighted-average remaining contractual term (years) | | | Aggregate intrinsic value | | | Outstanding, beginning of year | | | 1.0 | | | $ | 12.12 | | | | | | | | | Granted | | | 0.2 | | | | 12.40 | | | | | | | | | Exercised | | | (0.2 | ) | | | 11.77 | | | | | | | | | Forfeited or expired | | | (0.1 | ) | | | 12.26 | | | | | | | | | Outstanding, end of year | | | 0.9 | | | $ | 12.28 | | | | 7.1 | | | $ | 9.6 | | | | | | | | | | | | | | | | | | | | Exercisable, March 31, 2023 | | | 0.4 | | | $ | 12.46 | | | | 5.5 | | | $ | 4.3 | |
The aggregate intrinsic value represents the difference between the closing price of Modine’s common shares on the last trading day of fiscal 20162023 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:
| | | 2016 | | | 2015 | | | 2014 | | | Intrinsic value of stock options exercised | | $ | 0.4 | | | $ | 0.4 | | | $ | 1.1 | | | Proceeds from stock options exercised | | $ | 0.5 | | | $ | 0.6 | | | $ | 1.1 | |
| | Years ended March 31, | | | | | 2023 | | | 2022 | | | 2021 | | | Intrinsic value of stock options exercised | | $ | 1.5 | | | $ | 0.1 | | | $ | 1.4 | | | Proceeds from stock options exercised | | | 2.9 | | | | 1.4 | | | | 4.1 | |
Restricted Stock:Stock The Company recorded $3.5$5.4 million, $2.8$5.0 million, and $2.2$4.3 million of compensation expense related to restricted stock in fiscal 2016, 2015,2023, 2022, and 2014,2021, respectively. The grant date fair value of restricted stock awards that vested during fiscal 2016, 2015,2023, 2022, and 20142021 was $3.4$4.7 million, $2.3$4.4 million, and $1.6$4.5 million, respectively. At March 31, 2016,2023, the Company had $4.7$6.4 million of unrecognized compensation expense related to non-vested restricted stock, which it expects to recognize over a weighted-average period of 2.41.8 years. The Company values restricted stock awards using the closing market valueprice of its common shares on the date of grant. TheBased upon the terms of the fiscal 2023 annual awards, restricted stock awards vest 33 percent, 33 percent, and 34 percent per year for three years, respectively. Restricted stock award grants preceding the fiscal 2023 grant vest 25 percent annuallyper year for four years, with the exception ofyears. Restricted stock awards granted to non-employee directors which fullyin fiscal 2023 vest uponone year from the time of grant.
A summary of restricted stock activity for fiscal 20162023 was as follows:
| | | Shares | | Weighted- average price | | Non-vested balance, beginning | | | 0.7 | | | $ | 10.68 | | | Granted | | | 0.3 | | | | 11.18 | | | Vested | | | (0.4 | ) | | | 10.01 | | | Non-vested balance, ending | | | 0.6 | | | $ | 11.29 | |
| | Shares | | | Weighted-average price | | | Non-vested balance, beginning of year | | | 0.7 | | | $ | 11.61 | | | Granted | | | 0.5 | | | | 13.60 | | | Vested | | | (0.3 | ) | | | 11.85 | | | Forfeited | | | (0.1 | ) | | | 10.58 | | | Non-vested balance, end of year | | | 0.8 | | | $ | 12.95 | |
Restricted Stock – Performance-Based Shares:Shares The Company recorded $0.5 million, $0.3 milliongranted performance-based cash awards in fiscal 2023, 2022, and $0.6 million2021 in lieu of compensation expense related toperformance-based stock awards. For performance-based stock awards, in fiscal 2016, 2015, and 2014, respectively. At March 31, 2016, the Company had $1.2 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. The Company values performance-based stockthe awards using the closing market valueprice of its common shares on the date of grant. During fiscal 2023 all performance-based awards were cash-based, therefore, the Company did not recognize compensation expense related to performance-based stock awards. In fiscal 2022, the Company recorded a $0.4 million benefit related to the performance-based stock awards granted in fiscal 2020. The payout earned for the fiscal 2020 awards was less than previously estimated. In fiscal 2021, the Company recorded $1.1million of compensation expense related to performance-based stock awards.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Shares areThe payouts earned under the performance portion of the restricted stock award program are based upon the attainment of certain financial goalstargets over a three-yearperiod and are awardedpaid after the end of that three-yearperformance period, if the performance targets have been achieved. A new The performance metrics for the performance-based cash awards granted in fiscal 2021 are based upon both a target three-yearaverage consolidated cash flow return on invested capital and a target three-yearaverage annual revenue growth at the end of the three-yearperformance period, may begin eachcommencing with the fiscal year; therefore, multiple performance periods, with distinct goals, may operate simultaneously.
year of grant. The performance components ofmetrics for the programs initiatedperformance-based cash awards granted in fiscal 20162022 and fiscal 2015 were2023 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 in consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”) at the end of athe three-year performance period, commencing with the fiscal year of grant. For the program initiated in fiscal 2014, the performance award was based upon a target three-year average ROACE, three-year average annual revenue growth, and Asia segment operating income at the end of the three-year performance period.
Note 6: | Note 6: Restructuring Activities |
During fiscal 2016,2023, restructuring and repositioning expenses primarily consisted of severance-related expenses for targeted headcount reductions in each the Company offered a voluntary retirement program to certain U.S. salaried employees. The program was offered as part ofClimate Solutions and Performance Technologies segments and supported the Company’s Strengthen, Diversify and Grow transformational initiative and supports the objective of reducing operational and SG&A cost structures. In addition, the Performance Technologies and Climate Solutions segments incurred equipment transfer costs in Europe and closure costs related to a previously-leased facility in the U.S., respectively.
Also duringDuring fiscal 2016,2022, the Company announced a plancommitted to close its Washington, Iowa manufacturing facilityrestructuring actions intended to reduce SG&A and isoperational expenses, particularly within the Performance Technologies segment. During fiscal 2022, the Company recorded $22.1 million of severance expenses, of which $20.3 million were recorded in the process of transferring the facility’s productionPerformance Technologies segment and primarily related to other Americas segment manufacturing facilities, which it expects to complete by the end of fiscal 2017.targeted headcount reductions in Europe. In addition, the Company completedimplemented targeted headcount reductions in 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.
DuringClimate Solutions segment. Also in fiscal 2015,2022, 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 ofincurred equipment transfer and plant consolidation costs.costs within the Performance Technologies segment.
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)
During fiscal 2021, restructuring actions consisted primarily of targeted headcount reductions and plant consolidation activities. The headcount reductions were primarily in Europe and in the Americas within the Performance Technologies segment and supported the Company’s objective of reducing operational and SG&A cost structures. During fiscal 2021, the Company transferred production from its manufacturing facility in Zhongshan, China to another Climate Solutions segment manufacturing facility in China. As a result of this plant consolidation, the Company recorded $3.7 million of severance expenses during fiscal 2021. Other plant consolidation activities in fiscal 2021 included transferring product lines to the Company’s Climate Solutions manufacturing facility in Mexico.
Restructuring and repositioning expenses were as follows:
| | Years ended March 31, | | | | | 2023 | | | 2022 | | | 2021 | | Employee severance and related benefits
| | $ | 3.5 | | | $ | 22.1 | | | $ | 11.7 | | | Other restructuring and repositioning expenses | | | 1.5 | | | | 2.0 | | | | 1.7 | | Total
| | $ | 5.0 | | | $ | 24.1 | | | $ | 13.4 | |
Other restructuring and repositioning expenses primarily consist of equipment transfer and plant consolidation costs.
The Company accrues severance in accordance with its written plans, procedures, and relevant statutory requirements. Changes in accrued severance were as follows:
| | | Years ended March 31, | | | | 2016 | | 2015 | | Beginning balance | | $ | 9.9 | | | $ | 19.4 | | | Additions | | | 12.8 | | | | 1.2 | | | Payments | | | (8.5 | ) | | | (7.3 | ) | | Effect of exchange rate changes | | | 0.5 | | | | (3.4 | ) | | Ending balance | | $ | 14.7 | | | $ | 9.9 | |
| | Years ended March 31, | | | | | 2023 | | | 2022 | | | Beginning balance | | $ | 20.2 | | | $ | 4.0 | | | Additions | | | 3.5 | | | | 22.1 | | | Payments | | | (12.4 | ) | | | (5.7 | ) | | Reclassified from held for sale | | | - | | | | 0.4 | | | Effect of exchange rate changes | | | (0.7 | ) | | | (0.6 | ) | | Ending balance | | $ | 10.6 | | | $ | 20.2 | |
During fiscal 2016,2022 and 2021, the Company identified potentialrecorded $56.0 million of a net asset impairment indicators related to a manufacturing facility in Germany, including pre-tax lossesreversal and $166.8 million of impairment charges, respectively, within its strategic decision to exit a certain product line in the future. In response,Performance Technologies segment. See Note 2 for additional information.
Also during fiscal 2022, the Company performed an impairment evaluation and recorded an asset impairment charge of $9.9$0.3 million withinto reduce the carrying value of a previously closed Climate Solutions facility to its Europe segment to write down the manufacturing facility’s long-lived assets to fair value. The Company determinedestimated fair value, using Level 3 inputs, primarily consisting of a facility appraisal, which considered the market rental value,less costs to sell.
Note 7: Other Income and estimated scrap values, which considered the specialized nature of the machinery and equipment.Expense
During fiscal 2014, the Company recorded asset impairment charges totaling $3.2 million, including $2.0 million within its Europe segment, primarily due to a manufacturing facility in Germany that the Company has closed, and $1.2 million within its Americas segment, related to the closure of its McHenry, Illinois manufacturing facility.
During fiscal 2015, the Company sold a wind tunnel within its Europe segment for cash proceeds of $5.8 million and recognized a gain of $3.2 million. At March 31, 2016 and 2015, assets held for sale of $8.5 million and $3.2 million, respectively, were included in other noncurrent assets and consisted of facilities that the Company is marketing for sale.
Note 7: | Other Income and Expense |
Other income and expense consisted of the following:
| | | Years ended March 31, | | | | 2016 | | 2015 | | 2014 | | Equity in earnings of non-consolidated affiliate | | $ | 0.1 | | | $ | 0.6 | | | $ | 0.7 | | | Interest income | | | 0.4 | | | | 0.5 | | | | 0.5 | | | Foreign currency transactions (a) | | | (1.3 | ) | | | (0.9 | ) | | | (2.0 | ) | | Gain from insurance recovery (b) | | | 9.5 | | | | - | | | | - | | | Total other income (expense) - net | | $ | 8.7 | | | $ | 0.2 | | | $ | (0.8 | ) |
| | Years ended March 31, | | | | | 2023 | | | 2022 | | | 2021 | | | Interest income | | $ | 1.3 | | | $ | 0.4 | | | $ | 0.5 | | | Foreign currency transactions (a) | | | (3.7 | ) | | | (1.4 | ) | | | 0.6 | | | Net periodic benefit cost (b) | | | (2.0 | ) | | | (1.1 | ) | | | (3.3 | ) | | Total other expense - net | | $ | (4.4 | ) | | $ | (2.1 | ) | | $ | (2.2 | ) |
| (a) | Foreign currency transactions primarily consist of foreign currency transaction gains and losses on the re-measurement or settlement of foreign currency-denominated assets and liabilities, including intercompany loans and transactions denominated in a foreign currencyand intercompany loans, along with gains and losses on foreign currency exchange contracts. |
| (b) | During fiscal 2016,Net periodic benefit cost for the Company settled an insurance claim related to machineryCompany’s pension and equipment destroyed in a fire at its Airedale facility and recorded a gainpostretirement plans is exclusive of $9.5 million. See Note 2 for additional information.service cost. |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Note 8: Income Taxes
The U.S. and foreign components of earnings from continuing operationsor loss before income taxes and the provisionbenefit or benefitprovision for income taxes consisted of the following:
| | | Years ended March 31, | | | | 2016 | | 2015 | | 2014 | | Components of (loss) earnings from continuing operations before income taxes: | | | | | | | | | | | United States | | $ | (15.4 | ) | | $ | 31.1 | | | $ | 14.1 | | | Foreign | | | 5.5 | | | | 10.1 | | | | 9.9 | | | Total (loss) earnings from continuing operations before income taxes | | $ | (9.9 | ) | | $ | 41.2 | | | $ | 24.0 | | | | | | | | | | | | | | | | | Income tax (benefit) expense: | | | | | | | | | | | | | | Federal: | | | | | | | | | | | | | | Current | | $ | 0.1 | | | $ | 0.4 | | | $ | (2.0 | ) | | Deferred | | | (13.0 | ) | | | 7.1 | | | | (95.8 | ) | | State: | | | | | | | | | | | | | | Current | | | 0.2 | | | | - | | | | 0.2 | | | Deferred | | | (2.5 | ) | | | 1.1 | | | | (21.4 | ) | | Foreign: | | | | | | | | | | | | | | Current | | | 9.6 | | | | 12.7 | | | | 10.0 | | | Deferred | | | (3.3 | ) | | | (2.3 | ) | | | 1.1 | | | Total income tax (benefit) expense | | $ | (8.9 | ) | | $ | 19.0 | | | $ | (107.9 | ) |
| | Years ended March 31, | | | | | 2023 | | | 2022 | | | 2021 | | | Components of earnings (loss) before income taxes: | | | | | | | | | | | United States | | $ | 12.5 | | | $ | 0.4 | | | $ | (48.7 | ) | | Foreign | | | 112.8 | | | | 101.1 | | | | (70.6 | ) | | Total earnings (loss) before income taxes | | $ | 125.3 | | | $ | 101.5 | | | $ | (119.3 | ) |
| Income tax (benefit) provision: | | | | | | | | | | | Federal: | | | | | | | | | | | Current | | $ | 1.5 | | | $ | 0.1 | | | $ | (0.1 | ) | | Deferred | | | (47.5 | ) | | | - | | | | 58.3 | | | State: | | | | | | | | | | | | | | Current | | | 2.3 | | | | 1.1 | | | | 0.4 | | | Deferred | | | (11.4 | ) | | | - | | | | 9.2 | | | Foreign: | | | | | | | | | | | | | | Current | | | 27.5 | | | | 17.8 | | | | 22.0 | | | Deferred | | | (0.7 | ) | | | (3.8 | ) | | | 0.4 | | | Total income tax (benefit) provision | | $ | (28.3 | ) | | $ | 15.2 | | | $ | 90.2 | |
The Company allocatesreconciliation between the U.S. federal statutory rate and the Company’s effective tax rate was as follows:
| | Years ended March 31, | | | | | 2023 | | | 2022 | | | 2021 | | | Statutory federal tax | | | 21.0 | % | | | 21.0 | % | | | 21.0 | % | | State taxes, net of federal benefit | | | (0.1 | ) | | | 1.4 | | | | 0.9 | | | Taxes on non-U.S. earnings and losses | | | 5.8 | | | | 3.5 | | | | (9.1 | ) | | Valuation allowances | | | (42.9 | ) | | | (8.8 | ) | | | (92.9 | ) | | Tax credits | | | (4.5 | ) | | | (3.4 | ) | | | 2.2 | | | Compensation | | | 0.7 | | | | 0.6 | | | | (1.3 | ) | | Tax rate or law changes | | | (0.2 | ) | | | 0.6 | | | | (0.2 | ) | | Uncertain tax positions, net of settlements | | | 0.4 | | | | (0.2 | ) | | | 0.1 | | | Notional interest deductions | | | (1.7 | ) | | | (2.7 | ) | | | 1.3 | | | Dividends and taxable foreign inclusions | | | 0.9 | | | | 1.6 | | | | 3.0 | | | Other | | | (2.0 | ) | | | 1.4 | | | | (0.6 | ) | | Effective tax rate | | | (22.6 | %) | | | 15.0 | % | | | (75.6 | %) |
The Company’s fiscal 2023 effective tax rate was favorably impacted by an income tax expense among continuing operations, discontinued operations, and other comprehensive income. The Company applies accounting for income taxes by tax jurisdiction, and in periods in which there is a loss from continuing operations before income taxes and pre-tax income in other categories (e.g., discontinued operations or other comprehensive income), it first allocates income tax expensebenefit related to the other sources of income, and records a related tax benefit in continuing operations.
Income tax expense attributable to earnings from continuing operations before income taxes differed from the amounts computed by applying the statutory U.S. federal income tax rate as a result of the following:
| | | Years ended March 31, | | | | 2016 | | 2015 | | 2014 | | Statutory federal tax | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % | | State taxes, net of federal benefit | | | 11.5 | | | | 2.4 | | | | 2.1 | | | Taxes on non-U.S. earnings and losses | | | 26.4 | | | | (4.9 | ) | | | (3.8 | ) | | Valuation allowance | | | (20.9 | ) | | | 8.3 | | | | (471.7 | ) | | Tax credits | | | 20.5 | | | | (6.1 | ) | | | (7.1 | ) | | Compensation | | | (3.7 | ) | | | 1.0 | | | | 0.4 | | | Tax rate or law changes | | | 1.3 | | | | 1.2 | | | | (9.2 | ) | | Uncertain tax positions, net of settlements | | | (4.3 | ) | | | 2.2 | | | | 0.4 | | | Dividend repatriation | | | 16.0 | | | | 2.4 | | | | 5.8 | | | Other | | | 8.1 | | | | 4.6 | | | | (1.5 | ) | | Effective tax rate | | | 89.9 | % | | | 46.1 | % | | | (449.6 | %) |
The Company recorded an additional valuation allowance of $5.0 million, $2.6 million and $12.3 million in fiscal 2016, 2015, and 2014, respectively, against neton deferred tax assets in certain jurisdictions after determining it was more likely than not that the net deferredU.S. The effective tax assetsrates in these jurisdictions will not be realized. The Company will continueboth fiscal 2022 and 2021 were significantly impacted by impairment charges or reversals, largely related to provide a valuation allowance against its net deferred tax assets in each of the applicable jurisdictions going forward until the need for a valuation allowance is eliminated. The need for a valuation allowance is eliminated when the Company determines it is more likely than not the deferred tax assets will be realized.
During fiscal 2016liquid-cooled automotive business, and 2014, the Company concluded it no longer needed a valuation allowance on certain deferred tax assets after determining it was more likely than not they would be realized. As a result, the Company recorded reversals of its deferred tax asset valuation allowance of $3.0 million and $119.2 million in fiscal 2016 and 2014, respectively. Also during fiscal 2014, the Company recorded income tax charges or benefits totaling $2.2 million related to foreignvaluation allowances. See Note 2 for information regarding the impairment charges and reversals. The income tax law changes.charges or benefits related to valuation allowances are described below.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The Company records valuation allowances against its net deferred tax assets to the extent it determines it is more likely than not that such assets will not be realized in the future. Each quarter, the Company evaluates the probability that its deferred tax assets will be realized and determines whether valuation allowances or adjustments thereto are needed. This determination involves judgement and the use of significant estimates and assumptions, including expectations of future taxable income and tax planning strategies. In addition, the Company considers the duration of statutory carryforward periods and historical financial results.
Since the third quarter of fiscal 2021, the Company has maintained a full valuation allowance against net deferred tax assets in the U.S. since the Company determined, at that time, it was more likely than not that the net deferred tax assets would not be realized. In the fourth quarter of fiscal 2023, based on the Company’s recent history of earnings, coupled with its forecasted profitability, the Company determined it was more likely than not that certain deferred tax assets in the U.S. will be realized. As a result, the Company reversed the valuation allowance related to these deferred tax assets and recorded an income tax benefit of $57.3 million. The Company evaluated both positive and negative objectively verifiable evidence and placed substantial weight on its fiscal 2022 and 2023 earnings, which resulted in a significant cumulative three-year income position. The Company also considered its forecasts for future earnings in certain key businesses. The Company has determined it is more likely than not that a portion of the deferred tax assets in the U.S. related to certain federal and state tax attributes will not be realized prior to expiration and, as such, has maintained a valuation allowance against these assets. In addition, the Company recorded a net increase of other deferred tax asset valuation allowances totaling $3.6 million.
Based upon its analyses during fiscal 2022, the Company determined it was more likely than not that the deferred tax assets in certain foreign jurisdictions would be realized. As a result, the Company reversed the valuation allowances related to these deferred tax assets and recorded income tax benefits totaling $13.0 million. The Company’s analyses included consideration of the transaction perimeter modification and the termination of the sale agreement for the liquid-cooled automotive business and the related impairment reversals. Separately, the Company determined it was more likely than not that the deferred tax assets in a foreign jurisdiction would not be realized. As a result, the Company recorded an income tax charge of $1.6 million. Together, these fiscal 2022 valuation allowance adjustments resulted in a net income tax benefit of $11.4 million during fiscal 2022. In addition, the Company recorded a net increase of other deferred tax asset valuation allowances totaling $2.5 million.
Based upon its analyses during fiscal 2021, the Company determined it was more likely than not that its deferred tax assets in the U.S. and in certain foreign jurisdictions would not be realized. As a result, the Company recorded income tax charges totaling $116.5 million to increase the valuation allowances on deferred tax assets in the U.S. ($103.3 million) and in certain foreign jurisdictions ($13.2 million). The Company’s analyses during fiscal 2021 included consideration of the impairment charges recorded for the liquid-cooled automotive business, which contributed to the Company entering into a three-year cumulative loss position in the U.S. and in certain foreign jurisdictions as of December 31, 2020. Also during fiscal 2021, the Company recorded a net increase of other deferred tax asset valuation allowances totaling $22.0 million and recorded a $9.3 million income tax benefit resulting from allocation of the income tax provision between net earnings and other comprehensive income.
At March 31, 2023, valuation allowances against deferred tax assets in the U.S. and in certain foreign jurisdictions totaled $33.9 million and $27.7 million, respectively. The Company will maintain the valuation allowances in each applicable tax jurisdiction until it determines it is more likely than not the deferred tax assets will be realized, thereby eliminating the need for a valuation allowance. Future events or circumstances, such as lower taxable income or unfavorable changes in the financial outlook of the Company’s operations in certain jurisdictions, could necessitate the establishment of further valuation allowances.
The tax effects of temporary differences that gave rise to deferred tax assets and liabilities were as follows:
| | | March 31, | | | | 2016 | | 2015 | | Deferred tax assets: | | | | | | | | Accounts receivable | | $ | 0.1 | | | $ | 0.3 | | | Inventories | | | 3.6 | | | | 3.8 | | | Plant and equipment | | | 4.3 | | | | 0.8 | | | Pension and employee benefits | | | 52.6 | | | | 50.5 | | | Net operating loss, capital loss, and credit carryforwards | | | 109.4 | | | | 105.0 | | | Other, principally accrued liabilities | | | 6.9 | | | | 6.8 | | | Total gross deferred tax assets | | | 176.9 | | | | 167.2 | | | Less: valuation allowance | | | (50.8 | ) | | | (48.0 | ) | | Net deferred tax assets | | | 126.1 | | | | 119.2 | | | | | | | | | | | | | Deferred tax liabilities: | | | | | | | | | | Plant and equipment | | | 5.5 | | | | 5.3 | | | Goodwill | | | 0.6 | | | | 0.6 | | | Other | | | 1.1 | | | | 1.0 | | | Total gross deferred tax liabilities | | | 7.2 | | | | 6.9 | | | Net deferred tax asset | | $ | 118.9 | | | $ | 112.3 | |
| | March 31, | | | | | 2023 | | | 2022 | | | Deferred tax assets: | | | | | | | | Accounts receivable | | $ | 0.9 | | | $ | 0.8 | | | Inventories | | | 6.0 | | | | 6.5 | | | Plant and equipment | | | 17.2 | | | | 19.9 | | | Lease liabilities | | | 15.9 | | | | 13.5 | | | Pension and employee benefits | | | 24.1 | | | | 27.5 | | | Net operating and capital losses | | | 55.4 | | | | 53.9 | | | Credit carryforwards | | | 49.0 | | | | 48.5 | | | Research and experimental expenditures | | | 8.0 | | | | - | | | Other, principally accrued liabilities | | | 13.2 | | | | 13.5 | | | Total gross deferred tax assets | | | 189.7 | | | | 184.1 | | | Less: valuation allowances | | | (61.6 | ) | | | (112.2 | ) | | Net deferred tax assets | | | 128.1 | | | | 71.9 | | | | | | | | | | | | | Deferred tax liabilities: | | | | | | | | | | Plant and equipment | | | 7.5 | | | | 8.6 | | | Lease assets | | | 15.7 | | | | 13.2 | | | Goodwill | | | 4.8 | | | | 4.9 | | | Intangible assets | | | 20.1 | | | | 22.4 | | | Other | | | 1.1 | | | | 1.5 | | | Total gross deferred tax liabilities | | | 49.2 | | | | 50.6 | | | Net deferred tax assets | | $ | 78.9 | | | $ | 21.3 | |
As of March 31, 2016, the Company adopted new accounting guidance, which requires that all deferred taxes be presented as non-current on the consolidated balance sheets. See Note 1 for additional information.
Unrecognized tax benefits were as follows:
| | | Years ended March 31, | | | | 2016 | | 2015 | | Beginning balance | | $ | 5.6 | | | $ | 2.1 | | | Gross increases - tax positions in prior period | | | - | | | | 3.1 | | | Gross decreases - tax positions in prior period | | | (0.1 | ) | | | - | | | Gross increases - tax positions in current period | | | 0.4 | | | | 0.4 | | | Ending balance | | $ | 5.9 | | | $ | 5.6 | |
| | Years ended March 31, | | | | | 2023 | | | 2022 | | | Beginning balance | | $ | 9.3 | | | $ | 9.6 | | | Gross increases - tax positions in prior period | | | 0.2 | | | | 0.1 | | | Gross decreases - tax positions in prior period | | | (0.1 | ) | | | (0.2 | ) | | Gross increases - tax positions in current period | | | 0.9 | | | | 1.0 | | | Lapse of statute of limitations | | | (0.6 | ) | | | (1.2 | ) | | Ending balance | | $ | 9.7 | | | $ | 9.3 | |
The Company’s liability for unrecognized tax benefits as of March 31, 20162023 was $5.9$9.7 million and, if recognized, $3.5$7.8 million would have an effective tax rate impact. The Company estimates a $2.0 million net decrease in unrecognized tax benefits during fiscal 2024 mainly due to lapses in statutes of limitations. If recognized, these reductions would have an impact on the Company’s effective tax rate.
The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense. During fiscal 2023, 2022 and 2021, interest and penalties included within income tax expense in the consolidated statements of operations were not significant. At March 31, 20162023 and 2015,2022, accrued interest and penalties were not significant.totaled $0.8 million and $0.7 million, respectively.
The Company files income tax returns in multiple jurisdictions and is subject to examination by taxing authorities throughout the world. At March 31, 2016,2023, the Company was under income tax examination in a number of foreign jurisdictions. The Company does not anticipate a significant change in unrecognized tax benefits during the next twelve months.
The following tax years remain subject to examination for the Company’s major tax jurisdictions:
Austria | Fiscal 2012 - 2015 | Brazil | Calendar 2011 - 2015 | | Germany | Fiscal 20122017 - 2015Fiscal 2022 | | Italy | Fiscal 2018 - Fiscal 2022 | | United States | Fiscal 20132020 - 2015Fiscal 2022 |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
At March 31, 2016,2023, the Company had federal and state research and development tax credits of $23.3$60.4 million that, if not utilized against domesticU.S. taxes, will expire between fiscal 20182024 and 2036.2043. The Company also had various state and local tax loss carry forwards of $190.8 million that, ifcarryforwards totaling $136.7 million. If not utilized against state apportioned taxable income, certain state and local carryforwards will expire at various times duringbetween fiscal 2017 through 2036.2024 and 2042, while some will not expire due to an unlimited carryforward period. In addition, the Company had tax loss carry forwards of $330.7and foreign attribute carryforwards totaling $285.0 million in various tax jurisdictions throughout the world. Certain of the carry forwards in the U.S. and manycarryforwards in foreign jurisdictions are offset by a valuation allowance.allowances. If not utilized against taxable income, $156.9$54.9 million of these tax lossescarryforwards will expire at various times duringbetween fiscal 2017 through 2035,2024 and $173.82034, and $230.1 million, mainly related to Germany Austria and India,Italy, will not expire due to an unlimited carry-forwardcarryforward period.
At March 31, 2016,The Company’s practice and intention is to reinvest, with certain insignificant exceptions, the earnings of its non-U.S. subsidiaries outside of the U.S., and therefore, the Company provided $1.1 million of tax on undistributed earningshas not recorded foreign withholding taxes or deferred income taxes for certain subsidiaries not considered permanently reinvested. Undistributed earnings totaling $491.0 million are considered permanently reinvested inthese earnings. The Company has estimated the Company’s remaining foreign operations, and no provision has been made for taxes that would be payable upon the distribution of such earnings. It is not practicable to estimate thenet amount of unrecognized foreign withholding taxestax and deferred tax liabilityliabilities would total approximately $12.0 million if the accumulated foreign earnings were distributed; however, the actual tax cost would be dependent on such earnings.circumstances existing when remittance occurs.
Note 9: | Note 9: Earnings Per Share |
The components of basic and diluted earnings per share were as follows:
| | | Years ended March 31, | | | | 2016 | | 2015 | | 2014 | | Basic: | | | | | | | | | | | (Loss) earnings from continuing operations | | $ | (1.0 | ) | | $ | 22.2 | | | $ | 131.9 | | | Less: Net earnings attributable to noncontrolling interest | | | (0.6 | ) | | | (1.0 | ) | | | (1.5 | ) | | Less: Undistributed earnings attributable to unvested shares | | | - | | | | (0.2 | ) | | | (1.7 | ) | | (Loss) earnings from continuing operations available to Modine shareholders | | | (1.6 | ) | | | 21.0 | | | | 128.7 | | | Earnings from discontinued operations, net of income taxes | | | - | | | | 0.6 | | | | - | | | Net (loss) earnings available to Modine shareholders | | $ | (1.6 | ) | | $ | 21.6 | | | $ | 128.7 | | | | | | | | | | | | | | | | | Weighted-average shares outstanding - basic | | | 47.3 | | | | 47.2 | | | | 46.9 | | | | | | | | | | | | | | | | | Basic Earnings Per Share: | | | | | | | | | | | | | | (Loss) earnings per share - continuing operations | | $ | (0.03 | ) | | $ | 0.45 | | | $ | 2.75 | | | Earnings per share - discontinued operations | | | - | | | | 0.01 | | | | - | | | Net (loss) earnings per share - basic | | $ | (0.03 | ) | | $ | 0.46 | | | $ | 2.75 | | | | | | | | | | | | | | | | | Diluted: | | | | | | | | | | | | | | (Loss) earnings from continuing operations | | $ | (1.0 | ) | | $ | 22.2 | | | $ | 131.9 | | | Less: Net earnings attributable to noncontrolling interest | | | (0.6 | ) | | | (1.0 | ) | | | (1.5 | ) | | Less: Undistributed earnings attributable to unvested shares | | | - | | | | (0.2 | ) | | | (0.9 | ) | | (Loss) earnings from continuing operations available to Modine shareholders | | | (1.6 | ) | | | 21.0 | | | | 129.5 | | | Earnings from discontinued operations, net of income taxes | | | - | | | | 0.6 | | | | - | | | Net (loss) earnings available to Modine shareholders | | $ | (1.6 | ) | | $ | 21.6 | | | $ | 129.5 | | | | | | | | | | | | | | | | | Weighted-average shares outstanding - basic | | | 47.3 | | | | 47.2 | | | | 46.9 | | | Effect of dilutive securities | | | - | | | | 0.6 | | | | 0.7 | | | Weighted-average shares outstanding - diluted | | | 47.3 | | | | 47.8 | | | | 47.6 | | | | | | | | | | | | | | | | | Diluted Earnings Per Share: | | | | | | | | | | | | | | (Loss) earnings per share - continuing operations | | $ | (0.03 | ) | | $ | 0.44 | | | $ | 2.72 | | | Earnings per share - discontinued operations | | | - | | | | 0.01 | | | | - | | | Net (loss) earnings per share - diluted | | $ | (0.03 | ) | | $ | 0.45 | | | $ | 2.72 | |
| | Years ended March 31, | | | | | 2023 | | | 2022 | | | 2021 | | | Basic Earnings Per Share: | | | | | | | | | | | Net earnings (loss) attributable to Modine | | $ | 153.1 | | | $ | 85.2 | | | $ | (210.7 | ) | | | | | | | | | | | | | | | | Weighted-average shares outstanding – basic | | | 52.3 | | | | 52.0 | | | | 51.3 | | | | | | | | | | | | | | | | | Net earnings (loss) per share – basic | | $ | 2.93 | | | $ | 1.64 | | | $ | (4.11 | ) | | | | | | | | | | | | | | | | Diluted Earnings Per Share: | | | | | | | | | | | | | | Net earnings (loss) attributable to Modine | | $ | 153.1 | | | $ | 85.2 | | | $ | (210.7 | ) | | | | | | | | | | | | | | | | Weighted-average shares outstanding – basic | | | 52.3 | | | | 52.0 | | | | 51.3 | | | Effect of dilutive securities | | | 0.5 | | | | 0.5 | | | | - | | | Weighted-average shares outstanding – diluted | | | 52.8 | | | | 52.5 | | | | 51.3 | | | | | | | | | | | | | | | | | Net earnings (loss) per share – diluted | | $ | 2.90 | | | $ | 1.62 | | | $ | (4.11 | ) |
For the years ended March 31, 2016, 2015,fiscal 2023, 2022 and 2014,2021, the calculation of diluted earnings per share excluded 0.80.5 million, 0.60.5 million, and 0.81.0 million, stock options, respectively, because they were anti-dilutive. For fiscal 2023, 2022 and 2021, the year ended March 31, 2016,calculation of diluted earnings per share excluded 0.2 million, 0.2 million, and 0.4 million restricted stock awards, respectively, because they were anti-dilutive. For fiscal 2021 the total number of potential dilutivepotentially-dilutive securities was 0.40.2 million. However, these securities were not included in the computation of diluted net loss per share since to do so would decreasehave decreased the loss per share.
54Note 10: Cash, Cash Equivalents and Restricted Cash
Cash, cash equivalents and restricted cash consisted of the following:
| | March 31, | | | | | 2023 | | | 2022 | | | Cash and cash equivalents | | $ | 67.1 | | | $ | 45.2 | | | Restricted cash | | | 0.1 | | | | 0.2 | | Total cash, cash equivalents and restricted cash
| | $ | 67.2 | | | $ | 45.4 | |
Restricted cash, which is reported within other current assets and other noncurrent assets in the consolidated balance sheets, consists primarily of deposits for contractual guarantees or commitments required for rents, import and export duties, and commercial agreements.
Note 11: Inventories
Inventories consisted of the following:
| | | March 31, | | | | 2016 | | 2015 | | Raw materials and work in process | | $ | 79.5 | | | $ | 80.7 | | | Finished goods | | | 31.5 | | | | 27.0 | | | Total inventories | | $ | 111.0 | | | $ | 107.7 | |
| | March 31, | | | | | 2023 | | | 2022 | | | Raw materials | | $ | 218.3 | | | $ | 186.7 | | | Work in process | | | 49.9 | | | | 55.1 | | | Finished goods | | | 56.7 | | | | 39.4 | | | Total inventories | | $ | 324.9 | | | $ | 281.2 | |
Note11: | Note 12: Property, Plant and Equipment |
Property, plant and equipment, including depreciable lives, consisted of the following:
| | | March 31, | | | | 2016 | | 2015 | | Land | | $ | 7.2 | | | $ | 8.2 | | | Buildings and improvements (10-40 years) | | | 221.3 | | | | 221.0 | | | Machinery and equipment (3-12 years) | | | 694.3 | | | | 652.0 | | | Office equipment (3-10 years) | | | 84.1 | | | | 81.9 | | | Construction in progress | | | 36.7 | | | | 31.7 | | | | | | 1,043.6 | | | | 994.8 | | | Less: accumulated depreciation | | | (705.0 | ) | | | (672.7 | ) | | Net property, plant and equipment | | $ | 338.6 | | | $ | 322.1 | |
| | March 31, | | | | | 2023 | | | 2022 | | | Land | | $ | 16.4 | | | $ | 16.8 | | Buildings and improvements (10-40 years) | | | 264.0 | | | | 264.6 | | Machinery and equipment (3-15 years) | | | 853.3 | | | | 869.4 | | Office equipment (3-10 years) | | | 93.6 | | | | 96.2 | | | Construction in progress | | | 47.5 | | | | 31.2 | | | | | | 1,274.8 | | | | 1,278.2 | | | Less: accumulated depreciation | | | (960.3 | ) | | | (962.8 | ) | | Net property, plant and equipment | | $ | 314.5 | | | $ | 315.4 | |
Depreciation expense totaled $48.6$46.5 million, $50.0$46.4 million, and $57.3$60.1 million for the years ended March 31, 2016, 2015,fiscal 2023, 2022, and 2014,2021, respectively.
Gains and losses related to the disposal of property, plant and equipment are recorded inwithin SG&A expenses. TotalFor fiscal 2023 and 2021, losses related to the disposal of property, plant and equipment were $0.4 million, $1.1 million and $2.6 million for the years ended March 31, 2016, 2015, and 2014, respectively.
Note 12: | Investment in Affiliate |
The Company’s investment in its non-consolidated affiliate is accounted for under the equity method. The Company has a 50 percent ownership of Nikkei Heat Exchanger Company, Ltd. (“NEX”). At both March 31, 2016 and 2015, the Company included the investment in NEX of $3.2 million in other noncurrent assets. At March 31, 2016, the investment in NEX is equal to the Company's investment in the underlying assets.
The Company reports the results of operations for NEX in the consolidated financial statements using a one-month reporting delay. The Company reports equity in earnings from non-consolidated affiliates within other income and expense in the consolidated statements of operations. The Company’s share of NEX’s earnings for the years ended March 31, 2016, 2015, and 2014 wastotaled $0.1 million, $0.6 million and $0.7 million, respectively. For fiscal 2022, gains related to the disposal of property, plant and equipment totaled $0.1 million.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note13: | Note 13: Intangible Assets |
Intangible assets consisted of the following:
| | | March 31, 2016 | | | March 31, 2015 | | | | | | | | | | | | | | | | | | | | | | | Trade names | | $ | 8.9 | | | $ | (6.3 | ) | | $ | 2.6 | | | $ | 9.1 | | | $ | (5.8 | ) | | $ | 3.3 | | | Acquired technology | | | 5.5 | | | | (1.5 | ) | | | 4.0 | | | | 5.6 | | | | (0.9 | ) | | | 4.7 | | | Customer relationships | | | 2.0 | | | | (0.4 | ) | | | 1.6 | | | | 2.1 | | | | (0.2 | ) | | | 1.9 | | | Total intangible assets | | $ | 16.4 | | | $ | (8.2 | ) | | $ | 8.2 | | | $ | 16.8 | | | $ | (6.9 | ) | | $ | 9.9 | |
| | March 31, 2023 | | | March 31, 2022 | | | | | Gross Carrying Value | | | Accumulated Amortization | | | Net Intangible Assets | | | Gross Carrying Value | | | Accumulated Amortization | | | Net Intangible Assets | | | Customer relationships | | $ | 60.3 | | | $ | (23.4 | ) | | $ | 36.9 | | | $ | 61.2 | | | $ | (20.1 | ) | | $ | 41.1 | | | Trade names | | | 50.1 | | | | (15.9 | ) | | | 34.2 | | | | 50.8 | | | | (13.8 | ) | | | 37.0 | | | Acquired technology | | | 22.6 | | | | (12.6 | ) | | | 10.0 | | | | 23.1 | | | | (10.9 | ) | | | 12.2 | | | Total intangible assets | | $ | 133.0 | | | $ | (51.9 | ) | | $ | 81.1 | | | $ | 135.1 | | | $ | (44.8 | ) | | $ | 90.3 | |
The Company recorded $1.6$8.0 million, $1.6$8.4 million, and $0.8$8.5 million of amortization expense during fiscal 2016, 20152023, 2022, and 2014,2021, respectively. Estimated futureThe Company estimates that it will record approximately $8.0 million of annual amortization expense is as follows:in fiscal 2024 through 2028.
| Fiscal Year | | Estimated Amortization Expense | | | 2017 | | $ | 1.6 | | | 2018 | | | 1.6 | | | 2019 | | | 1.5 | | | 2020 | | | 1.3 | | | 2021 | | | 0.8 | | | 2022 & Beyond | | | 1.4 | |
Note 14: Goodwill
Changes in
The following table presents a roll forward of the carrying amountvalue of goodwill byfrom March 31, 2021 to March 31, 2023. The Company has recast the March 31, 2022 and 2021 goodwill balances to be comparable with the current segment and instructure. There was no impact to the aggregate, wereunderlying reporting units as follows:a result of the segment realignment during fiscal 2023.
| | | Americas | | Asia | | Building HVAC | | Total | | Balance, March 31, 2014 | | $ | 10.9 | | | $ | 0.5 | | | $ | 17.3 | | | $ | 28.7 | | | Impairment charge | | | (7.8 | ) | | | - | | | | - | | | | (7.8 | ) | | Effect of exchange rate changes | | | (3.1 | ) | | | - | | | | (1.6 | ) | | | (4.7 | ) | | Balance, March 31, 2015 | | | - | | | | 0.5 | | | | 15.7 | | | | 16.2 | | | Effect of exchange rate changes | | | - | | | | - | | | | (0.4 | ) | | | (0.4 | ) | | Balance, March 31, 2016 | | $ | - | | | $ | 0.5 | | | $ | 15.3 | | | $ | 15.8 | |
| | Climate Solutions
| | | Performance Technologies
| | | Total | | Balance, March 31, 2021 | | $ | 110.5 | | | $ | 60.2 | | | $ | 170.7 | | | Effect of exchange rate changes | | | (2.4 | ) | | | (0.2 | ) | | | (2.6 | ) | Balance, March 31, 2022 | | | 108.1 | | | | 60.0 | | | | 168.1 | | | Effect of exchange rate changes | | | (2.4 | ) | | | (0.1 | ) | | | (2.5 | ) | Balance, March 31, 2023 | | $ | 105.7 | | | $ | 59.9 | | | $ | 165.6 | |
The Company assessestests goodwill for impairment annually, as of March 31, or more frequently if events or circumstances change that would, more likely than not, reduce the fair value of a reporting unit below its carrying value. To test goodwill for impairment, the Company determines the fair value of each reporting unit based upon the present value of estimated future cash flows and compares the fair value of each reporting unit with its carrying value. The Company conductedCompany’s determination of fair value involves judgment and the use of estimates and assumptions, including assumptions regarding the revenue growth rates and operating profit margins used to calculate estimated future cash flows and risk-adjusted discount rates.
As a result of its annual assessment for goodwill impairment duringtests performed as of March 31, 2023, the fourth quarter of fiscal 2016 by applying a fair value-based test andCompany determined that the fair value of itseach of the reporting units within its Climate Solutions and Performance Technologies segments exceeded their respective book values. In fiscal 2015, the Company recorded a $7.8 million goodwill impairment charge within the Americas segment in connection with its annual assessment. The impairment charge was primarily caused by a decline in the financial outlook for Brazil.
At both March 31, 20162023 and 2015,2022, accumulated goodwill impairment losses totaled $31.6 million and $8.7$40.8 million within the AmericasPerformance Technologies segment.
Note 15: Product Warranties and Europe segments, respectively.Other Commitments
Note 15: | Product Warranties Operating Leases, and Other Commitments |
Product warranties: MostMany of the Company’s products are covered under a warranty period ranging from one to five years. The Company records a liability for product warranty obligations at the time of sale to a customer based upon historical warranty experience. In addition, the Companyand adjusts its warranty accruals if it becomes probable that expected claims will differ from initialprevious estimates.
Changes in accrued warranty costs were as follows:
| | Years ended March 31, | | | | | 2023 | | | 2022 | | | Beginning balance | | $ | 6.3 | | | $ | 5.2 | | | Warranties recorded at time of sale | | | 5.4 | | | | 5.5 | | | Adjustments to pre-existing warranties | | | 0.9 | | | | (1.3 | ) | | Settlements | | | (5.6 | ) | | | (4.4 | ) | | Reclassified from held for sale | | | - | | | | 1.3 | | | Effect of exchange rate changes | | | (0.1 | ) | | | - | | | Ending balance | | $ | 6.9 | | | $ | 6.3 | |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Changes in accrued warranty costs were as follows:Indemnification Agreements
| | | Years ended March 31, | | | | 2016 | | 2015 | | Beginning balance | | $ | 10.4 | | | $ | 14.0 | | | Warranties recorded at time of sale | | | 5.7 | | | | 5.8 | | | Adjustments to pre-existing warranties | | | (1.1 | ) | | | 1.5 | | | Settlements | | | (6.7 | ) | | | (9.2 | ) | | Effect of exchange rate changes | | | - | | | | (1.7 | ) | | Ending balance | | $ | 8.3 | | | $ | 10.4 | |
Operating leases: The Company leases various facilities and equipment under operating leases. Rental expense for these leases totaled $11.9 million in fiscal 2016, and $11.5 million in both fiscal 2015 and 2014.
Future minimum rental commitments at March 31, 2016 under non-cancelable operating leases were as follows:
| Fiscal Year | | | | | 2017 | | $ | 8.1 | | | 2018 | | | 5.6 | | | 2019 | | | 4.8 | | | 2020 | | | 4.6 | | | 2021 | | | 4.1 | | | 2022 and beyond | | | 26.3 | | | Total | | $ | 53.5 | |
Indemnification agreements: From time to time, the Company provides indemnification agreements related to the sale or purchase of an entity or facility. These indemnification agreements cover customary representations and warranties typically provided in conjunction with such transactions, including income, sales, excise or other tax matters, environmental matters and other third-party claims. The indemnification periods provided generally range from less than one year to fifteen years. In addition, standard indemnification provisions reside in many commercial agreements to which the Company is a party and relate to responsibility in the event of potential third-party claims. The fair value of the Company’s outstanding indemnification obligations at March 31, 2016 is2023 was not material.
Commitments: Commitments
At March 31, 2016,2023, the Company had capital expenditure commitments of $20.5 million.$25.3 million. Significant commitments include equipment expenditures to support expanding manufacturing capacity in the Climate Solutions segment and tooling and equipment expenditures for new and renewal programs with vehicular customers in the Americas and Europe segments.Performance Technologies segment. The Company utilizes inventory arrangements with certain vendors in the normal course of business under which the vendors maintain inventory stock at the Company’s facilities or at outside facilities. Title passes to the Company at the time goods are withdrawn for use in production. The Company has agreements with the vendors to use the material within a specific period of time. In some cases, the Company bears the risk of loss for the inventory because Modine is required to insure the inventory against damage and/or theft. This inventory is included within the Company’s consolidated balance sheets as raw materials inventory.
57
Note 16: Leases
The Company determines if an arrangement is a lease at contract inception. The lease term begins upon lease commencement, which is when the Company takes possession of the asset, and may include options to extend or terminate the lease when it is reasonably certain that such options will be exercised. The Company uses the lease term within its determination of the appropriate lease classification, either as an operating lease or as a finance lease, and to calculate straight-line lease expense for its operating leases.
ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. The Company recognizes ROU assets and lease liabilities at the lease commencement date, based upon the present value of lease payments over the lease term. As its lease agreements typically do not provide an implicit interest rate, the Company primarily uses an incremental borrowing rate to calculate the ROU asset and lease liability. In determining the incremental borrowing rate, the Company considers its current collateralized borrowing rate, the term of the lease, and the economic environment where the lease activity is concentrated. The Company believes this method effectively estimates a borrowing rate that it could obtain for a debt instrument with similar terms as the lease agreement.
Based upon its accounting policy, the Company does not separate lease and non-lease components for any asset class. In addition, the Company does not record short-term leases (i.e. leases with an initial term of 12 months or less) on its consolidated balance sheets.
Certain leases require the Company to pay taxes, insurance, maintenance, and other operating expenses associated with the leased asset. Such amounts are not included in the measurement of the lease liability to the extent they are variable in nature. These variable lease costs are recognized as variable lease expense when incurred. The depreciable life of the ROU assets and related leasehold improvements are limited by the expected lease term, unless the lease contains a provision to transfer title to the Company or a purchase option that the Company expects to execute.
The Company’s most significant leases represent leases of real estate, such as manufacturing facilities, warehouses, and offices. In addition, the Company leases manufacturing and IT equipment and vehicles. The Company’s most significant leases have remaining lease terms of 1 to 11 years. Certain leases contain renewal options for varying periods, which are at the Company’s discretion. If reasonably certain of exercise, the Company includes the renewal periods within the calculation of ROU assets and lease liabilities. The Company’s lease agreements do not contain material residual value guarantees or material restrictive covenants.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts) Lease Assets and Liabilities The following table provides a summary of leases recorded on the consolidated balance sheets.
| | Balance Sheet Location | | March 31, 2023 | | | March 31, 2022 | | | Lease Assets | | | | | | | | | | Operating lease ROU assets | | Other noncurrent assets | | $ | 59.1 | | | $ | 52.1 | | | Finance lease ROU assets (a) | | Property, plant and equipment - net | | | 7.1 | | | | 7.7 | | | | | | | | | | | | | | | Lease Liabilities | | | | | | | | | | | | Operating lease liabilities | | Other current liabilities
| | $ | 11.8 | | | $ | 12.7 | | | Operating lease liabilities | | Other noncurrent liabilities | | | 48.9 | | | | 41.2 | | | Finance lease liabilities | | Long-term debt - current portion | | | 0.4 | | | | 0.4 | | | Finance lease liabilities | | Long-term debt | | | 2.3 | | | | 2.8 | |
Note 16:(a) | IndebtednessFinance lease ROU assets were recorded net of accumulated amortization of $3.2 million and $2.8 million as of March 31, 2023 and 2022, respectively. |
Components of Lease Expense The Company records operating lease expense as either cost of sales or SG&A expenses within its consolidated statements of operations, depending upon the nature and use of the ROU assets. The Company records finance lease expense as depreciation expense within cost of sales or SG&A expenses, depending upon the nature and use of the ROU assets, and as interest expense in its consolidated statements of operations.
The components of lease expense were as follows:
| | Years ended March 31, | | | | | 2023 | | | 2022 | | | 2021
| | | Operating lease expense (a) | | $ | 21.9 | | | $ | 20.0 | | | $ | 19.5 | | | Finance lease expense: | | | | | | | | | | | | | | Depreciation of ROU assets | | | 0.5 | | | | 0.5 | | | | 0.5 | | | Interest on lease liabilities | | | 0.1 | | | | 0.2 | | | | 0.2 | | | Total lease expense | | $ | 22.5 | | | $ | 20.7 | | | $ | 20.2 | |
| (a) | In fiscal 2023, 2022, and 2021 operating lease expense included short-term lease expense of $5.7 million, $4.2 million, and $3.5 million respectively. Variable lease expense was not significant. |
Supplemental Cash Flow Information
| | Years ended March 31, | | | | | 2023 | | | 2022 | | | 2021
| | | Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | | | | | Operating cash flows for operating leases | | $ | 14.6 | | | $ | 15.7 | | | $ | 14.2 | | | Financing cash flows for finance leases | | | 0.5 | | | | 0.6 | | | | 0.6 | | | | | | | | | | | | | | | | | ROU assets obtained in exchange for lease liabilities: | | | | | | | | | | | | | | Operating leases | | $ | 21.2 | | | $ | 7.8 | | | $ | 9.8 | | | Finance leases | | | - | | | | 0.1 | | | | 0.1 | |
Lease Term and Discount Rates
| | March 31, 2023 | | | March 31, 2022 | | | Weighted-average remaining lease term: | | | | | | | | Operating leases | | 8.3 years | | | 8.5 years | | | Finance leases | | 5.8 years | | | 6.8 years | | | | | | | | | | | Weighted-average discount rate: | | | | | | | | Operating leases | | | 3.7 | % | | | 3.4 | % | | Finance leases | | | 4.6 | % | | | 4.6 | % |
Maturity of Lease Liabilities Future minimum rental payments for leases with initial non-cancellable lease terms in excess of one year were as follows at March 31, 2023:
| Fiscal Year | | Operating Leases | | | Finance Leases | | | 2024 | | $ | 13.8 | | | $ | 0.5 | | | 2025 | | | 11.5 | | | | 0.5 | | | 2026 | | | 10.1 | | | | 0.5 | | | 2027 | | | 8.4 | | | | 0.5 | | | 2028 | | | 7.3 | | | | 0.5 | | 2029 and beyond | | | 19.2 | | | | 0.6 | | | Total lease payments | | | 70.3 | | | | 3.1 | | | Less: Interest | | | (9.6 | ) | | | (0.4 | ) | | Present value of lease liabilities | | $ | 60.7 | | | $ | 2.7 | |
Note 17: Indebtedness
In October 2022, the Company executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and U.S. dollar- and euro-denominated term loan facilities maturing in October 2027. In addition, the credit agreement provides for shorter-duration swingline loans. This credit agreement modified the Company’s then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.
In connection with the credit agreement modification during fiscal 2023, the Company incurred $2.2 million of debt issuance costs. Of these costs, the Company deferred $1.5 million, which will be amortized as interest expense over the term of the debt, and recorded $0.7 million as interest expense on the consolidated statement of operations. The Company paid $0.6 million for debt issuance costs during fiscal 2023 and the remaining issuance costs were added to the new term loan principal at the time of the modification.
Long-term debt was comprisedconsisted of the following:
| | | Fiscal year of maturity | | | March 31, 2016 | | March 31, 2015 | | | | | | | | | | | | | Foreign credit agreements | | | 2018-2020 | | | $ | 0.4 | | | $ | 0.2 | | | 6.8% Senior Notes | | | 2017-2021 | | | | 125.0 | | | | 125.0 | | | Revolving credit facility | | | 2019 | | | | - | | | | - | | | | | | | | | | 125.4 | | | | 125.2 | | | Other (a) | | | 2017-2030 | | | | 8.6 | | | | 4.9 | | | | | | | | | | 134.0 | | | | 130.1 | | | Less: current portion | | | | | | | (8.5 | ) | | | (0.5 | ) | | Total long-term debt | | | | | | $ | 125.5 | | | $ | 129.6 | |
| Fiscal year of maturity | | March 31, 2023 | | | March 31, 2022 | | | | | | | | | | | | Term loans | 2028 | | $ | 215.7 | | | $ | 163.7 | | 5.9% Senior Notes | 2029 | | | 100.0 | | | | 100.0 | | 5.8% Senior Notes | 2027 | | | 33.3 | | | | 41.7 | | | Revolving credit facility | 2028 | | | - | | | | 64.9 | | | Other (a) | | | | 2.7 | | | | 3.2 | | | | | | | 351.7 | | | | 373.5 | | | Less: current portion | | | | (19.7 | ) | | | (21.7 | ) | | Less: unamortized debt issuance costs | | | | (2.7 | ) | | | (3.4 | ) | | Total long-term debt | | | $ | 329.3 | | | $ | 348.4 | |
| (a) | Other long-term debt primarily includes capitalfinance lease obligations and other financing-type obligations. |
The Company maintains a $175.0 million domestic revolving credit facility, which expires in August 2018. Long-term debt, including the current portion of long-term debt, matures as follows:
| Fiscal Year | | | | | 2024 | | $ | 19.7 | | | 2025 | | | 19.7 | | | 2026 | | | 44.7 | | | 2027 | | | 44.7 | | | 2028 | | | 197.4 | | 2029 and beyond | | | 25.5 | | | Total | | $ | 351.7 | |
Borrowings under the revolving credit, agreementswingline and term loan facilities bear interest at a variable rate, based onupon the London Interbank Offered Rate (“LIBOR”) plus 125 to 225 basis points (1.8 percent at March 31, 2016) dependingapplicable reference rate and including a margin percentage dependent upon the Company’s leverage ratio, as defineddescribed below. At March 31, 20162023, the weighted-average interest rate for the term loans was 6.0 percent. Based upon the terms of the credit agreement, the Company classifies borrowings under its revolving credit and 2015,swingline facilities as long-term and short-term debt, respectively, on its consolidated balance sheets.
At March 31, 2023, the Company had no outstanding borrowings were outstanding underrelated to the revolving credit facility.and swingling facilities and domestic letters of credit totaled $5.4 million. As a result, available borrowing capacity under the Company’s revolving credit facility was $269.6 million as of March 31, 2023. At March 31, 2022, the Company’s borrowings under its revolving credit and swingline facilities totaled $64.9 million and $7.0 million, respectively.
The Company also maintains credit agreements for its foreign subsidiaries, withsubsidiaries. The outstanding short-term borrowings at March 31, 2016 and 2015 of $28.6related to these foreign credit agreements totaled $3.7 million and $18.6 million, respectively. At March 31, 2016, the Company’s foreign unused lines of credit totaled $32.0 million. In aggregate, the Company had total available lines of credit of $207.0$0.7 million at March 31, 2016.2023 and March 31, 2022, respectively.
Provisions in
Indebtedness under the Company’s revolving credit facility,agreement and Senior Note agreements and various foreign credit agreements require the Company to maintain compliance with various covenants and include certain cross-default clauses. Under its primary debt agreements in the U.S., the Company has providedis secured by liens on substantially all domestic assets. The Company is also subjectThese agreements further require compliance with various covenants that may limit the Company’s ability to a leverage ratio covenant, which requiresincur additional indebtedness; grant liens; make investments, loans, or guarantees; engage in certain transactions with affiliates; and make restricted payments including dividends. In addition, the agreements may require prepayment in the event of certain asset sales.
Financial covenants within its credit agreements require the Company to limit its consolidated indebtedness, less a portion of the Company’sits cash balance,balances, 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”.), and an interest expense coverage The Company must also maintain a ratio which requires the Company to maintainof Adjusted EBITDA of at least three times consolidated interest expense. TheAs of March 31, 2023, the Company was in compliance with its debt covenants as of March 31, 2016.covenants.
Long-term debt matures as follows:
| Fiscal Year | | | | | 2017 | | $ | 8.5 | | | 2018 | | | 16.5 | | | 2019 | | | 16.5 | | | 2020 | | | 16.6 | | | 2021 | | | 69.4 | | | 2022 & beyond | | | 6.5 | | | Total | | $ | 134.0 | |
The Company estimates the fair value of long-term debt using discounted future cash flows at rates offered to the Company for similar debt instruments of comparable maturities. AtAs of March 31, 20162023 and 2015,2022, the carrying value of Modine’sthe Company’s long-term debt approximated fair value, with the exception of the Senior Notes, which had aan aggregate fair value of approximately $139.0$125.9 million and $141.0$138.9 million, respectively. The fair value of the Senior NotesCompany’s long-term debt is categorized as Level 2 within the fair value hierarchy. Refer to Note 4 for the definition of a Level 2 fair value measurement. MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 17: | Note 18: Pension and Employee Benefit Plans |
Defined Contribution Employee Benefit Plans:
Plans
The Company maintains a domestic 401(k) plansplan that allowallows employees to contribute a portion of their salary to help them save for retirement. The Company matched 50 percent ofcurrently matches employee contributions up to 54.5 percent of their compensation. During fiscal 2021, as part of its response to the negative impacts of the COVID-19 pandemic, the Company suspended matching employee compensation, during fiscal 2016, 2015, and 2014. The Company also makes annual employer contributions into active employee accounts based upon a percentagefor part of employee compensation. Employees can choose among various investment alternatives, including (subject to restrictions) Modine stock. The Company’s matching contributions and annual employer contributions are discretionary.the year. The Company’s expense for defined contribution employee benefit plans during fiscal 2016, 2015,2023, 2022, and 20142021 was $4.6 $6.9 million, $5.9$6.4 million, and $8.3$3.0 million, respectively. The decreasing trend in expense from fiscal 2014 was primarily due to lower discretionary employer contributions.
In addition, the Company maintains a non-qualified deferred compensation planplans for eligible employees, and various non-U.S. subsidiaries have government-required defined contribution plans in place, under which they contribute a percentage of employee earnings into accounts, consistent with local laws.
Statutory Termination Plans:
Plans
Certain non-U.S. subsidiaries have statutory termination indemnity plans covering eligible employees. The benefits under these plans are based upon years of service and final average compensation levels or a monthly retirement benefit amount. These programs are all substantially unfunded in accordance with local laws, but are often covered by national obligatory umbrella insurance programs that protect employees from losses in the event that an employer defaults on its obligations.laws.
Defined Benefit Employee Benefit Plans:Pension Plans
Pension plans:The Company maintains non-contributory defined benefit pension plans that cover eligible domestic employees. These plans are closed to new participants. The primary domestic plans cover most of its domestic employees hired on or before December 31, 2003. The2003 and provide benefits provided are based primarily onupon years of service and average compensation for salaried and some hourly employees. Benefits for other hourly employees are based onupon a monthly retirement benefit amount. Domestic salaried employees hired after December 31, 2003 are not covered under a defined benefit plan. Currently, the Company’s domestic pension plans do not include increases in annual earnings or future service in calculating the average annual earnings and years of credited service under the pension plan benefit formula. Certain non-U.S. subsidiaries of the Company also have legacy defined benefit plans which cover a smaller number of active employees and are substantially unfunded. The primary non-U.S. plans are maintained in Germany and AustriaItaly and are closed to new participants.
The Company contributed $6.7 million, $5.9 million, and $8.0 millionpreviously maintained a pension plan in Austria that conveyed to the buyer of the air-cooled automotive business during fiscal 2022; see Note 1 for additional information.
In connection with funding relief provisions within the American Rescue Plan Act of 2021, the Company did not make cash contributions to its U.S. pension plans during fiscal 2016, 2015,2023. The Company contributed $3.5 million and 2014,$19.3 million to its U.S. pension plans during fiscal 2022 and 2021, respectively. In addition, the Company contributed $1.5 million, $1.5 million, and $2.2 million to its non-U.S. pension plans during fiscal 2023, 2022, and 2021, respectively. These contributions are reported in the change in other liabilities in the consolidated statements of cash flows.
During fiscal 2016, in an effort to reduce the size, volatility, mortality risk, and costs associated with its U.S. pension plans, the Company completed a voluntary lump-sum payout program offered to certain eligible former employees. Approximately 2,000 participants accepted the lump-sum settlement offer. During fiscal 2016, a total of $65.3 million was paid from pension plan assets for lump-sum payouts, which reduced the Company’s pension obligation by the same amount. In connection with these lump-sum payouts, the Company recorded $42.1 million of non-cash settlement losses related to the accelerated recognition of unamortized actuarial losses previously recorded on the consolidated balance sheets within accumulated other comprehensive loss. During fiscal 2016, the Company recorded $33.3 million and $8.8 million of settlement losses as SG&A expenses and cost of sales, respectively, within the consolidated statements of operations.Postretirement Plans
Postretirement plans: The Company provides selected healthcare and life insurance benefits for eligible retired domestic employees. The Company periodically amends these unfunded plans to change the contribution rate of retirees and the amounts and forms of coverage. An annual limit on the Company’s cost is defined for the majority of these plans. The Company’s net periodic income for its postretirement plans duringin each of fiscal 2016, 2015,2023, 2022, and 20142021 was $0.3 million, $0.1 million, and $1.0 million, respectively.million.
Measurement Date: The Company uses March 31 as the measurement date for its pension and postretirement plans.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Measurement Date
The Company uses March 31 as the measurement date for its pension and postretirement plans.
Changes in benefit obligations and plan assets, as well as the funded status of the Company’s global pension plans, for the fiscal years ended March 31, 2016 and 2015 were as follows:
| | | 2016 | | 2015 | | Change in benefit obligation: | | | | | | | | Benefit obligation at beginning of year | | $ | 328.2 | | | $ | 295.7 | | | Service cost | | | 0.6 | | | | 0.5 | | | Interest cost | | | 11.2 | | | | 13.0 | | | Actuarial (gain) loss | | | (2.8 | ) | | | 40.6 | | | Benefits paid (a) | | | (78.1 | ) | | | (14.6 | ) | | Effect of exchange rate changes | | | 1.9 | | | | (7.0 | ) | | Benefit obligation at end of year | | $ | 261.0 | | | $ | 328.2 | | | | | | | | | | | | | Change in plan assets: | | | | | | | | | | Fair value of plan assets at beginning of year | | $ | 217.0 | | | $ | 213.7 | | | Actual return on plan assets | | | (5.3 | ) | | | 10.8 | | | Benefits paid (a) | | | (78.1 | ) | | | (14.6 | ) | | Employer contributions | | | 7.9 | | | | 7.1 | | | Fair value of plan assets at end of year | | $ | 141.5 | | | $ | 217.0 | | | Funded status at end of year | | $ | (119.5 | ) | | $ | (111.2 | ) | | | | | | | | | | | | Amounts recognized in the consolidated balance sheets: | | | | | | | | | | Current liability | | $ | (0.9 | ) | | $ | (0.8 | ) | | Noncurrent liability | | | (118.6 | ) | | | (110.4 | ) | | | | $ | (119.5 | ) | | $ | (111.2 | ) |
| | Years ended March 31, | | | | | 2023 | | | 2022 | | | Change in benefit obligation: | | | | | | | | Benefit obligation at beginning of year | | $ | 228.6 | | | $ | 260.6 | | | Service cost | | | 0.2 | | | | 0.3 | | | Interest cost | | | 8.1 | | | | 7.3 | | Actuarial gain
| | | (25.8 | ) | | | (16.5 | ) | | Benefits paid | | | (16.1 | ) | | | (16.0 | ) | | Disposition of air-cooled automotive business | | | - | | | | (5.5 | ) | | Effect of exchange rate changes | | | (0.1 | ) | | | (1.6 | ) | | Benefit obligation at end of year | | $ | 194.9 | | | $ | 228.6 | | | | | | | | | | | | | Change in plan assets: | | | | | | | | | | Fair value of plan assets at beginning of year | | $ | 179.9 | | | $ | 183.3 | | | Actual return on plan assets | | | (12.0 | ) | | | 7.6 | | | Benefits paid | | | (16.1 | ) | | | (16.0 | ) | | Employer contributions | | | 1.5 | | | | 5.0 | | | Fair value of plan assets at end of year | | $ | 153.3 | | | $ | 179.9 | | | Funded status at end of year | | $ | (41.6 | ) | | $ | (48.7 | ) | | | | | | | | | | | | Amounts recognized in the consolidated balance sheets: | | | | | | | | | | Current liability | | $ | (1.4 | ) | | $ | (1.5 | ) | | Noncurrent liability | | | (40.2 | ) | | | (47.2 | ) | | | | $ | (41.6 | ) | | $ | (48.7 | ) |
| (a) | In fiscal 2016, $65.3 million was paid from plan assets in connection with lump-sum payouts. |
As of March 31, 2023, 2022, and 2021, the benefit obligation associated with the Company’s non-U.S. pension plans totaled $21.2 million, $26.5 million, and $36.4 million, respectively. The $5.3 million decrease in the benefit obligation associated with non-U.S. pension plans as of March 31, 2023, compared with the prior year, was primarily due to net actuarial gains during the year from an increase in discount rates and employer contributions for benefits paid to plan participants which decreased the obligation by $4.4 million and $1.5 million, respectively, and to a lesser extent, the impact of foreign currency exchange rates. The decreases were partially offset by service and interest cost totaling $0.7 million. In fiscal 2022, the $9.9 million decrease was primarily due to the sale of the air-cooled automotive business in Austria, which resulted in a $5.5 million decrease. In addition, net actuarial gains during the year, the impact of foreign currency exchange rate changes, and employer contributions for benefits paid to plan participants decreased the obligation by $1.9 million, $1.6 million, and $1.5 million, respectively. The decreases were partially offset by service and interest cost totaling $0.6 million.
The accumulated benefit obligation for pension plans was $257.9$194.4 million and $325.5$228.1 million as of March 31, 20162023 and 2015,2022, respectively. The net actuarial loss related to the pension plans recognized in accumulated other comprehensive loss was $162.0$123.5 million and $192.3$131.5 million as of March 31, 20162023 and 2015,2022, respectively.
Costs for the Company’s pension plans included the following components for the fiscal years ended March 31, 2016, 2015, and 2014:
| | | 2016 | | 2015 | | 2014 | | Components of net periodic benefit cost: | | | | | | | | | | | Service cost | | $ | 0.6 | | | $ | 0.5 | | | $ | 0.6 | | | Interest cost | | | 11.2 | | | | 13.0 | | | | 13.0 | | | Expected return on plan assets | | | (14.9 | ) | | | (16.7 | ) | | | (15.7 | ) | | Amortization of net actuarial loss | | | 6.4 | | | | 5.5 | | | | 6.3 | | | Settlements (a) | | | 42.1 | | | | - | | | | - | | | Net periodic benefit cost | | $ | 45.4 | | | $ | 2.3 | | | $ | 4.2 | | | | | | | | | | | | | | | | | Other changes in benefit obligation recognized in other comprehensive loss (income): | | | | | | | | | | | | | | Net actuarial loss (gain) | | $ | 17.5 | | | $ | 46.4 | | | $ | (17.3 | ) | | Amortization of net actuarial loss (a) | | | (48.5 | ) | | | (5.5 | ) | | | (6.3 | ) | | Total recognized in other comprehensive (income) loss | | $ | (31.0 | ) | | $ | 40.9 | | | $ | (23.6 | ) |
| (a) | During fiscal 2016, in connection with lump-sum payouts to pension plan participants, the Company recorded $42.1 million of settlement losses, which were previously recorded in accumulated other comprehensive loss. |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
Costs for the Company’s global pension plans included the following components:
| | Years ended March 31, | | | | | 2023 | | | 2022 | | | 2021 | | | Components of net periodic benefit cost: | | | | | | | | | | | Service cost | | $ | 0.2 | | | $ | 0.3 | | | $ | 0.4 | | | Interest cost | | | 8.1 | | | | 7.3 | | | | 7.9 | | | Expected return on plan assets | | | (11.6 | ) | | | (12.9 | ) | | | (11.5 | ) | | Amortization of net actuarial loss | | | 5.7 | | | | 6.9 | | | | 6.9 | | | Settlements (a) | | | - | | | | - | | | | 0.2 | | | Net periodic benefit cost | | $ | 2.4 | | | $ | 1.6 | | | $ | 3.9 | | | | | | | | | | | | | | | | Other changes in benefit obligation recognized in other comprehensive income: | | | | | | | | | | | | | Net actuarial gain
| | $ | 2.1 | | | $ | 11.4 | | | $ | 33.8 | | | Amortization of net actuarial loss (b) | | | 5.7 | | | | 8.6 | | | | 7.1 | | Total recognized in other comprehensive income
| | $ | 7.8 | | | $ | 20.0 | | | $ | 40.9 | |
| (a) | The settlement charges resulted from activity associated with the Company’s non-U.S. pension plans. |
| (b) | The fiscal 2022 amount includes $1.7 million of net actuarial losses written-off as a result of the sale of the Austrian air-cooled automotive business. See Note 1 for additional information. |
The Company estimates $5.6 amortized $5.7 million, $8.6 million, and $7.1million of net actuarial loss for itsin fiscal 2023, 2022, and 2021, respectively. Exclusive of the $1.7 million written-off in fiscal 2022 upon the sale of the Austrian air-cooled automotive business referenced above, less than $1.0 million of the amortization was attributable to the Company’s non-U.S. pension plans will be amortized from accumulated other comprehensive loss into net periodic benefit cost during fiscal 2017.in each of these years.
The Company used a discount rate of 4.1%5.2% and 4.0%3.9% as of March 31, 20162023 and 2015,2022, respectively, infor determining its benefit obligations under its U.S. pension plans. The Company used a weighted-average discount rate of 1.8%3.8% and 1.3%1.8% as of March 31, 20162023 and 2015,2022, respectively, infor determining its benefit obligations under its non-U.S. pension plans. The Company used a discount rate of 4.3%3.9%, 4.7%3.2%, and 4.4%3.4% to determine its costs under its U.S. pension plans for the fiscal years ended March 31, 2016, 2015,2023, 2022, and 2014,2021, respectively. The Company used a weighted-average discount rate of 1.3%2.9%, 3.0%1.6%, and 3.5%1.4% to determine its costs under its non-U.S. pension plans for the fiscal years ended March 31, 2016, 2015,2023, 2022, and 2014,2021, respectively. The Company determined the discount rates used for its U.S. pension plans by modeling a portfolio of high-quality corporate bonds, with appropriate consideration given to expected defined benefit payment terms and duration of the respective pension obligations. The Company used a similar process to determine the discount rate for its non-U.S. pension obligations.
Plan assets in the Company’s U.S. defined benefitpension plans comprise 100 percent of the Company’s world-wide pension plan assets. The Company’s U.S. pension plan weighted-average asset allocations at the measurement dates of March 31, 20162023 and 20152022 were as follows:
| | | Target allocation | | Plan assets | | | | | | | 2016 | | 2015 | | Equity securities | | | 55 | % | | | 56 | % | | | 55 | % | | Debt securities | | | 38 | % | | | 36 | % | | | 36 | % | | Alternative assets | | | 5 | % | | | 4 | % | | | 5 | % | | Cash | | | 2 | % | | | 4 | % | | | 4 | % | | | | | 100 | % | | | 100 | % | | | 100 | % |
| | Target allocation | | | Plan assets | | | | | | | | 2023 | | | 2022 | | | Equity securities | | | 76 | % | | | 76 | % | | | 74 | % | | Debt securities | | | 18 | % | | | 15 | % | | | 17 | % | | Real estate investments | | | 5 | % | | | 8 | % | | | 8 | % | | Cash and cash equivalents | | | 1 | % | | | 1 | % | | | 1 | % | | | | | 100 | % | | | 100 | % | | | 100 | % |
Due to market conditions and other factors, including timing of benefit payments and other transactions, actual asset allocation may vary from the target allocation outlined above. The Company periodically rebalances the assets to the target allocations. As of March 31, 20162023 and 2015,2022, the Company’s pension plans did not directly own shares of Modine common stock.
The Company employs a total return investment approach, whereby a mix of equities and fixed-income investments are used to maximize the long-term returngrowth of plan assets,principal, while avoiding excessive risk. The Company has established pension plan guidelines based upon an evaluation of market conditions, tolerance for risk and cash requirements for benefit payments. The Company measures and monitors investment risk on an ongoing basis through quarterly investment portfolio reviews, annual liability measurements and periodic asset/liability studies.
The expected rate of return on U.S. plan assets is based upon historical return experience and forward-looking return expectations for major asset class categories. For fiscal 2016, 2015, and 20142023, U.S. pension plan expense, the expected rate of return on plan assets was 8.07.0 percent. For fiscal 20172022, and 2021 U.S. pension plan expense, the expected rate of return on plan assets was 7.5 percent. For fiscal 2024 U.S. pension plan expense, the Company has assumed a rate of return on plan assets of 8.06.5 percent.
The Company’s funding policy for its U.S. pension plans is to contribute annually, at a minimum, the amount necessary on an actuarial basis to provide for benefits in accordance with applicable laws and regulations. TheAs a result of funding relief provisions within the American Rescue Plan Act of 2021, the Company expectsdoes not expect to make cash contributions of $8.1 million to theseits U.S. plans during fiscal 2017.2024.
Estimated pension benefit payments for the next ten fiscal years are as follows:
| Fiscal Year | | Estimated Pension Benefit Payments | | | 2017 | | $ | 14.5 | | | 2018 | | | 15.2 | | | 2019 | | | 15.3 | | | 2020 | | | 15.8 | | | 2021 | | | 16.1 | | | 2022-2026 | | | 79.3 | |
| Fiscal Year | | Estimated Pension Benefit Payments | | | 2024 | | $ | 15.5 | | | 2025 | | | 15.7 | | | 2026 | | | 15.6 | | | 2027 | | | 15.5 | | | 2028 | | | 15.4 | | 2029-2033 | | | 72.4 | |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 18: | Note 19: Derivative Instruments |
The Company uses derivative financial instruments from time to time as a tool to manage certain financial risks. The Company’s policy prohibits the use of leveraged derivatives. Accounting for derivatives and hedging activities requires derivative financial instruments to be measured at fair value and recognized as assets or liabilities in the consolidated balance sheets. All of the Company’s derivative financial instruments are categorized within Level 2 of the fair value hierarchy. Refer to Note 4 for the definition of a Level 2 fair value measurement. Accounting for the gain or loss resulting from the change in fair value of the derivative financial instruments depends on whether it has been designated and is effective, as a hedge, and, if so, on the nature of the hedging activity.
Commodity Derivatives:Derivatives The Company periodically enters into futuresover-the-counter forward contracts related to certain forecasted purchases of aluminum and copper. The Company’s strategy in entering into these contracts is to reduce its exposure to changing market prices for future purchases of these commodities. The Company has notdesignates certain commodity forward contracts as cash flow hedges for accounting purposes. Accordingly, for these designated commodity contracts entered into in fiscal 2014, 2015, and 2016 for hedge accounting. Accordingly,hedges, the Company records unrealized gains and losses on theserelated to the change in the fair value of the contracts are recordedin accumulated other comprehensive income (loss) (“AOCI”) within shareholders’ equity and subsequently recognizes the gains and losses within cost of sales.sales as the underlying inventory is sold.
Foreign exchange contracts:Exchange Contracts The Company’s foreign exchange risk management strategy uses derivative financial instruments to mitigate foreign currency exchange risk. The Company periodically enters into foreign currency exchangeforward contracts to hedge specific foreign currency-denominated assets and liabilities.liabilities as well as forecasted transactions. The Company designates certain hedges of forecasted transactions as cash flow hedges for accounting purposes. Accordingly, for these designated hedges, the Company records unrealized gains and losses related to the change in the fair value of the contracts in AOCI within shareholders’ equity and subsequently recognizes 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. The Company has not designated forward contracts related to foreign currency-denominated assets and liabilities as hedges. Accordingly, for these non-designated contracts, for hedge accounting. Accordingly,the Company records unrealized gains and losses related to changes in fair value are recorded in other income and expense. Gains and losses on these foreign currency contracts are offset by foreign currency gains and losses associated with the related assets and liabilities.
The fair value of the Company’s derivative financial instruments recorded in the consolidated balance sheets were as follows:
| | Balance Sheet Location | | March 31, 2016 | | | March 31, 2015 | | | Foreign exchange contracts | Other current assets | | $ | 0.1 | | | $ | - | | | Foreign exchange contracts | Other current liabilities | | | - | | | | 0.3 | | | Commodity derivatives | Other current liabilities | | | 0.1 | | | | 0.1 | |
| _ | Balance Sheet Location | | March 31, 2023 | | | March 31, 2022 | | | Derivatives designated as hedges: | | | | | | | | | Commodity derivatives | Other current assets | | $ | - | | | $ | 0.5 | | | Foreign exchange contracts | Other current assets | | | 1.3 | | | | 0.3 | | | | | | | | | | | | | | Derivatives not designated as hedges: | | | | | | | | | | | Foreign exchange contracts | Other current liabilities | | $ | 0.2 | | | $ | 0.3 | |
The amounts recorded in the consolidated statements of operations for the Company’sassociated with derivative financial instruments that the Company designated for hedge accounting during the years ended March 31 were as follows:
| | Statement of Operations | | Years ended March 31, | | Location | | 2016 | | 2015 | | 2014 | | Commodity derivatives | Cost of sales | | $ | (0.7 | ) | | $ | (0.2 | ) | | $ | (0.5 | ) | | Foreign exchange contracts | Other income (expense) - net | | | 0.6 | | | | (1.1 | ) | | | - | | | Total loss | | | $ | (0.1 | ) | | $ | (1.3 | ) | | $ | (0.5 | ) |
| | Gain (loss) recognized in other comprehensive income | | Statement of Operations | | Gain (loss) reclassified from AOCI | | | | | 2023 | | | 2022 | | | 2021 | | Location | | 2023 | | | 2022 | | | 2021 | | | Commodity derivatives | | $ | (1.6 | ) | | $ | 1.1 | | | $ | 2.2 | | Cost of sales
| | $ | (1.0 | ) | | $ | 1.2 | | | $ | - | | | Foreign exchange contracts | | | 1.6 | | | | - | | | | - | | Net sales | | | 0.6 | | | | - | | | | - | | | Foreign exchange contracts | | | 0.4 | | | | 0.6 | | | | (0.1 | ) | Cost of sales | | | 0.7 | | | | 0.4 | | | | (0.1 | ) | | Total gains (losses) | | $ | 0.4 | | | $ | 1.7 | | | $ | 2.1 | | | | $ | 0.3 | | | $ | 1.6 | | | $ | (0.1 | ) |
Note 19: | Contingencies and Litigation |
The amounts associated with derivative financial instruments that the Company did not designate for hedge accounting were as follows:
| Statement of Operations | | Years ended March 31, | | | _ | Location | | 2023 | | 2022 | | 2021 | | | Foreign exchange contracts | Net sales | | | $ | (0.5 | ) | | $ | (0.6 | ) | | $ | - | | | Foreign exchange contracts | Other income (expense) - net | | | | (2.6 | ) | | | (0.8 | ) | | | 0.6 | | | Total gains (losses) | | | | $ | (3.1 | ) | | $ | (1.4 | ) | | $ | 0.6 | |
Note 20: Risks, Uncertainties, Contingencies and Litigation
Supply Chain Disruptions and Inflationary Market risk: Conditions Market and economic dynamics, including the impacts of the COVID-19 pandemic, have contributed to global supply chain challenges and inflationary market conditions. Since the fourth quarter of fiscal 2022, the military conflict between Russia and Ukraine and the related sanctions imposed by governments in the U.S. and abroad have also impacted these market conditions. The Company sells a broad rangeis focused on mitigating the negative impacts of productslabor shortages, supply chain challenges and inflationary market conditions, including changing raw material, energy and logistic costs, as well as delays and shortages in certain purchased commodities and components. At this time, the Company cannot reasonably estimate the full impact that provide thermal solutions to customers operating primarilythe supply chain challenges and other related economic and market dynamics will have on the Company’s business, results of operations and cash flows in the commercial vehicle, off-highway, automotive, and commercial heating and air conditioning markets. The Company operates in diversified markets as a strategy for offsetting the risk associated with a downturn in any one or morefuture.
Credit risk: Risk The Company invests excess cash primarily in investment quality, short-term liquid debt instruments. Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of accounts receivable. The Company sells a broad range of products that provide thermal solutions to customers operating throughout the world. In fiscal 20162023 and 2015, two2022, no customers each accounted for more than ten percent or more of the Company’s total sales. In fiscal 2014,2021, one vehicular customer accounted for more than ten percent or more of the Company’s total sales. Sales to the Company’s top ten customers represented 63were 39 percent, 39 percent, and 43 percent of total sales in both fiscal 20162023, 2022, and 2015 and 56 percent in fiscal 2014.2021, respectively. At March 31, 20162023 and 2015, 452022, 37 percent and 4729 percent, respectively, of the Company'sCompany’s trade accounts receivable were due from the Company'sCompany’s top ten customers. These customers operate primarily in the commercial vehicle, off-highway, automotive truck, and heavy equipment marketslight vehicle, data center cooling, and are influenced by similar marketcommercial air conditioning and general economic factors. Collateralrefrigeration markets. The Company generally does not require collateral or advanced payments are generally not required.from its customers. The Company has not experienced significant credit losses to customers in the markets served. MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The Company manages credit risk through its focus on the following:
| ● | Cash and investments – reviewing cash deposits and short-term investments to ensure banks have credit ratings acceptable to the Company and that short-term investments are maintained in secured or guaranteed instruments; |
| ● | Accounts receivable – performing periodic customer credit evaluations and actively monitoring their financial condition and applicable business news; |
| ● | Pension assets – ensuring that investments within pension plans provide appropriate diversification, monitoring of investment teams, ensuring that portfolio managers adhere to the Company’s investment policies and directives, and ensuring that exposure to high risk investments is limited; and |
| ● | Insurance – ensuring that insurance providers maintain acceptable financial ratings. |
Insurance – ensuring that insurance providers maintain financial ratings that are acceptable to the Company.
Counterparty risks: Risk The Company manages counterparty risksrisk through its focus on the following:
| ● | Customers – performing thorough reviews of customer credit reports and accounts receivable aging reports by internal credit committees; |
| ● | Suppliers – maintaining a supplier risk management program and utilizing industry sources to identify and mitigate high risk situations; and |
| ● | Derivatives – ensuring that counterparties to derivative instruments maintain credit ratings that are acceptable to the Company. |
Environmental: The United States Environmental Protection Agency has designated the Company as a potentially responsible party for remediation of three sites. These sites are: Auburn Incinerator, Inc./Lake Calumet Cluster (Illinois), Cam-Or (Indiana) and a scrap metal site known as Chemetco (Illinois). In addition, Modine is voluntarily participating in the care of an inactive landfill owned by the City of Trenton (Missouri). These sites are not Company-owned; however, they allegedly contain materials attributable to Modine from past operations. The percentage of material allegedly attributable to Modine is relatively low. Remediation of these sites is in various stages of administrative or judicial proceedings and includes recovery of past governmental costs and the costs of future investigations and remedial actions. The Company accrues for costs anticipated for the remedial settlement of the sites listed above if they are probable and can be reasonably determined. Costs anticipated for the remedial settlement of the sites listed above that are not probable or cannot be reasonably determined at this time have not been accrued; however, the Company does not believe any potential costs would be materialacceptable to the Company’s financial position due to its relatively small portion of contributed materials.Company.
Environmental The Company has recorded environmental investigation and remediation accruals for subsurface contaminationrelated to manufacturing facilities in the U.S., one of which the Company currently owns and operates, and at its former manufacturing facility in the NetherlandsNetherlands. These accruals primarily relate to soil and groundwater contamination at its manufacturing facility in Brazil. During fiscal 2016, the Company recorded charges totaling $1.6 million, within cost of sales, to establish an environmental accrual for investigative work related to a previously-owned manufacturing facility in the United States. In addition, the Company has recorded accruals for other lesser environmental matters at certain facilities located in the United States. These accruals generally relate to facilities where past operations followed practices and procedures that were considered acceptable under then-existing regulations, or where the Company is a successor to the obligations of prior owners, and current laws and regulations require investigative and/or remedial work to ensure sufficient environmental compliance. In instances where a range of loss can be reasonably estimated for a probable environmental liability, but no amount within the range is a better estimate than any other amount, the Company accrues the minimum of the range. The Company’s accruals for these environmental matters totaled $5.1$17.6 million and $3.8$18.2 million at March 31, 20162023 and 2015,2022, respectively. During fiscal 2023 and 2022, the Company increased its remediation accrual related to a former manufacturing facility in the U.S. by $1.0 million and $3.4 million, respectively. As additional information becomes available regarding environmental matters, the Company will re-assess the liability related to these mattersliabilities and revise the estimated accrual, accruals, if necessary. Based onWhile it is possible that the ultimate environmental remediation costs may be in excess of amounts accrued, the Company believes, based upon currently available information, the Company believesthat the ultimate outcome of these matters, individually and in the aggregate, will not have a material adverse effect on its financial position. However, these matters are subject to inherent uncertainties, and unfavorable outcomes could occur, including significant monetary damages. During fiscal 2011, one
Other litigation:Litigation In the normal course of business, the Company and its subsidiaries are named as defendants in various other lawsuits and enforcement proceedings by private parties, governmental agencies and/or others in which claims are asserted against Modine. The Company believes that any additional loss in excess of amounts already accrued would not have a material effect on the Company’s consolidated balance sheet, results of operations, and cash flows. In the opinion ofaddition, management expects that the liabilities if any, which may ultimately result from such lawsuits or proceedings, areif any, would not expected to have a material adverse effect on the Company’s consolidated financial statements.position.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 20: | Note 21: Accumulated Other Comprehensive Loss |
Changes in accumulated other comprehensive loss were as follows:
| | | Foreign Currency Translation | | Defined Benefit Plans | | Total | | Balance, March 31, 2015 | | $ | (40.7 | ) | | $ | (157.9 | ) | | $ | (198.6 | ) | | | | | | | | | | | | | | | | Other comprehensive loss before reclassifications | | | 4.7 | | | | (16.6 | ) | | | (11.9 | ) | | Reclassifications: | | | | | | | | | | | | | | Amortization of unrecognized net loss (a) | | | - | | | | 48.3 | | | | 48.3 | | | Amortization of unrecognized prior service credit (a) | | | - | | | | (0.2 | ) | | | (0.2 | ) | | Income taxes | | | - | | | | (11.8 | ) | | | (11.8 | ) | | Total other comprehensive loss | | | 4.7 | | | | 19.7 | | | | 24.4 | | | | | | | | | | | | | | | | | Balance, March 31, 2016 | | $ | (36.0 | ) | | $ | (138.2 | ) | | $ | (174.2 | ) |
| | Foreign Currency Translation | | | Defined Benefit Plans | | | Cash Flow Hedges | | | Total | | Balance, March 31, 2022 | | $ | (39.1 | ) | | $ | (111.1 | ) | | $ | 0.7 | | | $ | (149.5 | ) | | | | | | | | | | | | | | | | | | | | Other comprehensive income (loss) before reclassifications | | | (18.4 | ) | | | 2.5 | | | | 0.4 | | | | (15.5 | ) | | Reclassifications: | | | | | | | | | | | | | | | | | | Amortization of unrecognized net loss (a) | | | - | | | | 5.3 | | | | - | | | | 5.3 | | | Realized gains - net (b) | | | - | | | | - | | | | (0.3 | ) | | | (0.3 | ) | | Income taxes | | | - | | | | (1.1 | ) | | | - | | | | (1.1 | ) | | Total other comprehensive income (loss) | | | (18.4 | ) | | | 6.7 | | | | 0.1 | | | | (11.6 | ) | | | | | | | | | | | | | | | | | | | Balance, March 31, 2023 | | $ | (57.5 | ) | | $ | (104.4 | ) | | $ | 0.8 | | | $ | (161.1 | ) |
| | | Foreign Currency Translation | | Defined Benefit Plans | | Total | | Balance, March 31, 2014 | | $ | 27.3 | | | $ | (131.2 | ) | | $ | (103.9 | ) | | | | | | | | | | | | | | | | Other comprehensive loss before reclassifications | | | (68.0 | ) | | | (45.2 | ) | | | (113.2 | ) | | Reclassifications: | | | | | | | | | | | | | | Amortization of unrecognized net loss (a) | | | - | | | | 5.4 | | | | 5.4 | | | Amortization of unrecognized prior service credit (a) | | | - | | | | (0.1 | ) | | | (0.1 | ) | | Income taxes | | | - | | | | 13.2 | | | | 13.2 | | | Total other comprehensive loss | | | (68.0 | ) | | | (26.7 | ) | | | (94.7 | ) | | | | | | | | | | | | | | | | Balance, March 31, 2015 | | $ | (40.7 | ) | | $ | (157.9 | ) | | $ | (198.6 | ) |
| | Foreign Currency Translation | | | Defined Benefit Plans | | | Cash Flow Hedges | | | Total | | Balance, March 31, 2021 | | $ | (31.0 | ) | | $ | (130.8 | ) | | $ | 0.6 | | | $ | (161.2 | ) | | | | | | | | | | | | | | | | | | | | Other comprehensive income (loss) before reclassifications | | | (8.1 | ) | | | 11.5 | | | | 1.7 | | | | 5.1 | | | Reclassifications: | | | | | | | | | | | | | | | | | | Amortization of unrecognized net loss (a) | | | - | | | | 6.5 | | | | - | | | | 6.5 | | | Unrecognized net pension loss in disposed business (c) | | | - | | | | 1.7 | | | | - | | | | 1.7 | | | Realized gains - net (b) | | | - | | | | - | | | | (1.6 | ) | | | (1.6 | ) | | Income taxes | | | - | | | | - | | | | - | | | | - | | Total other comprehensive income (loss) | | | (8.1 | ) | | | 19.7 | | | | 0.1 | | | | 11.7 | | | | | | | | | | | | | | | | | | | | Balance, March 31, 2022 | | $ | (39.1 | ) | | $ | (111.1 | ) | | $ | 0.7 | | | $ | (149.5 | ) |
| (a) | Amounts are included in the calculation of net periodic benefit cost for the Company’s defined benefit plans, which include pension and other postretirement plans. See Note 1718 for additional information about the Company’s pension plans. |
| (b) | Amounts represent net gains and losses associated with cash flow hedges that were reclassified to net earnings. See Note 19 for additional information regarding derivative instruments. |
| (c) | As a result of the sale of the Austrian air-cooled automotive business, the Company wrote-off $1.7 million of net actuarial losses related to its pension plan as a component of the loss on sale recorded during fiscal 2022. See Note 1 for additional information. |
Note 21: | Note 22: Segment and Geographic Information |
The Company’s product lines consist of heat-transfer componentssystems and systems.components. The Company serves the vehicular,commercial, industrial, and building HVAC&R markets and vehicular markets.
The Company’s Climate Solutions segment provides heat transfer products, heating, ventilating, and air conditioning markets. During fiscal 2016, the Company combined its North America and South America segments into the Americasrefrigeration products and data center cooling solutions to global customers. The Company’s Performance Technologies segment to streamline operations, gain synergiesdesigns and improve its cost structure. As a result, the Company recast the prior-period segment financial information to conform to the current-period presentation. There was no impact to the Company’s consolidated financial statements as a result. Throughout fiscal 2016, the Company’s four operating segments were as follows:
Americas:
Comprised ofmanufactures air-and liquid-cooled technology for vehicular, stationary power, and industrial original equipmentapplications. In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coatings products in North America and South America, as well as aftermarket products in South America.application services.
Europe:
Comprised of vehicular and industrial original equipment products in Europe.
Asia:
Comprised of vehicular and industrial original equipment products in Asia.
Building HVAC:
Comprised of building heating, ventilating and air conditioning products throughout the world.
Each operating segment is managed by a vice president and has separate financial results reviewed by the Company’s chief operating decision maker. TheseFinancial results, including net sales, gross profit, gross margin and operating income, together with other considerations, are used by managementthe chief operating decision maker in evaluating the performance of each segment and in making decisions on the allocation of resources among the Company’s various businesses.
Effective April 1, 2022, the Company began managing its operations under two operating segments, Climate Solutions and Performance Technologies. The Climate Solutions segment includes the previously-reported BHVAC and CIS segments, with the exception of CIS Coatings. The Performance Technologies segment includes the previously-reported HDE and Automotive segments and the CIS Coatings business. See Note 3 for information regarding the primary operating activities of each segment. The Company’s new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management. The Company believes this simplified segment structure allows it to better focus resources on targeted growth opportunities and allows for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow. The segment realignment had no impact on the Company’s consolidated financial position, results of operations, and cash flows. Segment financial information for the prior periods has been recast to conform to the current presentation.
The following is a summary of net sales, gross profit, and operating income by segment:segment. See Note 3 for additional information regarding net sales by product groups within each segment.
| | Year ended March 31, 2023 | | | | | External Sales | | | Inter-segment Sales | | | Total | | | Net sales: | | | | | | | | | | | | $ | 1,011.5 | | | $ | 0.4 | | | $ | 1,011.9 | | | | | 1,286.4 | | | | 29.8 | | | | 1,316.2 | | | Segment total | | | 2,297.9 | | | | 30.2 | | | | 2,328.1 | | | Corporate and eliminations | | | - | | | | (30.2 | ) | | | (30.2 | ) | | Net sales | | $ | 2,297.9 | | | $ | - | | | $ | 2,297.9 | |
| | Years ended March 31, | | Net sales: | | 2016 | | 2015 | | 2014 | | Americas | | $ | 585.5 | | | $ | 666.9 | | | $ | 688.3 | | | Europe | | | 524.1 | | | | 578.2 | | | | 584.4 | | | Asia | | | 79.0 | | | | 81.2 | | | | 71.5 | | | Building HVAC | | | 181.4 | | | | 186.3 | | | | 146.5 | | | Segment total | | | 1,370.0 | | | | 1,512.6 | | | | 1,490.7 | | | Corporate and eliminations | | | (17.5 | ) | | | (16.2 | ) | | | (13.1 | ) | | Net sales | | $ | 1,352.5 | | | $ | 1,496.4 | | | $ | 1,477.6 | |
| | | Years ended March 31, | | | | 2016 | | 2015 | | 2014 | | Gross profit: | | $'s | | | % of sales | | $'s | | | % of sales | | $'s | | | % of sales | | Americas | | $ | 100.1 | | | | 17.1 | % | | $ | 109.1 | | | | 16.3 | % | | $ | 114.3 | | | | 16.6 | % | | Europe | | | 68.1 | | | | 13.0 | % | | | 68.7 | | | | 11.9 | % | | | 70.8 | | | | 12.1 | % | | Asia | | | 12.2 | | | | 15.5 | % | | | 11.5 | | | | 14.2 | % | | | 8.9 | | | | 12.5 | % | | Building HVAC | | | 54.2 | | | | 29.9 | % | | | 55.9 | | | | 30.0 | % | | | 43.4 | | | | 29.6 | % | | Segment total | | | 234.6 | | | | 17.1 | % | | | 245.2 | | | | 16.2 | % | | | 237.4 | | | | 15.9 | % | | Corporate and eliminations (a) | | | (11.1 | ) | | | - | | | | 1.3 | | | | - | | | | 0.8 | | | | - | | | Gross profit | | $ | 223.5 | | | | 16.5 | % | | $ | 246.5 | | | | 16.5 | % | | $ | 238.2 | | | | 16.1 | % |
| | | Years ended March 31, | | Operating income: | | 2016 | | 2015 | | 2014 | | Americas | | $ | 36.2 | | | $ | 33.4 | | | $ | 49.6 | | | Europe | | | 13.3 | | | | 25.7 | | | | 9.6 | | | Asia | | | 0.8 | | | | 0.3 | | | | (3.3 | ) | | Building HVAC | | | 13.9 | | | | 19.1 | | | | 9.4 | | | Segment total | | | 64.2 | | | | 78.5 | | | | 65.3 | | | Corporate and eliminations (a) | | | (71.7 | ) | | | (25.8 | ) | | | (28.1 | ) | | Operating (loss) income | | $ | (7.5 | ) | | $ | 52.7 | | | $ | 37.2 | |
| (a) | During fiscal 2016, the Company recorded pension settlement losses of $42.1 million at Corporate, within SG&A expenses ($33.3 million) and cost of sales ($8.8 million). See Note 17 for additional information. |
Inter-segment sales are accounted for based on an established markup over production costs. Net sales for corporate and eliminations primarily represent the elimination of inter-segment sales. The operating loss for corporate includes certain research and development costs, legal, finance and other general corporate and central services expenses, and other costs that are either not directly attributable to an operating segment or not considered when management evaluates segment performance.
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts) | | Year ended March 31, 2022 | | | | | External Sales | | | Inter-segment Sales | | | Total | | | Net sales: | | | | | | | | | | | | $ | 910.1 | | | $ | 0.4 | | | $ | 910.5 | | | | | 1,140.0 | | | | 32.4 | | | | 1,172.4 | | | Segment total | | | 2,050.1 | | | | 32.8 | | | | 2,082.9 | | | Corporate and eliminations | | | - | | | | (32.8 | ) | | | (32.8 | ) | | Net sales | | $ | 2,050.1 | | | $ | - | | | $ | 2,050.1 | |
| | Year ended March 31, 2021 | | | | | External Sales | | | Inter-segment Sales | | | Total | | | Net sales: | | | | | | | | | | | | $ | 731.1 | | | $ | 0.1 | | | $ | 731.2 | | | | | 1,077.3 | | | | 31.5 | | | | 1,108.8 | | | Segment total | | | 1,808.4 | | | | 31.6 | | | | 1,840.0 | | | Corporate and eliminations | | | - | | | | (31.6 | ) | | | (31.6 | ) | | Net sales | | $ | 1,808.4 | | | $ | - | | | $ | 1,808.4 | |
Inter-segment sales are accounted for based upon an established markup over production costs. Net sales for Corporate and eliminations primarily represent the elimination of inter-segment sales.
| | Years ended March 31, | | | | | 2023 | | | 2022 | | | 2021 | | | Gross profit: | | _$’s | | | % of sales | | | _$’s | | | % of sales | | | | | | % of sales | | | Climate Solutions | | $ | 223.6 | | | | 22.1 | % | | $ | 166.3 | | | | 18.3 | % | | $ | 136.6 | | | | 18.7 | % | | Performance Technologies | | | 166.1 | | | | 12.6 | % | | | 142.2 | | | | 12.1 | % | | | 157.1 | | | | 14.2 | % | | Segment total | | | 389.7 | | | | 16.7 | % | | | 308.5 | | | | 14.8 | % | | | 293.7 | | | | 16.0 | % | | Corporate and eliminations | | | (0.3 | ) | | | - | | | | 0.8 | | | | - | | | | (0.3 | ) | | | - | | | Gross profit | | $ | 389.4 | | | | 16.9 | % | | $ | 309.3 | | | | 15.1 | % | | $ | 293.4 | | | | 16.2 | % |
| | Years ended March 31, | | | Operating income: | | 2023 | | | 2022 | | | 2021 | | | | $
| 124.1 | | | $
| 73.4 | | | $
| 49.9 | | | Performance Technologies | | | 65.6 | | | | 77.4 | | | | (109.1 | ) | | Segment total | | | 189.7 | | | | 150.8 | | | | (59.2 | ) | | Corporate and eliminations (a) | | | (39.3 | ) | | | (31.6 | ) | | | (38.5 | ) | | Operating income (loss) | | $
| 150.4 | | | $
| 119.2 | | | $
| (97.7 | ) |
| (a) | The operating loss for Corporate includes certain research and development costs, legal, finance and other general corporate and central services expenses, and other costs that are either not directly attributable to an operating segment or not considered when management evaluates segment performance. |
The following is a summary of totalsegment assets, by segment:comprised entirely of trade accounts receivable and inventories, and other assets:
| | March 31, | | | Assets: | | 2023 | | | 2022 | | | | $ | 334.8 | | | $ | 291.7 | | | | | 388.1 | | | | 357.0 | | | | | 843.0 |
| | | 778.3 |
| | Total assets | | $ | 1,565.9 | | | $ | 1,427.0 | |
| | | March 31, | | | | | 2016 | | | 2015 | | | Americas | | $ | 267.2 | | | $ | 277.7 | | | Europe | | | 301.9 | | | | 282.7 | | | Asia | | | 104.0 | | | | 92.2 | | | Building HVAC (a) | | | 99.0 | | | | 131.3 | | | Corporate and eliminations | | | 148.8 | | | | 147.0 | | | Total assets | | $ | 920.9 | | | $ | 930.9 | |
| (a) | As of March 31, 2015, totalRepresents cash and cash equivalents, other current assets, within the Building HVAC segment included $48.0 million of insurance-relatedproperty plant and equipment, intangible assets, goodwill, deferred income taxes, and other noncurrent assets for the rebuild of the facility damaged by the Airedale fire. See Note 2 for additional information.Climate Solutions and Performance Technologies segments and Corporate. |
The following is a summary of capital expenditures and depreciation and amortization expense by segment:
| | Years ended March 31, | | | Capital expenditures: | | 2023 | | | 2022 | | | 2021 | | | | $ | 24.2 | | | $ | 9.9 | | | $ | 7.2 | | | | | 25.2 | | | | 29.2 | | | | 25.0 | | | | | 1.3 | | | | 1.2 | | | | 0.5 | | | Total capital expenditures | | $ | 50.7 | | | $ | 40.3 | | | $ | 32.7 | |
| | Years ended March 31, | | | Depreciation and amortization expense: | | 2023 | | | 2022 | | | 2021 | | | | $ | 21.7 | | | $ | 23.6 | | | $ | 24.9 | | Performance Technologies (a)
| | | 31.8 | | | | 29.9 | | | | 42.1 | | | Corporate | | | 1.0 | | | | 1.3 | | | | 1.6 | | | Total depreciation and amortization expense | | $ | 54.5 | | | $ | 54.8 | | | $ | 68.6 | |
| | | Years ended March 31, | | | Capital expenditures: | | 2016 | | | 2015 | | | 2014 | | | Americas | | $ | 26.7 | | | $ | 30.2 | | | $ | 24.6 | | | Europe | | | 24.8 | | | | 21.5 | | | | 22.9 | | | Asia | | | 6.2 | | | | 3.8 | | | | 4.6 | | | Building HVAC | | | 5.1 | | | | 2.8 | | | | 1.0 | | | Total capital expenditures | | $ | 62.8 | | | $ | 58.3 | | | $ | 53.1 | |
| (a) | During fiscal 2021, upon classifying the liquid- and air-cooled automotive businesses as held for sale, the Company ceased depreciating the long-lived assets within the disposal groups. In fiscal 2022, the Company resumed depreciating the long-lived assets within the liquid-cooled automotive business when it no longer met the requirements to be classified as held for sale. See Note 2 for additional information. |
| | | Years ended March 31, | | | Depreciation and amortization expense: | | 2016 | | | 2015 | | | 2014 | | | Americas | | $ | 22.1 | | | $ | 21.3 | | | $ | 22.6 | | | Europe | | | 18.0 | | | | 19.8 | | | | 26.6 | | | Asia | | | 6.5 | | | | 7.2 | | | | 6.7 | | | Building HVAC | | | 3.6 | | | | 3.3 | | | | 2.2 | | | Total depreciation and amortization expense | | $ | 50.2 | | | $ | 51.6 | | | $ | 58.1 | |
The following is a summary of net sales by geographicalgeographic area, based upon the location of the selling unit:
| | Years ended March 31, | | | | | 2023 | | | 2022 | | | 2021 | | | United States | | $ | 1,139.3 | | | $ | 949.6 | | | $ | 765.7 | | | Italy | | | 249.5 | | | | 232.0 | | | | 188.6 | | | Hungary | | | 210.7 | | | | 185.2 | | | | 153.7 | | | China | | | 151.6 | | | | 166.0 | | | | 217.6 | | | Brazil | | | 103.6 | | | | 81.2 | | | | 48.5 | | | United Kingdom | | | 93.6 | | | | 118.6 | | | | 96.4 | | | Other | | | 349.6 | | | | 317.5 | | | | 337.9 | | | Net sales | | $ | 2,297.9 | | | $ | 2,050.1 | | | $ | 1,808.4 | |
| | | Years ended March 31, | | | | | 2016 | | | 2015 | | | 2014 | | | United States | | $ | 627.6 | | | $ | 669.3 | | | $ | 645.7 | | | Germany | | | 155.3 | | | | 193.8 | | | | 229.5 | | | Hungary | | | 145.9 | | | | 161.0 | | | | 150.3 | | | Austria | | | 113.1 | | | | 118.7 | | | | 109.8 | | | Other | | | 310.6 | | | | 353.6 | | | | 342.3 | | | Net sales | | $ | 1,352.5 | | | $ | 1,496.4 | | | $ | 1,477.6 | |
MODINE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except per share amounts)
The following is a summary of property, plant and equipment by geographicalgeographic area:
| | March 31, | | | | | 2023 | | | 2022 | | | United States | | $ | 96.4 | | | $ | 83.6 | | Hungary
| | | 40.8 | | | | 44.0 | | | China | | | 40.2 | | | | 45.6 | | | Mexico | | | 34.0 | | | | 38.5 | | | Italy | | | 32.8 | | | | 33.2 | | | Other | | | 70.3 | | | | 70.5 | | Total property, plant and equipment
| | $ | 314.5 | | | $ | 315.4 | |
| | | March 31, | | | | | 2016 | | | 2015 | | | United States | | $ | 92.5 | | | $ | 92.7 | | | Austria | | | 44.2 | | | | 41.5 | | | China | | | 33.6 | | | | 31.8 | | | Germany | | | 32.1 | | | | 47.2 | | | Hungary | | | 31.4 | | | | 28.9 | | | Other | | | 104.8 | | | | 80.0 | | | Total property, plant and equipment | | $ | 338.6 | | | $ | 322.1 | |
The following is a summary of net sales by end market:
| | | Years ended March 31, | | | | | 2016 | | | 2015 | | | 2014 | | | Commercial vehicle | | $ | 459.8 | | | $ | 512.5 | | | $ | 477.0 | | | Automotive | | | 396.8 | | | | 401.8 | | | | 395.6 | | | Off-highway | | | 206.2 | | | | 274.6 | | | | 320.8 | | | Building HVAC | | | 181.4 | | | | 186.3 | | | | 146.5 | | | Other | | | 108.3 | | | | 121.2 | | | | 137.7 | | | Net sales | | $ | 1,352.5 | | | $ | 1,496.4 | | | $ | 1,477.6 | |
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 22: | Quarterly Financial Data (Unaudited) |
Quarterly financial data is summarized below for the years ended March 31, 2016 and 2015:
| | | Fiscal 2016 quarters ended | | | | | | | June | | Sept. | | Dec. | | March | | Fiscal 2016 | | | | | | | | | | | | | | | | | | | Net sales | | $ | 346.1 | | | $ | 334.0 | | | $ | 328.7 | | | $ | 343.7 | | | $ | 1,352.5 | | | Gross profit | | | 57.0 | | | | 45.7 | | | | 58.6 | | | | 62.2 | | | | 223.5 | | | Earnings (loss) from continuing operations (a) | | | 5.5 | | | | (22.5 | ) | | | 8.2 | | | | 7.8 | | | | (1.0 | ) | | Net earnings (loss) attributable to Modine (a) | | | 5.1 | | | | (22.5 | ) | | | 8.2 | | | | 7.6 | | | | (1.6 | ) | | Net earnings (loss) per share attributable to Modine shareholders: | | | | | | | | | | | | | | | | | | | | | | Basic | | $ | 0.11 | | | $ | (0.47 | ) | | $ | 0.17 | | | $ | 0.16 | | | $ | (0.03 | ) | | Diluted | | | 0.11 | | | | (0.47 | ) | | | 0.17 | | | | 0.16 | | | | (0.03 | ) |
| | | Fiscal 2015 quarters ended | | | | | | | June | | Sept. | | Dec. | | March | | Fiscal 2015 | | | | | | | | | | | | | | | | | | | Net sales | | $ | 392.5 | | | $ | 377.3 | | | $ | 363.6 | | | $ | 363.0 | | | $ | 1,496.4 | | | Gross profit | | | 67.7 | | | | 56.7 | | | | 59.4 | | | | 62.7 | | | | 246.5 | | | Earnings (loss) from continuing operations (b) | | | 14.1 | | | | 2.0 | | | | 9.1 | | | | (3.0 | ) | | | 22.2 | | | Net earnings (loss) attributable to Modine (b) | | | 13.7 | | | | 1.7 | | | | 9.6 | | | | (3.2 | ) | | | 21.8 | | | Net earnings (loss) per share attributable to Modine shareholders: | | | | | | | | | | | | | | | | | | | | | | Basic | | $ | 0.29 | | | $ | 0.04 | | | $ | 0.20 | | | $ | (0.07 | ) | | $ | 0.46 | | | Diluted | | | 0.28 | | | | 0.04 | | | | 0.20 | | | | (0.07 | ) | | | 0.45 | |
| (a) | During fiscal 2016, restructuring expenses totaled $2.6 million, $1.0 million, $1.6 million, and $11.4 million for the quarters ended June 30, 2015, September 30, 2015, December 31, 2015, and March 31, 2016, respectively (see Note 6). During the fourth quarter of fiscal 2016, the Company recorded a $9.9 million asset impairment charge related to a manufacturing facility in Germany (see Note 6). During fiscal 2016, non-cash pension settlement losses totaled $39.2 million, $1.1 million, and $1.8 million for the quarters ended September 30, 2015, December 31, 2015, and March 31, 2016, respectively (see Note 17). During the fourth quarter of fiscal 2016, the Company recorded a $9.5 million gain related to an insurance settlement for equipment losses resulting from the Airedale fire (see Note 2). Also during the fourth quarter of fiscal 2016, the Company reversed a deferred tax asset valuation allowance, and, as a result, recorded an income tax benefit of $3.0 million (see Note 8). |
| (b) | During fiscal 2015, restructuring expenses totaled $0.8 million, $1.0 million, $1.9 million, and $1.0 million for the quarters ended June 30, 2014, September 30, 2014, December 31, 2014, and March 31, 2015, respectively (see Note 6). During the third quarter of fiscal 2015, the Company sold a wind tunnel and recognized a gain of $3.2 million (see Note 6). During the fourth quarter of fiscal 2015, the Company recorded a $7.8 million goodwill impairment charge (see Note 14) and a $3.2 million charge associated with a legal matter in Brazil (see Note 19). |
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of
Modine Manufacturing Company:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheet of Modine Manufacturing Company and subsidiaries (the Company) as of March 31, 2023, the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for the year ended March 31, 2023, and the related notes and financial statement schedule II - Valuation and Qualifying Accounts (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of March 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the accompanying consolidated financial statements listed in the index appearing under Item 15(a)(1),referred to above present fairly, in all material respects, the financial position of Modine Manufacturingthe Company and its subsidiaries atas of March 31, 2016 and 2015,2023, and the results of theirits operations and theirits cash flows for each of the three years in the periodyear ended March 31, 20162023, in conformity with accounting principlesU.S. generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2016,2023 based on criteria established in Internal Control -– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Commission.
Basis for Opinions
The Company'sCompany’s management is responsible for these consolidated financial statements, and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting,, included in the accompanying Management’s Report on Internal Control overOver Financial Reporting appearing under Item 9A.Reporting. Our responsibility is to express opinionsan opinion on thesethe Company’s consolidated financial statements and an opinion on the financial statement schedule, and on the Company'sCompany’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordanceare a public accounting firm registered with the standards of the Public Company Accounting Oversight Board (United States). (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our auditsaudit of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements, assessingstatements. Our audit also included evaluating the accounting principles used and significant estimates made by management, andas well as evaluating the overall presentation of the consolidated financial statement presentation.statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it classifies deferred taxes in fiscal 2016.Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i)(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii)(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii)(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Realizability of certain domestic deferred tax assets
As discussed in Notes 1 and 8 to the consolidated financial statements, 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. In making this assessment, the Company considers expectations of future taxable income and tax planning strategies. In addition, the Company considers the duration of statutory carryforward periods and historical financial results. Valuation allowances as of March 31, 2023 were $61.6 million, a portion of which are related to certain domestic deferred tax assets. The Company recorded a reduction in its valuation allowance on its deferred tax assets during the year ended March 31, 2023.
We identified the evaluation of the realizability of certain domestic deferred tax assets, specifically certain federal carryforward assets, as a critical audit matter. Subjective and challenging auditor judgment was required to: (i) evaluate the realizability of certain federal carryforward assets based on the projected future taxable income over the periods in which those federal carryforward assets will be utilized, and (ii) assess the application of tax laws to utilize the federal carryforward assets.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s evaluation of the realizability of the federal carryforward assets, including controls related to the projections of future taxable income and the application of tax laws to utilize the federal carryforward assets. We evaluated the reasonableness of management’s projections of future taxable income, including positive and negative evidence used, by comparing the projections to:
recent financial profitability trends of the Company industry data and economic trends, and evidence obtained in other areas of the audit.
We assessed the Company’s ability to project future earnings based on comparisons of the Company’s previous annual projections to actual results. We performed a sensitivity analysis over the amount and timing of future taxable income to assess the impact on utilization of the federal carryforward assets. We involved tax professionals with specialized skills and knowledge, who assisted in assessing the Company’s application of tax laws to utilize the federal carryforward assets and evaluating the recognition and realizability of the carryforward assets.
/s/PricewaterhouseCoopers KPMG LLP
We have served as the Company’s auditor since 2022. Milwaukee, Wisconsin May 26, 201625, 2023
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Modine Manufacturing Company
Opinion on the Financial Statements
We have audited the consolidated balance sheet of Modine Manufacturing Company and its subsidiaries (the “Company”) as of March 31, 2022, and the related consolidated statements of operations, comprehensive income, cash flows and shareholders’ equity for each of the two years in the period ended March 31, 2022, including the related notes and schedule of valuation and qualifying accounts as of and for each of the two years in the period ended March 31, 2022 listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2022, and the results of its operations and its cash flows for each of the two years in the period ended March 31, 2022 in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
May 26, 2022, except for the change in composition of reportable segments discussed in Note 22 to the consolidated financial statements, as to which the date is May 25, 2023
We served as the Company’s auditor from 1935to 2022.
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. |
Not applicable.Applicable
| ITEM 9A. | CONTROLS AND PROCEDURES. |
Conclusion Regarding Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report on Form 10-K, management of the Company, at the direction of the General Counsel and under the supervision, and with the participation, of the Company'sCompany’s President and Chief Executive Officer and Executive Vice President, Finance and Chief Financial Officer, evaluated the effectiveness of the Company'sCompany’s disclosure controls and procedures, at a reasonable assurance level, as defined in the Securities Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Finance and Chief Financial Officer have concluded that the design and operation of the Company'sCompany’s disclosure controls and procedures were effective, at a reasonable assurance level, as of March 31, 2016.2023.
Management’s Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. The Company’s internal control over financial reporting is a process designed by, or under the supervision of, the Company’s President and Chief Executive Officer and Executive Vice President, Finance and Chief Financial Officer, and effected by the Company'sCompany’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of its financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management, with the participation of the Company’s President and Chief Executive Officer and Executive Vice President, Finance and Chief Financial Officer, has assessed the effectiveness of the Company’s internal control over financial reporting as of March 31, 2016.2023. In making its assessment, of internal control over financial reporting, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in “Internal Control—Integrated Framework (2013).” Based onupon this assessment, management concluded that, as of March 31, 2016,2023, the Company’s internal control over financial reporting was effective.
The effectiveness of the Company’s internal control over financial reporting as of March 31, 20162023 has been audited by PricewaterhouseCoopersKPMG LLP, an independent registered public accounting firm, as stated in their report which appears herein.
Changes in Internal Control Over Financial Reporting
There have been no changes in internal control over financial reporting during the fourth quarter of fiscal 20162023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
| ITEM 9B. | OTHER INFORMATION. |
None.
| ITEM 9C. | DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS. |
Not Applicable.
PART III
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. |
Directors. The Company incorporates by reference the information appearing in the Company'sCompany’s Proxy Statement for the 20162023 Annual Meeting of Shareholders to be held on July 21, 2016August 17, 2023 (the “2016“2023 Annual Meeting Proxy Statement”) under the caption “Election of Directors.”
Executive Officers. The information in response to this Item appears under the caption "Executive Officers of the Registrant"“Information about our Executive Officers” in this Form 10-K.
Compliance with Section 16(a)Code of the Exchange Act. Conduct
The Company incorporates by reference the information appearing in the 2016 Annual Meeting Proxy Statement under the caption “Section 16(a) Beneficial Ownership Reporting Compliance.”
Code of Ethics. The Company incorporates by reference the information appearing in the 20162023 Annual Meeting Proxy Statement under the caption “Corporate Governance – Code of Ethics.Conduct.” The Company'sCompany’s Code of Ethics (labeled as the Code of Conduct)Conduct is included on its website, www.modine.com (About Modine link). We intend to satisfy our disclosure requirements under Item 5.05 of Form 8-K regarding amendments to, or waivers of, any provision of our Code of Conduct that applies to our principal executive, financial and accounting officers and our directors by posting such information on our website.
Board Committee Charters. Charters The Board of Directors has approved charters for its Audit Committee, Officer NominationHuman Capital and Compensation Committee, Corporate Governance and Nominating Committee and Technology Committee. These charters are included on the Company’s website, www.modine.com (Investors link).
Audit Committee Financial Expert. The Company incorporates by reference the information appearing in the 20162023 Annual Meeting Proxy Statement under the caption “Committees of the Board of Directors – Audit Committee.”
Audit Committee Disclosure. The Company incorporates by reference the information appearing in the 20162023 Annual Meeting Proxy Statement under the captions “Committees of the Board of Directors – Audit Committee” and “Board Meetings and Committees.”
Guidelines on Corporate Governance. The Board of Directors has adopted Guidelines on Corporate Governance. The Company’s Guidelines on Corporate Governance are included on its website, www.modine.com (Investors link).
Security Holder Recommendation of Board Nominees. The Company incorporates by reference the information appearing in the 20162023 Annual Meeting Proxy Statement under the caption “Shareholder Nominations and Recommendations of Director Candidates.”
Delinquent Section 16(a) Reports The Company incorporates by reference the information appearing in the 2023 Annual Meeting Proxy Statement under the caption “Delinquent Section 16(a) Reports.”
We do not intend to incorporate our internet website and the information contained therein or incorporated therein into this annual report on Form 10-K.
| ITEM 11. | EXECUTIVE COMPENSATION. |
The information appearing in the 20162023 Annual Meeting Proxy Statement under the captions “Compensation Discussion and Analysis,” “Compensation of Directors,” “Committees of the Board of Directors – Officer NominationHuman Capital and Compensation Committee: CompensationHCC Committee Interlocks and Insider Participation,” and “Compensation Committee Report” is incorporated herein by reference.
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. |
The Company incorporatesOther than the information below, the information required by this Item 12 is incorporated by reference to the information relating to stock ownershipsection under the caption “Security Ownership of Certain Beneficial Owners and Management,” and under the caption “Equity Compensation Plan Information,”Management” in the 20162023 Annual Meeting Proxy Statement.
Each of the Company’s equity compensation plans, listed below, has been approved by its shareholders:
Amended and Restated 2008 Incentive Compensation Plan; 2017 Incentive Compensation Plan; and Amended and Restated 2020 Incentive Compensation Plan.
The following table sets forth required information about equity compensation plans as of March 31, 2023:
| Plan Category | | Number of shares to be issued upon exercise of outstanding options, warrants or rights (a) | | Weighted-average exercise price of outstanding options, warrants and rights (b) | | Number of shares remaining available for future issuance (excluding securities reflected in 1st column) (c) | | Equity Compensation Plans approved by security holders | | 1,889,799 | | $12.28 | | 2,159,658 | | Equity Compensation Plans not approved by security holders | | - | | - | | - | | Total | | 1,889,799 | | $12.28 | | 2,159,658 |
| (a) | Includes shares issuable under the following type of awards: options – 890,687 shares and restricted stock units –999,112 shares. The number of shares subject to options were granted under the following plans: 2008 Incentive Plan – 136,735 shares, 2017 Incentive Plan – 142,972 shares, 2020 Incentive Plan –610,980 shares. Shares issuable under restricted stock unit awards were granted under the following plans: 2017 Incentive Plan – 83,350 shares, 2020 Incentive Plan – 915,762 shares. |
| (b) | The weighted average exercise price does not take into account awards of restricted stock units or performance stock which do not have an exercise price. |
| (c) | Includes the number of shares remaining available for future issuance under the Amended and Restated 2020 Incentive Compensation Plan. |
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. |
The Company incorporates by reference the information contained in the 20162023 Annual Meeting Proxy Statement under the captions “Certain Relationships and Related Party Transactions” and “Director Independence.”
| ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES. |
The Company incorporates by reference the information contained in the 20162023 Annual Meeting Proxy Statement under the caption “Independent Auditors’ Fees for Fiscal 20162023 and 2015.2022.”
PART IV
| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. |
(a) Documents Filed. The following documents are filed as part of this Report:
(a) | Documents Filed. The following documents are filed as part of this Report: |
| | Page in Form 10-K | | | | 1. The consolidated financial statements of Modine Manufacturing Company and its subsidiaries filed under Item 8: | | | | | Consolidated Statements of Operations for the years ended March 31, 2016, 20152023, 2022 and 20142021 | 3842 | Consolidated Statements of Comprehensive Income for the years ended March 31, 2016, 20152023, 2022 and 20142021 | 3943 | Consolidated Balance Sheets at March 31, 20162023 and 20152022 | 4044 | Consolidated Statements of Cash Flows for the years ended March 31, 2016, 20152023, 2022 and 20142021 | 4145 | Consolidated Statements of Shareholders'Shareholders’ Equity for the years ended March 31, 2016, 20152023, 2022 and 20142021 | 4246 | | Notes to Consolidated Financial Statements | 43-6847-81 | Report of Independent Registered Public Accounting Firm (KPMG PCAOB ID 185) | 6982
| Report of Independent Registered Public Accounting Firm (PricewaterhouseCoopers PCAOB ID 238) | 83
| | | | 2. Financial Statement Schedules | | | | | The following financial statement schedule should be read in conjunction with the consolidated financial statements set forth in Item 8: | | | Schedule II -- Valuation and Qualifying Accounts for the years ended March 31, 2023, 2022 and 2021 | 7487 | | | | Schedules other than those listed above are omitted because they are not applicable, not required, or because the required information is included in the consolidated financial statements and the notes thereto. | | | | | | 3. Exhibits and Exhibit Index. | 75-7788-91 | | | | See the Exhibit Index included as the last part of this report, which is incorporated herein by reference. Each management contract and compensatory plan or arrangement required to be filed as an exhibit to this report is identified in the Exhibit Index by an asterisktwo asterisks following its exhibit number. | |
ITEM 16. | FORM 10-K SUMMARY. |
None.
MODINE MANUFACTURING COMPANY AND SUBSIDIARIES (A Wisconsin Corporation)
SIGNATURESSCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the years ended March 31, 2023, 2022 and 2021
(In millions)
| | | | | Additions | | | | | | | | | Description | | Balance at Beginning of Period | | | Charged (Benefit) to Costs and Expenses | | | Charged to Other Accounts | | | Reclassified from (to) Held for Sale | | | Balance at End of Period | | | | | | | | | | | | | | | | | | | | 2023: Valuation Allowance for Deferred Tax Assets | | $ | 112.2 | | | $ | (49.7 | ) | | $ | (0.9 | )(a) | | $ | - | | | $ | 61.6 | | | | | | | | | | | | | | | | | | | | | | | | | 2022: Valuation Allowance for Deferred Tax Assets | | $ | 90.7 | | | $ | (4.6 | ) | | $ | (1.0 | )(a) | | $ | 27.1 | | | $ | 112.2 | | | | | | | | | | | | | | | | | | | | | | | | | 2021: Valuation Allowance for Deferred Tax Assets | | $ | 46.9 | | | $ | 86.2 |
| | $ | 2.8 | (a) | | $ | (45.2 | ) | | $ | 90.7 | |
| (a) | Foreign currency translation and other adjustments. |
MODINE MANUFACTURING COMPANY (THE “REGISTRANT”) (COMMISSION FILE NO. 1-1373)
TO 2023 ANNUAL REPORT ON FORM 10-K
Exhibit No. | | Description | | Incorporated Herein By Referenced To | | Filed Herewith | | | | | | | | | | Amended and Restated Articles of Incorporation, as amended. | | Exhibit 3.1 to Form 10-K for the fiscal year ended March 31, 2018 | | | | | | | | | | | | Bylaws, as amended. | | Exhibit 3.1 to Registrant’s Current Report on Form 8-K dated January 19, 2023 | | | | | | | | | | | | Form of Stock Certificate of the Registrant. | | Exhibit 4(a) to Form 10-K for the fiscal year ended March 31, 2003 (“2003 10-K”) | | | | | | | | | | | | Amended and Restated Articles of Incorporation, as amended. | | See Exhibit 3.1 hereto | | | | | | | | | | | | Amended and Restated Collateral Agency Intercreditor Agreement (the “Original Intercreditor Agreement”) dated as of August 12, 2010 among the Lenders (as defined therein), the Noteholders (as defined therein) and JPMorgan Chase Bank, N.A. as Collateral Agent. | | Exhibit 4.3 to Registrant’s Current Report on Form 8-K dated August 12, 2010 | | | | | | | | | | | | First Amendment to the Original Intercreditor Agreement, among the Lenders, the Note Holders and JPMorgan as Collateral Agent, pursuant to which the Lenders, the Note Holders and JPMorgan amended the Original Intercreditor Agreement. | | Exhibit 4.3 to Registrant’s Current Report on Form 8-K dated August 30, 2013 | | | | | | | | | | | | Credit Facility Agreement among Modine Holding GmbH, Modine Europe GmbH and Deutsche Bank AG dated as of April 27, 2012. | | Exhibit 4.10 to Registrant’s Form 10-K for the fiscal year ended March 31, 2012 | | | | | | | | | | | | Description of Registrant’s securities. | | | | X | | | | | | | | | | Fourth Amended and Restated Credit Agreement dated as of June 28, 2019. | | Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated June 28, 2019 | | | | | | | | | | | | Second Amended and Restated Note Purchase and Private Shelf Agreement dated as of August 6, 2019. | | Exhibit 4.1 to Registrant’s Form 10-Q for the third quarter ended December 31, 2019 (“December 31, 2019 10-Q”) | | | | | | | | | | | | First Amendment to Second Amended and Restated Note Purchase and Private Shelf Agreement dated as of January 31, 2020. | | Exhibit 4.2 to December 31, 2019 10-Q | | | | | | | | | | | | First Amendment to Fourth Amended and Restated Credit Agreement dated as of May 19, 2020. | | Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated May 19, 2020 (“May 19, 2020 8-K”) | | | | | | | | | | | | Second Amendment to Second Amended and Restated Note Purchase and Private Shelf Agreement dated as of May 19, 2020. | | Exhibit 4.2 to May 19, 2020 8-K | | |
| | Amendment No. 2 to Fourth Amended and Restated Credit Agreement dated as of May 18, 2021. | | Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated May 18, 2021 (“May 18, 2021 8-K”) | | | | | | | | | | | | Third Amendment to Second Amended and Restated Note Purchase and Private Shelf Agreement dated as of May 18, 2021. | | Exhibit 4.2 to May 18, 2021 8-K | | | | | | | | | | | | Fifth Amended and Restated Credit Agreement dated as of October 12, 2022. | | Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated October 12, 2022 | | | | | | | | | | | | Fourth Amendment to Second Amended and Restated Note Purchase and Private Shelf Agreement dated as of November 21, 2022. | | Exhibit 4.1 to Registrant’s Form 10-Q for the third quarter ended December 31, 2022 | | | | | | | | | | | | Director Emeritus Retirement Plan effective April 1, 1992 (and frozen as of July 1, 2000). | | Exhibit 10(a) to Registrant’s Form 10-K for the fiscal year ended March 31, 2002 | | | | | | | | | | | | Form of Change in Control and Termination Agreement (amended and restated) between the Registrant and officers other than Neil Brinker. | | Exhibit 10(f) to Registrant’s Form 10-K for the fiscal year ended March 31, 2004 | | | | | | | | | | | | Executive Supplemental Retirement Plan (as amended). | | Exhibit 10(f) to Registrant’s Form 10-K for the fiscal year ended March 31, 2000 | | | | | | | | | | | | Deferred Compensation Plan (as amended). | | Exhibit 10(y) to 2003 10-K | | | | | | | | | | | | 2008 Incentive Compensation Plan (Amended and Restated effective May 7, 2014). | | Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated July 17, 2014 | | | | | | | | | | | | Form of Fiscal 2023 Performance Cash Award Agreement. | | Exhibit 10.1 to the Registrant’s Form 10-Q for the first quarter ended June 30, 2022 (“June 30, 2022 10-Q”) | | | | | | | | | | | | Form of Fiscal 2023 Incentive Stock Option Award Agreement. | | Exhibit 10.2 to June 30, 2022 10-Q | | | | | | | | | | | | Form of Fiscal 2023 Non-Qualified Stock Option Award Agreement.. | | Exhibit 10.3 to June 30, 2022 10-Q | | | | | | | | | | | | Form of Fiscal 2023 Restricted Stock Unit Award Agreement.. | | Exhibit 10.4 to June 30, 2022 10-Q | | | | | | | | | | | | Form of Fiscal 2023 Modine Non-Employee Director Restricted Stock Unit Award Agreement with Deferral. | | Exhibit 10.6 to June 30, 2022 10-Q | | | | | | | | | | | | Form of Fiscal 2023 Modine Non-Employee Director Restricted Stock Unit Award Agreement without Deferral. | | Exhibit 10.7 to June 30, 2022 10-Q | | | | | | | | | | | | Change in Control Agreement dated as of June 4, 2021, by and between Modine Manufacturing Company and Neil D. Brinker. | | Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated June 4, 2021 | | | | | | | | | | | | Amendment No. 1 to Form of Change in Control and Termination Agreement (amended and restated) between the Registrant and Officers other than Neil Brinker. | | Exhibit 10.17 to Registrant’s Form 10-K for the fiscal year ended March 31, 2011 | | | | | | | | | | | | Supplemental Severance Policy. | | Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated October 17, 2011 | | |
| | 2017 Incentive Compensation Plan. | | Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated July 20, 2017 | | | | | | | | | | | | Transition and Separation Agreement between Thomas A. Burke and Modine Manufacturing Company effective as of August 4, 2020. | | Exhibit 10.6 to the Registrant’s Form 10-Q for the second quarter ended September 30, 2020 | | | | | | | | | | | | [Corrected] Offer Letter dated as of November 10, 2020, by and between the Company and Neil Brinker. | | Exhibit 10.1 to the Registrant’s Form 10-Q for the third quarter ended December 31, 2020 | | | | | | | | | | | | 2020 Incentive Compensation Plan (Amended and Restated effective July 21, 2022). | | Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated July 21, 2022 | | | | | | | | | | | | Form of Retention Letter, effective August 31, 2020, between the Company and each of Michael B. Lucareli, Scott L. Bowser and Sylvia A. Stein. | | Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated August 31, 2020 | | | | | | | | | | | | Offer Letter dated as of July 2, 2021, by and between the Company and Adrian Peace. | | Exhibit 10.1 to the Registrant’s Form 10-Q for the second quarter ended September 30, 2021 10-Q (“September 30, 2021 10-Q”) | | | | | | | | | | | | Offer Letter dated as of July 16, 2021, by and between the Company and Eric S. McGinnis. | | Exhibit 10.2 to September 30, 2021 10-Q | | | | | | | | | | | | First Amendment to Eric S. McGinnis Offer Letter. | | Exhibit 10.3 to September 30, 2021 10-Q | | | | | | | | | | | | Form of Retention Restricted Stock Award Agreement, effective October 19, 2022, between the Company and each of Brian J. Agen, Michael B. Lucareli, Eric S. McGinnis and Sylvia A. Stein. | | Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated October 19, 2022 | | | | | | | | | | | | List of subsidiaries of the Registrant. | | | | X | | | | | | | | | | Consent of PricewaterhouseCoopers LLP. | | | | X | | | | | | | | | | Consent of KPMG LLP. | | | | X | | | | | | | | | | Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer. | | | | X | | | | | | | | | | Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. | | | | X | | | | | | | | | | Section 1350 Certification of Neil D. Brinker, President and Chief Executive Officer. | | | | X | | | | | | | | | | Section 1350 Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. | | | | X | | | | | | | | 101.INS | | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). | | | | X | | | | | | | | 101.SCH | | Inline XBRL Taxonomy Extension Schema. | | | | X | | | | | | | | 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | | | | X | | | | | | | | 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document. | | | | X |
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document. | | | | X | | | | | | | | 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | | | | X | | | | | | | | 104 | | Cover page interactive data file (formatted as inline XBRL and contained in Exhibits 101). | | | | |
* | Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, the Registrant has omitted certain agreements with respect to long-term debt not exceeding 10% of consolidated total assets. The Registrant agrees to furnish a copy of any such agreements to the Securities and Exchange Commission upon request. |
** | Denotes management contract or executive compensation plan or arrangement required to be filed as an exhibit pursuant to Item 15 of Form 10-K. |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: May 26, 201625, 2023 | Modine Manufacturing Company | | | | | | By: | /s/ Thomas A. BurkeNeil D. Brinker | | | Neil D. Brinker, President | | | | Thomas A. Burke, President and Chief Executive Officer | | | | and Chief (Principal Executive Officer | | | (Principal Executive Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated.
/s/ Thomas A. BurkeNeil D. Brinker | | Neil D. Brinker | Thomas A. BurkeMay 25, 2023
| President, Chief Executive Officer and Director | | (Principal Executive Officer) | May 26, 2016
| | | | /s/ Michael B. Lucareli | | Michael B. Lucareli | May 25, 2023 | Executive Vice President, Finance and Chief Financial Officer | | (Principal Financial and Accounting Officer) | May 26, 2016
| | | | /s/ Marsha C. Williams | | Marsha C. Williams | DirectorMay 25, 2023
| Chairperson, Board of Directors | May 26, 2016
| | | | /s/ David J. AndersonEric D. Ashleman | | Eric D. Ashleman | David J. AndersonMay 25, 2023
| Director | |
| | | /s/ Suresh V. Garimella |
| Suresh V. Garimella | May 26, 201625, 2023 | Director | | | | | /s/ Charles P. CooleyKatherine C. Harper | | Katherine C. Harper | Charles P. CooleyMay 25, 2023 | Director | May 26, 2016
| | | | /s/ Suresh V. Garimella
Suresh V. Garimella
Director
| May 26, 2016
|
/s/ Larry O. Moore |
| Larry O. Moore | May 25, 2023 | Director | May 26, 2016
| | | | /s/ Christopher W. Patterson |
| Christopher W. Patterson | May 25, 2023 | Director | May 26, 2016
| | | | /s/ Christine Y. YanDavid J. Wilson | | David J. Wilson | Christine Y. YanMay 25, 2023
| Director | May 26, 2016
| | | | /s/ David G. Bills David G. Bills
Director
William A. Wulfsohn | May 26, 2016
|
MODINE MANUFACTURING COMPANY AND SUBSIDIARIES
(A Wisconsin Corporation)
SCHEDULE II ‑ VALUATION AND QUALIFYING ACCOUNTSFor the years ended March 31, 2016, 2015 and 2014
(In millions)
| | | | | | Additions | | | | | | | Description | | Balance at Beginning of Period | | | Charged (Benefit) to Costs and Expenses | | | Charged to Other Accounts | | | | Balance at End of Period | | | | | | | | | | | | | | | | | | 2016: Valuation Allowance for Deferred Tax Assets | | $ | 48.0 | | | $ | 1.5 | | | $ | 1.3 | | (a) | | $ | 50.8 | | | | | | | | | | | | | | | | | | | | | | 2015: Valuation Allowance for Deferred Tax Assets | | $ | 61.2 | | | $ | (6.8 | ) | | $ | (6.4 | ) | (a) | | $ | 48.0 | | | | | | | | | | | | | | | | | | | | | | 2014: Valuation Allowance for Deferred Tax Assets | | $ | 172.8 | | | $ | (113.1 | ) | | $ | 1.5 | | (a) | | $ | 61.2 | |
Notes:
| (a) | Foreign currency translation and other adjustments |
MODINE MANUFACTURING COMPANY
(THE “REGISTRANT”)
(COMMISSION FILE NO. 1-1373)
TO
2016 ANNUAL REPORT ON FORM 10-K
Exhibit No. | | Description | | Incorporated Herein By
Referenced To
| | Filed
Herewith
| William A. Wulfsohn | | | | | | May 25, 2023 | 3.1 | | Amended and Restated Articles of Incorporation, as amended. | | Exhibit 4.2 to Registrant’s Registration Statement on Form S-3 (333-161030) dated August 4, 2009 | Director | | | | | | /s/ Christine Y. Yan | | | |
| 3.2Christine Y. Yan | | Bylaws, as amended. | | Exhibit 3.1 to Registrant’s Current Report on Form 8-K dated February 10, 2015 | | May 25, 2023 | | | | | | | | 4.1 | | Form of Stock Certificate of the Registrant. | | Exhibit 4(a) to Form 10-K for the fiscal year ended March 31, 2003 ("2003 10-K") | | | | | | | | | | 4.2 | | Amended and Restated Articles of Incorporation, as amended. | | See Exhibit 3.1 hereto. | | | | | | | | | | 4.3** | | Note Purchase and Private Shelf Agreement (the “Original Note Purchase Agreement”) dated as of August 12, 2010 among the Registrant and the Series A Purchasers named therein of $125,000,000 6.83% Secured Senior Notes, Series A, due August 12, 2020 and $25,000,000 Private Shelf Facility and each Prudential Affiliate (as defined therein) that may become bound by certain provisions thereof. | | Exhibit 4.2 to Registrant’s Current Report on Form 8-K dated August 12, 2010 8-K (“August 12, 2010 8-K”) | | | | | | | | | | 4.4** | | Amended and Restated Collateral Agency Intercreditor Agreement (the “Original Intercreditor Agreement”) dated as of August 12, 2010 among the Lenders (as defined therein), the Noteholders (as defined therein) and JPMorgan Chase Bank, N.A. as Collateral Agent. | | Exhibit 4.3 to August 12, 2010 8-K | | | | | | | | | | 4.5** | | First Amendment to Note Purchase and Private Shelf Agreement and Waiver dated as of March 15, 2012, with Prudential Investment Management, Inc., The Prudential Insurance Company of America and Prudential Retirement Insurance and Annuity Company (collectively the “Noteholders”) pursuant to which the Company and the Noteholders amended the Original Note Purchase Agreement. | | Exhibit 4.2 to Registrant’s Current Report on Form 8-K dated March 15, 2012 8-K | | | | | | | | | | 4.6** | | Second Amendment to Note Purchase and Private Shelf Agreement dated as of April 20, 2012, with Prudential Investment Management, Inc., The Prudential Insurance Company of America and Prudential Retirement Insurance and Annuity Company (collectively the “Noteholders”) pursuant to which the Company and the Noteholders amended the Original Note Purchase Agreement, as amended. | | Exhibit 4.2 to Registrant’s Current Report on Form 8-K dated April 20, 2012 8-K | | | | | | | | | | 4.7** | | Third Amendment to Note Purchase and Private Shelf Agreement dated as of August 6, 2012, with Prudential Investment Management, Inc., The Prudential Insurance Company of America and Prudential Retirement Insurance and Annuity Company (collectively the “Noteholders”) pursuant to which the Company and the Noteholders amended the Original Note Purchase Agreement, as amended. | | Exhibit 4.2 to Registrant’s Current Report on Form 8-K dated August 6, 2012 8-K | Director | |
4.8** | | Second Amended and Restated Credit Agreement dated as of August 30, 2013, with JPMorgan Chase Bank, N.A., as Administrative Agent, LC Issuer, Swing Line Lender and as a Lender, and U.S. Bank, N.A. and Wells Fargo Bank, N.A. as Syndication Agents and as Lenders, BMO Harris Bank N.A., as Documentation Agent and as Lender and Associated Bank, N.A., Comerica Bank and Sovereign Bank as Lenders | | Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated August 30, 2013 (“August 30, 2013 8-K”) | | | | | | | | | | 4.9** | | Fourth Amendment to Note Purchase and Private Shelf Agreement (the “Fourth Note Purchase Amendment”) dated as of August 30, 2013, with Prudential Investment Management, Inc., The Prudential Insurance Company of America and Prudential Retirement Insurance and Annuity Company (collectively the “Note Holders”) pursuant to which the Company and the Note Holders amended the Original Note Purchase Agreement, as amended. | | Exhibit 4.2 to August 30, 2013 8-K | | | | | | | | | | 4.10** | | First Amendment to the Original Intercreditor Agreement, among the Lenders, the Note Holders and JPMorgan as Collateral Agent, pursuant to which the Lenders, the Note Holders and JPMorgan amended the Original Intercreditor Agreement. | | Exhibit 4.3 to August 30, 2013 8-K | | | | | | | | | | 4.11 | | Credit Facility Agreement among Modine Holding GmbH, Modine Europe GmbH and Deutsche Bank AG dated as of April 27, 2012. | | Exhibit 4.10 to Registrant’s Form 10-K for the fiscal year ended March 31, 2012 | | | | | | | | | | 10.1* | | Director Emeritus Retirement Plan effective April 1, 1992 (and frozen as of July 1, 2000). | | Exhibit 10(a) to Registrant’s Form 10-K for the fiscal year ended March 31, 2002 | | | | | | | | | | 10.2* | | Employment Agreement between the Registrant and Thomas A. Burke dated as of June 15, 2007. | | Exhibit 10.3 to Registrant’s Current Report on Form 8-K dated June 15, 2007 | | | | | | | | | | 10.3* | | Form of Amendment No. 1 to Employment Agreement entered into as of July 1, 2008 with Thomas A. Burke. | | Exhibit 10.1 to Registrant���s Current Report on Form 8-K dated July 1, 2008 | | | | | | | | | | 10.4* | | Form of Change in Control and Termination Agreement (amended and restated) between the Registrant and officers other than Thomas A. Burke. | | Exhibit 10(f) to Registrant’s Form 10-K for the year ended March 31, 2004 | | | | | | | | | | 10.5* | | Employment Agreement, dated July 1, 2014, between Modine Holding GmbH and Holger Schwab, effective as of July 1, 2015. | | Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated July 1, 2014 | | | | | | | | | | 10.6* | | Executive Supplemental Retirement Plan (as amended). | | Exhibit 10(f) to Registrant's Form 10-K for the fiscal year ended March 31, 2000 | | | | | | | | | | 10.7* | | Deferred Compensation Plan (as amended). | | Exhibit 10(y) to 2003 10-K | | | | | | | | | | 10.8* | | 2007 Incentive Compensation Plan. | | Appendix A to the Registrant's Proxy Statement dated June 18, 2007 | | | | | | | | | | 10.9* | | 2008 Incentive Compensation Plan92
(Amended and Restated effective May 7, 2014).
| | Exhibit 10.1 to Registrant's Current Report on Form 8-K dated July 17, 2014 | | |
10.10* | | Amendment No. 1 to Form of Change in Control and Termination Agreement (amended and restated) between the Registrant and Officers other than Thomas A. Burke. | | Exhibit 10.17 to Registrant's Form 10-K for the fiscal year ended March 31, 2011 | | | | | | | | | | 10.11* | | Supplemental Severance Policy. | | Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated October 17, 2011 | | | | | | | | | | 10.12* | | Form of Fiscal 2016 Modine Performance Stock Award Agreement | | Exhibit 10.1 to Form 10-Q for the first quarter ended June 30, 2015 ("June 30, 2015 10-Q") | | | | | | | | | | 10.13* | | Form of Fiscal 2016 Modine Incentive Stock Options Award Agreement | | Exhibit 10.2 to June 30, 2015 10-Q | | | | | | | | | | 10.14* | | Form of Fiscal 2016 Modine Restricted Stock Award Agreement | | Exhibit 10.3 to June 30, 2015 10-Q | | | | | | | | | | 10.15* | | Form of Fiscal 2016 Modine Non-Qualified Stock Option Award Agreement | | Exhibit 10.4 to June 30, 2015 10-Q | | | | | | | | | | | | List of subsidiaries of the Registrant. | | | | X | | | | | | | | | | Consent of independent registered public accounting firm. | | | | X | | | | | | | | | | Rule 13a-14(a)/15d-14(a) Certification of Thomas A. Burke, President and Chief Executive Officer. | | | | X | | | | | | | | | | Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Vice President, Finance and Chief Financial Officer. | | | | X | | | | | | | | | | Section 1350 Certification of Thomas A. Burke, President and Chief Executive Officer. | | | | X | | | | | | | | | | Section 1350 Certification of Michael B. Lucareli, Vice President, Finance and Chief Financial Officer. | | | | X | | | | | | | | 101.INS | | Instance Document | | | | X | | | | | | | | 101.SCH | | XBRL Taxonomy Extension Schema | | | | X | | | | | | | | 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | | | X | | | | | | | | 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | | | X | | | | | | | | 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | | | X | | | | | | | | 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | | | X |
* Denotes management contract or executive compensation plan or arrangement required to be filed as an exhibit pursuant to Item 15 of Form 10-K.
** Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, the Registrant has omitted certain agreements with respect to long-term debt not exceeding 10% of consolidated total assets. The Registrant agrees to furnish a copy of any such agreements to the Securities and Exchange Commission upon request.
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