| (in millions) | |
Year Ended March 31, 2023 Compared with Year Ended March 31, 2022
Fiscal 20202023 net sales of $1,976$2,298 million were $237$248 million, or 1112 percent, lowerhigher than the prior year, primarily due to lowerhigher sales volume in both of our VTS and CIS segments and favorable commercial pricing, including adjustments in response to raw material price increases. These increases were partially offset by a $46$111 million unfavorable impact of foreign currency exchange rate changes, partially offset by higher salesrates. Sales in our BHVAC segment. Sales decreased $175the Performance Technologies and Climate Solutions segments increased $144 million and $84$101 million, in our VTS and CIS segments, respectively. Sales increased $9 million in our BHVAC segment.
Fiscal 20202023 cost of sales of $1,668$1,909 million decreased $179increased $168 million, or 10 percent, primarily due to lowerhigher sales volume and higher raw material prices, which increased $34 million. These increases were partially offset by a $39$95 million favorable impact of foreign currency exchange rate changes.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 an $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 90110 basis points to 84.4 percent and was negatively impacted by approximately 80 basis points due to higher labor and inflationary costs and, to a lesser extent, by sales mix. These negative impacts were partially offset by favorable material costs, which impacted costs of sales by approximately 30 basis points. The favorable material costs primarily resulted from lower commodity pricing, which more than offset the negative impacts of tariffs. In addition, we recorded $3 million of costs at Corporate for program and equipment transfers associated with the separation of the VTS segment’s automotive business in preparation for a potential sale.84.9 percent.
As a result of lowerhigher sales and higher cost of sales as a percentage of sales, fiscal 20202022 gross profit decreased $58increased $16 million and gross margin declined 90110 basis points to 15.615.1 percent.
Fiscal 20202022 SG&A expenses increased $6$4 million. The increase in SG&A expenses was primarily due to separation and projecthigher 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 recorded at Corporate associated withrelated to our review of strategic alternatives for the VTS segment’s automotive business, which increased approximately $29 million. This increase was partially offset bybusinesses and lower compensation-related expenses,strategic reorganization costs, which decreased approximately $13$4 million lower environmental charges related to previously-owned manufacturing facilities in the U.S., which decreased approximatelyand $3 million, and a $4 million favorable impactrespectively. The lower strategic reorganization costs primarily resulted from foreign currency exchange rate changes.lower severance expenses for executive management positions.
Restructuring expenses totaled $12of $24 million duringin fiscal 2020 and2022 increased $2$11 million compared with the prior year. The fiscal 2020 restructuringyear, primarily due to higher severance-related expenses primarily consisted of severance expenses related to targeted headcount reductions in the VTSPerformance Technologies segment, and equipment transfer and plant consolidation costspartially offset by lower severance-related expenses in the CISClimate Solutions segment. The fiscal 2020 headcount reductions were in response to lower market demand and in support of our objective to reduce operational and SG&A cost structures. During
In fiscal 2021, we approved headcount reductionsrecorded $167 million of impairment charges to write down the long-lived assets in the VTSliquid-cooled and CIS segmentsAustrian 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, we expect to record approximately $4 millionrecorded a net impairment reversal of severance expenses during the first quarter of fiscal 2021.$56 million.
During fiscal 2020,We sold our Austrian air-cooled automotive business on April 30, 2021. As a result of the sale, we recorded impairment charges totaling $9a $7 million primarily related to two manufacturing facilities in the VTS segment.loss on sale at Corporate during fiscal 2022.
Operating income of $38$119 million during fiscal 2020 decreased $722022 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. This decreaseyear, the fiscal 2022 operating income was primarily due to an increasefavorably impacted by higher gross profit. Operating income was negatively impacted by higher restructuring expenses, the loss on sale of $32 million of separation and project costs associated with our review of strategic alternatives for ourthe Austrian air-cooled automotive business, and lower earnings in our VTS and CIS segments, which decreased $37 million and $20 million, respectively, partially offset by higher earnings in our BHVAC segment, which increased $9 million.SG&A expenses.
The provision for income taxes was $12$15 million and $90 million in fiscal 2020, compared with a benefit for income taxes of $52022 and 2021, respectively. The $75 million in fiscal 2019. The $17 million changedecrease was primarily due to the absence of income tax benefits totaling $25 million recorded in the prior year and income tax charges totaling $10 million in the current year, partially offset by lower operating earnings in fiscal 2020. The $25 million of income tax benefits recorded in fiscal 2019 related to the recognition of tax assets for foreign tax credits and a manufacturing deduction in the U.S. and our accounting for the Tax Act. The $10$117 million of income tax charges recorded in fiscal 2020 were comprised of net charges totaling $7 million resulting from adjustments of2021 to increase the valuation allowances on certain 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 jurisdictionjurisdictions. 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 $3$9 million associated with legal entity restructuring in preparation for a potential sale of our automotive business. See Note 7resulting from the allocation of the Notes to Consolidated Financial Statements for additional information.income tax provision between net earnings and other comprehensive income.
Segment Results of Operations
A detailed comparison of our segment financial results for fiscal 2019 and 2018 can be found in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section in the Company’s 2019 Annual Report on Form 10-K filed with the SEC on May 23, 2019.
Effective April 1, 2020,2022, 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 automotive business separate fromconsolidated financial position, results of operations, and cash flows. We have recast the other businesses within the VTS segment. We are managing the automotive business as a separate segment as we target the sale or eventual exit of the automotive businesses. Beginningfinancial information for fiscal 2022 and 2021 we will reportto conform to the financial results for the automotive business as the Automotive segment. The remaining portion of the previous VTS segment will be named the Heavy-Duty Equipment segment and will include the heavy-duty commercial vehicle and off-highway businesses.fiscal 2023 presentation.
VTS
| | | Years ended March 31, | | | | | 2020 | | | 2019 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 1,177 | | | | 100.0 | % | | $ | 1,352 | | | | 100.0 | % | | Cost of sales | | | 1,032 | | | | 87.7 | % | | | 1,165 | | | | 86.2 | % | | Gross profit | | | 145 | | | | 12.3 | % | | | 187 | | | | 13.8 | % | | Selling, general and administrative expenses | | | 100 | | | | 8.5 | % | | | 113 | | | | 8.3 | % | | Restructuring expenses | | | 10 | | | | 0.8 | % | | | 9 | | | | 0.7 | % | | Impairment charges | | | 8 | | | | 0.7 | % | | | - | | | | - | | | Gain on sale of assets | | | (1 | ) | | | -0.1 | % | | | - | | | | - | | | Operating income | | $ | 28 | | | | 2.3 | % | | $ | 65 | | | | 4.8 | % |
Climate Solutions
VTS net sales decreased $175 million, or 13 percent, in fiscal 2020 compared with the prior year, primarily due to lower sales volume, a $31 million unfavorable impact of foreign currency exchange rate changes, and, to a lesser extent, unfavorable customer pricing largely resulting from contractually-scheduled price-downs. Sales to commercial vehicle, off-highway, and automotive customers decreased $64 million, $60 million, and $34 million, respectively. These sales declines largely result from weakness in global vehicular markets and the planned wind-down of certain commercial vehicle programs.| | | 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 | % |
VTS cost ofYear Ended March 31, 2023 Compared with Year Ended March 31, 2022
Climate Solutions net sales decreased $133increased $101 million, or 11 percent, primarily due to lower sales volume and a $26 million favorable impact of foreign currency exchange rate changes. As a percentage of sales, cost of sales increased 150 basis points to 87.7 percent. Beyond the unfavorable impact of the lower sales volume, higher labor and inflationary costs and unfavorable customer pricing negatively impacted cost of sales by approximately 90 basis points and 70 basis points, respectively. Higher depreciation costs, primarily resulting from recent manufacturing capacity expansion in China and Hungary, also negatively impacted cost of sales to a lesser extent. These negative impacts were partially offset by favorable material costs, which impacted cost of sales by approximately 30 basis points, improved operating efficiencies and cost savings from procurement initiatives. The favorable material costs primarily resulted from lower commodity pricing, which more than offset the negative impacts of tariffs.
As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $42 million and gross margin declined 150 basis points to 12.3 percent.
VTS SG&A expenses decreased $13 million compared with the prior year yet increased 20 basis points as a percentage of sales. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $9 million, lower environmental charges related to previously-owned manufacturing facilities in the U.S, which decreased approximately $3 million, and a $3 million favorable impact of foreign currency exchange rate changes.
Restructuring expenses during fiscal 2020 increased $1 million, primarily due to higher severance expenses resulting from targeted headcount reductions in Europe and in the Americas.
During fiscal 2020, we recorded asset impairment charges totaling $8 million, primarily related to manufacturing facilities in Austria and Germany to write down property and equipment assets to fair value. We anticipate future cash flows at these facilities will be negatively impacted by planned wind downs of certain commercial vehicle and automotive programs.
During fiscal 2020, we completed the sale of a previously-closed manufacturing facility in Germany and, as a result, recorded a gain of $1 million.
Operating income in fiscal 2020 decreased $37 million to $28 million, primarily due to lower gross profit and higher impairment charges, partially offset by lower SG&A expenses.
| CIS | | | | | | | Years ended March 31, | | | | | 2020 | | | 2019 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 624 | | | | 100.0 | % | | $ | 708 | | | | 100.0 | % | | Cost of sales | | | 531 | | | | 85.1 | % | | | 593 | | | | 83.8 | % | | Gross profit | | | 93 | | | | 14.9 | % | | | 115 | | | | 16.2 | % | | Selling, general and administrative expenses | | | 57 | | | | 9.2 | % | | | 61 | | | | 8.6 | % | | Restructuring expenses | | | 2 | | | | 0.3 | % | | | - | | | | - | | | Impairment charges | | | 1 | | | | 0.1 | % | | | - | | | | 0.1 | % | | Operating income | | $ | 33 | | | | 5.3 | % | | $ | 53 | | | | 7.5 | % |
CIS net sales decreased $84 million, or 12 percent, in fiscal 2020 compared with the prior year, primarily due to lower sales volume and a $12 million unfavorable impact of foreign currency exchange rate changes. Sales to commercial HVAC&R and data center cooling customers decreased $43 million and $38 million, respectively.
CIS cost of sales decreased $62 million, or 10 percent, primarily due to lower sales volume and an $11 million favorable foreign currency exchange rate impact. As a percentage of sales, cost of sales increased 130 basis points to 85.1 percent, primarily due to the unfavorable impact of lower sales volume and unfavorable sales mix.
As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $22 million and gross margin declined 130 basis points to 14.9 percent.
CIS SG&A expenses decreased $4 million compared with the prior year yet increased 60 basis points as a percentage of sales. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $2 million, and the favorable impact of cost-control initiatives.
Restructuring expenses during fiscal 2020 increased $2 million, primarily due to higher equipment transfer and plant consolidation costs. We are currently transferring product lines to our manufacturing facility in Mexico in order to achieve operational improvements and organizational efficiencies.
During fiscal 2020, we recorded a $1 million asset impairment charge related to a previously-closed manufacturing facility in Austria.
Operating income in fiscal 2020 decreased $20 million to $33 million, primarily due to lower gross profit, partially offset by lower SG&A expenses.
| BHVAC | | | | | | | Years ended March 31, | | | | | 2020 | | | 2019 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 221 | | | | 100.0 | % | | $ | 212 | | | | 100.0 | % | | Cost of sales | | | 150 | | | | 67.7 | % | | | 149 | | | | 70.1 | % | | Gross profit | | | 72 | | | | 32.3 | % | | | 63 | | | | 29.9 | % | | Selling, general and administrative expenses | | | 35 | | | | 15.8 | % | | | 35 | | | | 16.4 | % | | Loss on sale of assets | | | - | | | | - | | | | 2 | | | | 0.8 | % | | Operating income | | $ | 36 | | | | 16.5 | % | | $ | 27 | | | | 12.6 | % |
BHVAC net sales increased $9 million, or 4 percent, in fiscal 20202023 compared with the prior year, primarily due to higher sales in the U.S., which increased $14 million,volume and favorable commercial pricing. These increases were partially offset by lower sales in the U.K., which decreased $5 million. The higher sales in the U.S. were primarily driven by the increased sales of ventilation and heating products. The lower sales in the U.K. were primarily due to lower sales of air conditioning and ventilation products and a $3$52 million unfavorable impact of foreign currency exchange rate changes, partially offset by higherrates. Compared with the prior year, sales of data center sales.cooling, heat transfer, and HVAC & refrigeration products increased $58 million, $33 million, and $11 million, respectively.
BHVACClimate Solutions cost of sales increased $1$44 million, or less than 16 percent, in fiscal 2020.2023, primarily due to higher sales volume, partially offset by a $44 million favorable impact of foreign currency exchange rates. As a percentage of sales, cost of sales decreased 240380 basis points to 67.777.9 percent, primarily due to the favorable impact of higher sales mixvolume, favorable commercial pricing, and favorable customer pricing.improved operating efficiencies, partially offset by higher labor and inflationary costs.
As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $9$58 million and gross margin improved 240380 basis points to 32.322.1 percent.
BHVACClimate Solutions SG&A expenses remained consistentincreased $7 million compared with the prior year, yet decreased 6030 basis points as a percentage of sales. The increase in SG&A expenses was primarily due to a $5 million increase in compensation-related expenses, including commission expenses, and increases in other general and administrative expenses that have been impacted by inflationary market conditions. These increases were partially offset by a $4 million favorable impact of foreign currency exchange rate changes.
DuringRestructuring expenses totaling $2 million during fiscal 2019, we sold our business in South Africa2023 were consistent with the prior year and as a result, recorded a lossprimarily consisted of $2 million.severance-related expenses.
Operating income in fiscal 2020 of $362023 increased $51 million increased $9to $124 million, primarily due to higher gross profit.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 as of March 31, 20202023 of $71$67 million, and an available borrowing capacity of $118$270 million under our revolving credit facility. Given our extensive international operations, approximately $31$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 may be subject to foreign withholding taxes if repatriated.
In response to lower customer demand resulting from the COVID-19 pandemic, we have taken actions to reduce operating expenses, conserve We believe our sources of liquidity will provide sufficient cash and maximize liquidity. These actions have included, but are not limited to, production staffing adjustments, furloughs, shortened work weeks, and temporary salary reductions at all levels of our organization. In addition, we are reducing operating and administrative expenses. Further, as described below, we are focused on reducing our capital expenditures and have executed amendments to our primary credit agreements to help ensure liquidity through financial covenant flexibility during the next two fiscal years. Together with anticipated cash flow from operations, we currently believe we have sufficient available cash and access to both committed and uncommitted credit facilities to adequately cover our funding needs on both a short-short-term and long-term basis. However, we are continuing to monitor the impacts of COVID-19 on our business and the credit and financial markets.
The full extentOur 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 impactsAmerican Rescue Plan Act of COVID-19, which will largely depend on the length and severity of the pandemic, could have a material adverse effect on2021, we do not expect to make cash contributions to our business, results of operations, and cash flows and could adversely affect our access to capital and/or financing.U.S. pension plans during fiscal 2024.
Net Cash Provided by Operating Activities
Net cash provided by operating activities in fiscal 20202023 was $58$108 million, an increase of $96 million from $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, as 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 and lower pension plan contributions in fiscal 2023, as compared with the prior year.
Net cash provided by operating activities in fiscal 2022 was $12 million, a decrease of $45$138 million from $103$150 million in the prior year. This decrease in operating cash flow was primarily due to lower operating earnings in the current year and payments for separation and project costs associated with our strategic review of alternatives for the VTS segment’s automotive business, partially offset by favorableunfavorable net changes in working capital. The favorable changes in working capital, including higher inventory and accounts receivable levels and higher payments for incentive compensation and employee benefits as compared with the prior year, included lower employee benefit and incentive compensation payments.
Net cash provided by operating activities in fiscal 2019 was $103 million, a decrease of $21year. Inventory increased $61 million from $124 million in fiscal 2018. This decrease in operating cash flow primarily resulted from unfavorable changes in working capital, partially offset by the favorable impact of stronger earnings. The unfavorable changes in working capital, as compared with the prior year, included higher incentive compensation and other employee benefit payments and higher inventory levels associated with higher sales levels.March 31, 2021 to March 31, 2022.
Capital Expenditures
Capital expenditures of $71$51 million during fiscal 2020 decreased $32023 increased $11 million compared with fiscal 2019, primarily due to lower capital investments in our VTS segment compared with the prior year, particularly in China and North America. Similar to prior years, our2022. Our capital spending in fiscal 2020 primarily occurred2023 in the VTS segment, whichPerformance Technologies and Climate Solutions segments totaled $53$25 million and included$24 million, respectively. Capital expenditures in the Performance Technologies segment include tooling and equipment purchases in conjunction with new and renewal programs with customers, as well as $7 million of capital investments associated with preparing our automotive business for a potential sale. In response to the economic impacts of the COVID-19 pandemic, we are taking steps to preserve our financial liquidity. As part of this initiative, we are focused on reducing our capital expenditures by delaying certain projects and the purchase of certain program-related equipment and tooling. At March 31, 2020, our capital expenditure commitments totaled $12 million and primarily consisted of commitments for tooling and equipment expenditures in support of new and renewal programscustomers. Capital spending in the VTS segment.Climate Solutions segment include investments supporting our strategic growth initiatives, including expanding our data center business.
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 $33decreased $25 million to $482$353 million at March 31, 20202023 compared with the prior year, primarily due to additional borrowingsrepayments during fiscal 2020. In response to the economic impacts of the COVID-19 pandemic, we executed amendments to our primary credit agreements in May 2020 to provide additional covenant flexibility. The amendments temporarily raise the leverage coverage ratio limit during the next two fiscal years.2023.
Our credit agreements require us to maintain compliance with various covenants. As specifiedcovenants, 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 agreement, the term loansagreements may require prepayments in the event of certain asset sales. In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.
The leverage ratio covenant within our primary credit agreements in the U.S., we are subject to a leverage ratio covenant, which requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, in relation to ourno more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”). The leverage ratio covenant limit was 3.25 to 1 through the fourth quarter of fiscal 2020. We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense. As of March 31, 2020,2023, we were in compliance with our debt covenants; our leverage ratio and interest coverage ratio were 2.4 and 8.1, respectively.
In May 2020, as noted above, we executed amendments to our primary credit agreements that provide additional financial covenant flexibility during the next two fiscal years in light of the risks and uncertainties associated with the COVID-19 pandemic. We believe this additional flexibility will enable us to be compliant with our debt covenants, even if the adverse effects of the COVID-19 pandemic on our business are more severe than we currently anticipate. However, failure to comply with the debt covenants could result in an event of default, which, if not cured or waived, could result in us being required to repay borrowings before their due date. Under the amended agreements, the leverage ratio covenant limit is temporarily raised. For fiscal 2021, the leverage ratio covenant limit is 4.00 to 1, 4.75 to 1, 5.25 to 1, and 5.75 to 1 for the first, second, third, and fourth quarters, respectively. In fiscal 2022, the leverage ratio covenant limit is 4.75 to 1, 3.75 to 1, and 3.50 to 1 for the first, second and third quarters, respectively, and subsequently returns to 3.25 to 1 for the fourth quarter of fiscal 2022.covenants. We expect to remain in compliance with our debt covenants during fiscal 20212024 and beyond.
See Note 17 of the Notes to Consolidated Financial Statements for additional information regarding our credit agreements.
Off-Balance Sheet ArrangementsShare Repurchase Program
None.
Contractual Obligations
| | | March 31, 2020 | | | (in millions) | | Total | | | Less than 1 year | | | 1 - 3 years | | | 4 - 5 years | | | More than 5 years | | | | | | | | | | | | | | | | | | | | Long-term debt | | $ | 468.9 | | | $ | 15.2 | | | $ | 42.6 | | | $ | 294.4 | | | $ | 116.7 | | | Interest associated with long-term debt | | | 89.3 | | | | 17.7 | | | | 33.4 | | | | 24.5 | | | | 13.7 | | | Operating lease obligations | | | 71.8 | | | | 12.8 | | | | 20.7 | | | | 12.1 | | | | 26.2 | | | Capital expenditure commitments | | | 12.0 | | | | 12.0 | | | | - | | | | - | | | | - | | | Other long-term obligations (a) | | | 9.9 | | | | 1.9 | | | | 3.1 | | | | 3.0 | | | | 1.9 | | | Total contractual obligations | | $ | 651.9 | | | $ | 59.6 | | | $ | 99.8 | | | $ | 334.0 | | | $ | 158.5 | |
| (a) | Includes finance lease obligations and other long-term obligations. |
Our liabilities for pensions, postretirement benefits, and uncertain tax positions totaled $145During fiscal 2023, we repurchased $7 million asof our common stock. As of March 31, 2020. 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 $20 million to our U.S. pension plans during fiscal 2021.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 statementstatements are disclosed in Note 1 of the Notes to Consolidated Financial Statements.
Revenue Recognition
In fiscal 2019, we adopted new revenue recognition accounting guidance. In accordance with this new accounting guidance, weWe recognize revenue based upon consideration specified in a contract and as we satisfy performance obligations by transferring control over our products to our customers, which may be at a point in time or over time. The majority of our revenue is recognized at a point in time, based upon shipment terms. A limited number of our customer contracts provide an enforceable right to payment for performance completed to date. For these contracts, we recognize revenue over time based upon our estimated progress towardstoward the satisfaction of the contract’s performance obligations. We record an allowance for doubtful accounts for estimated uncollectible receivablescredit losses and we accrue for estimated warranty costs at the time of sale. We base these estimates upon historical experience, current business trends and current economic conditions.conditions, and risks specific to the 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, 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, 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 underlying assets. Fair value is generally based upon 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 $448$315 million and $106$81 million, respectively, at March 31, 2020.2023. 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 CISClimate 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 2020,2022, we recorded asseta net impairment charges totaling $8reversal of $56 million, primarily related manufacturing facilitiesto assets that were held for sale in Austriathe Performance Technologies segment. In fiscal 2021, we recorded $167 million of impairment charges to write down the long-lived assets in the liquid- and Germany withinair-cooled automotive businesses when they were classified as held for sale. In fiscal 2022, we adjusted the VTS segment. Seelong-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 52 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. We consider factors such as operating losses, declining financial and market outlooks, and market capitalization when evaluating the necessity for an interim impairment analysis. We test goodwill for impairment at a reporting unit level. Reporting unitsGoodwill resulting from recent acquisitions generally representrepresents the highest risk of impairment, which typically decreases as the businesses are integrated into the Company and positioned for future operating and financial performance. We test goodwill for impairment by comparing the fair value of each reporting unit with 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 a reporting unit exceeds the carrying value of the reporting unit’s net assets, goodwill is not impaired. However, if the carrying value of the reporting unit’s net assets exceeds its fair value, we would conclude goodwill is impaired and would record an impairment charge equal to the amount that the reporting unit’s carrying value exceeds its fair 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 and risk-adjusted discount rates, 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 rates used in determining discounted cash flows are 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 the continued economic uncertainty andinflationary 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, 2020,2023, our goodwill totaled $166 million related to our CISClimate Solutions and BHVACPerformance Technologies segments. Each of these segments is comprised of two reporting units. We conducted annual goodwill impairment tests during the fourth quarteras of fiscal 2020March 31, 2023 by applying a fair value-based test and determined the fair value of the reporting units in each of our reporting unitsoperating segments exceeded thetheir respective book 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 adjust our warranty accruals, which totaled $8 million at March 31, 2020, 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, 2020,2023, our pension liabilities totaled $134$42 million. The most significant assumptions include the discount rate, long-term expected return on plan assets, and mortality 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 upon 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 pension plan assets and the large majority of our pension plan expense.
To determine the expected rate of return on pension plan assets, we consider such factors as (a) the actual return earned on plan assets, (b) historical rates of return on the various asset classes in the plan portfolio, (c) projections of returns on those asset classes, (d) the amount of active management of the assets, (e) capital market conditions and economic forecasts, and (f) administrative expenses paid with the plan assets. The long-term rate of return utilized in both fiscal 20202023 and 20192022 was 7.0 percent and 7.5 percent.percent, respectively. For fiscal 2021,2024, we have also assumed a rate of 7.56.5 percent. A change of 25 basis points in the expected rate of return on assets would impact our fiscal 20212024 pension expense by $0.4less 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 20202023 and 2019,2022, for purposes of determining pension expense, we used a discount rate of 4.0 percent.3.9 and 3.2 percent, respectively. We determined these rates based upon a yield curve that was created following an analysis of the projected cash flows fromfor our plans. See Note 18 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 20212024 pension expense and projected benefit obligation by less than $1 million.million and approximately $4 million, respectively.
Income Taxes
We operate in numerous taxing jurisdictions; therefore, we are 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 a particular jurisdiction will not be realized. This determination, which is made on a jurisdiction-by-jurisdictionlegal entity-by-legal entity basis, involves judgment and the use of significant estimates and assumptions, including expectations of future taxable income and tax planning strategies. We believe the assumptions that we used are appropriate and result in a reasonable determination regarding the future realizability of deferred tax assets. However, future events or circumstances, such as lower-than-expected taxable income or unfavorable changes in the financial outlook of our operations in certain jurisdictions, could cause us to record additional valuation allowances.
See Note 78 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 NoteNotes 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 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:
The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliers, customers, and employees;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;
Economic,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 in particular, foreign currency exchange rate fluctuations; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); inflation; changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade, public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the United StatesU.S. or abroad, as well as continuing uncertainty regarding the short- and long-term implications of “Brexit”;abroad;
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, whetherincluding through our quotation process or through contract provisions for prospective price adjustments, as well as the inherent lag in timing of such contract provisions; and
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 healthimpact of problems, including logistic and continually increasing price-down focus of our vehicular customers in light of economic and market-specific factors, and the potential impact on us from any deterioration in the stability or performance of any of our major customers;
Unanticipated problemstransportation challenges, associated with suppliers meeting our time, quantity, quality, price and pricetiming 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 maintain current customer programsrelationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;
UnanticipatedThe impact of product or manufacturing difficulties or operating inefficiencies, including unanticipatedany program launch and product transfer challenges and warranty claims and delays or inefficiencies resulting from restrictions imposed in response to the COVID-19 pandemic;claims;
UnanticipatedThe impact of delays or modifications initiated by major customers with respect to program launches, product applications or requirements;
Our ability to consistently structure our operations in order to develop and maintain a competitive cost base with appropriately skilled and stable labor, while also positioning ourselves geographically, so that we can continue to support our customers with the technical expertise and market-leading products they demand and expect from Modine;
Our ability to effectively and efficiently reducemanage our cost structure in response to sales volume declinesincreases or decreases and to complete restructuring activities and realize the anticipated benefits of those activities;
Costs and other effects of the investigation and remediation of environmental contamination; particularlyincluding 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 anya 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 unanticipated litigation, claims, or other obligations.
Strategic Risks:
Our ability to successfully exit the automotive business within our VTS segment in a manner that is in the best interest of our shareholders in order to optimize the segment’s future financial performance;
Our ability to successfully realize anticipated benefits from strategic initiatives and our increased “industrial”continued application of 80/20 principles to our business, through which we are focused on reducing complexity and growing businesses with strong market presence, with our CIS and BHVAC businesses, while maintaining appropriate focus on the market opportunities presented by our VTS business;drivers;
Our ability to identify and execute on organic growth opportunities and diversification opportunities in orderacquisitions, and to position us for long-term success;efficiently and successfully integrate acquired businesses;
37Our ability to successfully execute strategies to reduce costs and improve operating margins; and
The potential impacts from unanticipated actions by activist shareholders, including disruption of our business and related costs.
Financial Risks:
| • | Our ability to fund our global liquidity requirements efficiently for Modine’sour current operations and meet our long-term commitments particularly in light of the significant volatility and negative pressure in the financial markets as a result of the COVID-19 pandemic and in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy; |
The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations, and of the continued uncertainty around the utilization of LIBOR or alternative reference rates;obligations;
The impact of changes in federal, state or local taxes that could have the effect of increasing our income tax expense;
Our ability to comply with the financial covenants as amended in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);
The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and
Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.
Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.
ITEM 7A.7A.
| QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.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 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, and throughout Europe. We also have joint ventures in China 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. Whenever 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 entity engaging in the transaction. In 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 2020,2023, 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 impacted 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. In fiscal 2020, 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 2020,2023, changes in foreign currency exchange rates unfavorably impacted our sales by $46$111 million; however, the impact on our operating income was less than $3only $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 2020,2023, there would not have been a material impact on our fiscal 20202023 earnings.
We maintain foreign currency-denominated debt obligations and intercompany loans that are subject to foreign currency exchange risk. We seek to mitigate this risk through maintaining offsetting positions between external and intercompany loans; however, from time to time, we also enter into foreign currency derivative contracts to manage the currency exchange rate exposure. These derivative instruments are typically not accounted 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 typically offset the foreign currency changes on the outstanding loans.
Interest Rate Risk
We 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 variable-rate debt to manage exposure to changes in interest rates. Interest on both our term loans and borrowings under our primary multi-currency revolving credit facility, including swingline borrowings, is variable and is currently based upon a variable interest rate, primarily on either LIBORSOFR or EURIBOR, plus 137.5 to 250175 basis points, depending on our leverage ratio. For purposes of calculating the variable interest rate under our current credit agreement, LIBOR cannot be less than one percent. As 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, 2020,2023, our outstanding borrowings on variable-rate term loans and thetotaled $216 million. There were no outstanding borrowings on our revolving credit facility totaled $189 million and $127 million, respectively.as of March 31, 2023. Based upon our outstanding debt with variable interest rates at March 31, 2020,2023, a 100-basis point increase in interest rates would increase our annual interest expense in fiscal 20212024 by approximately $3$2 million.
Commodity Price and Supply RisksRisk
We are dependent uponTo produce the supply ofproducts we sell, we purchase raw materials and supplies in our production processes 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. Commodity price risk is most prevalent togas, helium, and nitrogen. In addition, we also purchase components and parts that are integrated into our vehicular businesses, which provide customized production and service parts to customers under multi-year programs. In orderend products.
We seek to mitigate commodity price risk specificprimarily by adjusting product pricing in response to these long-term sales programs, we maintain contract provisionsapplicable price increases. Our contracts with certain vehicular customers contain provisions that allow us to prospectively adjust pricesprovide for prospective price adjustments based upon changes in raw material price fluctuations.prices. These prospective price adjustments generally lag behind the actual raw material price fluctuations by three months or longer, and typically the contract provisions are limited to the underlying material cost based upon the London Metal Exchange and exclude additional cost elements, such as related premiums and fabrication. For our industrial businesses,In instances where the risk is not covered contractually, we predominantly seek to mitigate commodity price risk by adjustingadjust product pricing in response to any applicable price increases, including through our quotation process and through price list increases.
In an effortfiscal 2023, we continued to manageexperience a significant increase in raw material prices and reduceprice increases on other goods and services in connection with global supply chain challenges and inflationary market conditions. In response, we implemented selling price increases for our costs,products. Nevertheless, we are still subject to the risk 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 our suppliers to ensure availability of purchased commodities and components and we have been consolidatingadded key suppliers to our supply base. As a result,base during the last year. However, we are still dependent upon limited sources of supply for certain components used in the manufacture of our products, including aluminum, copper, steel and stainless steel (nickel). WeEven 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, (including the potential effects of trade laws and tariffs), 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, 2020, 342023, 37 percent of our trade accounts receivable balance was concentrated with our top ten customers. These customers operate primarily in the automotive, 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 COVID-19 pandemic.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, 2020;2023; |
| • | Trade accounts receivable – Prior to granting credit, we evaluate each customer, taking into consideration the customer'scustomer’s financial condition, payment experience and credit information. After credit is granted, we actively monitor the customer'scustomer’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, we are also exposed to risks associated with demandsprice reduction pressure applied by OEM customers. If contractual price downs are unavoidable, we contemplate them in our customers for decreases in the price of our products. We attemptoverall strategy and adjust pricing as necessary to offset this risk with firm agreements with our customers whenever possible, but these agreements sometimes contain provisions for future price reductions.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 products that provide thermal solutionssolution systems to customers operating in diverse markets, including the automotive, commercial vehicle, off-highway, and commercial, industrial, and building HVAC&R markets. The COVID-19 pandemic has negatively impacted these markets; the duration and severity of the impacts of COVID-19 on these markets are currently uncertain. We are monitoring economic conditions in the U.S.commercial vehicle, off-highway, and abroadautomotive and the impacts associated with the COVID-19 pandemic.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, coilsdata centers, indoor air quality, and coolers in certain markets, andaftermarket coatings. Our investmentinvestments in these areas isare subject to the risks associated with technological success, customer and market acceptance, and our ability to meet the demands of our customers as these markets grow.
Hedging and Foreign Currency Forward Contracts
We use derivative financial instruments as a tool to manage certain financial risks. We prohibit the use of leveraged derivatives.
Commodity derivatives: Derivatives From time to time, we enter into over-the-counter forward contracts related to forecasted purchases of aluminum and copper. Our strategy is to reduce our exposure to changing market prices of these commodities. In fiscal 2020 and 2019, we designatedWe periodically designate certain commodity forward contracts as cash flow hedges for accounting purposes. Accordingly, forFor 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 2020, 20192023, 2022, and 2018,2021, net gains and losses recognized in cost of sales related to commodity forward contracts were less thanapproximately $1 million or less in each year.
Foreign currency forward contracts: Currency Forward Contracts We use derivative financial instruments in a limited way to mitigate foreign currency exchange risk. We periodically enter into foreign currency forward contracts to hedge specific foreign currency-denominated assets and liabilities as well as forecasted transactions. We have designatedtransactions and designate certain hedges of forecasted transactions as cash flow hedges for accounting purposes. Accordingly, forFor 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 2020, 2019,2023, 2022, and 2018,2021, net gains and losses recognized in sales and cost of sales related to foreign currency forward contracts were less than $1 million or less in each year. We have not designated 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 maintain credit ratings acceptable to us. At March 31, 2020,2023, all counterparties had a sufficient long-term credit rating.
ITEM 8.8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.DATA. |
MODINE MANUFACTURING COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended March 31, 2020, 20192023, 2022 and 20182021 (In millions, except per share amounts)
| | 2020 | | | 2019 | | | 2018 | | | 2023 | | | 2022 | | | 2021 | | | Net sales | | $ | 1,975.5 | | | $ | 2,212.7 | | | $ | 2,103.1 | | | $ | 2,297.9 | | | $ | 2,050.1 | | | $ | 1,808.4 | | | Cost of sales | | | 1,668.0 | | | | 1,847.2 | | | | 1,746.6 | | | | 1,908.5 | | | | 1,740.8 | | | | 1,515.0 | | | Gross profit | | | 307.5 | | | | 365.5 | | | | 356.5 | | | | 389.4 | | | | 309.3 | | | | 293.4 | | | Selling, general and administrative expenses | | | 249.6 | | | | 244.1 | | | | 245.8 | | | | 234.0 | | | | 215.1 | | | | 210.9 | | | Restructuring expenses | | | 12.2 | | | | 9.6 | | | | 16.0 | | | | 5.0 | | | | 24.1 | | | | 13.4 | | | Impairment charges | | | 8.6 | | | | 0.4 | | | | 2.5 | | | | (Gain) loss on sale of assets | | | (0.8 | ) | | | 1.7 | | | | - | | | | Operating income | | | 37.9 | | | | 109.7 | | | | 92.2 | | | | 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 | | | (22.7 | ) | | | (24.8 | ) | | | (25.6 | ) | | | (20.7 | ) | | | (15.6 | ) | | | (19.4 | ) | | Other expense - net | | | (4.8 | ) | | | (4.1 | ) | | | (3.3 | ) | | | Earnings before income taxes | | | 10.4 | | | | 80.8 | | | | 63.3 | | | | (Provision) benefit for income taxes | | | (12.4 | ) | | | 5.1 | | | | (39.5 | ) | | | Net (loss) earnings | | | (2.0 | ) | | | 85.9 | | | | 23.8 | | | | 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 | | | (0.2 | ) | | | (1.1 | ) | | | (1.6 | ) | | | (0.5 | ) | | | (1.1 | ) | | | (1.2 | ) | | Net (loss) earnings attributable to Modine | | $ | (2.2 | ) | | $ | 84.8 | | | $ | 22.2 | | | | Net earnings (loss) attributable to Modine | | | $ | 153.1 | | | $ | 85.2 | | | $ | (210.7 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net (loss) earnings per share attributable to Modine shareholders: | | | | | | | | | | | | | | | Net earnings (loss) per share attributable to Modine shareholders: | | | | | | | | | | | | | | | Basic | | $ | (0.04 | ) | | $ | 1.67 | | | $ | 0.44 | | | $ | 2.93 | | | $ | 1.64 | | | $ | (4.11 | ) | | Diluted | | $ | (0.04 | ) | | $ | 1.65 | | | $ | 0.43 | | | $ | 2.90 | | | $ | 1.62 | | | $ | (4.11 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | Weighted-average shares outstanding: | | | | | | | | | | | | | | | | | | | | | | | | | | Basic | | | 50.8 | | | | 50.5 | | | | 49.9 | | | | 52.3 | | | | 52.0 | | | | 51.3 | | | Diluted | | | 50.8 | | | | 51.3 | | | | 50.9 | | | | 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, 2020, 20192023, 2022 and 20182021 (In millions)
| | 2020 | | | 2019 | | | 2018 | | | 2023 | | | 2022 | | | 2021 | | | Net (loss) earnings | | $ | (2.0 | ) | | $ | 85.9 | | | $ | 23.8 | | | | Net earnings (loss) | | | $ | 153.6 | | | $ | 86.3 | | | $ | (209.5 | ) | | Other comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | | | | | | Foreign currency translation | | | (19.2 | ) | | | (37.6 | ) | | | 41.8 | | | | (18.9 | ) | | | (8.3 | ) | | | 30.9 | | | Defined benefit plans, net of income taxes of ($8.3), ($0.3) and ($0.2) million | | | (24.6 | ) | | | (1.4 | ) | | | 0.1 | | | | Cash flow hedges, net of income taxes of ($0.5), $0.1 and $0.1 million | | | (1.5 | ) | | | 0.4 | | | | 0.1 | | | 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) | | | (45.3 | ) | | | (38.6 | ) | | | 42.0 | | | | (12.1 | ) | | | 11.5 | | | | 62.6 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Comprehensive income (loss) | | | (47.3 | ) | | | 47.3 | | | | 65.8 | | | | 141.5 | | | | 97.8 | | | | (146.9 | ) | | Comprehensive (income) loss attributable to noncontrolling interest | | | 0.2 | | | | (0.6 | ) | | | (2.1 | ) | | | Comprehensive income attributable to noncontrolling interest | | | | - | | | | (0.9 | ) | | | (1.7 | ) | | Comprehensive income (loss) attributable to Modine | | $ | (47.1 | ) | | $ | 46.7 | | | $ | 63.7 | | | $ | 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, 20202023 and 20192022 (In millions, except per share amounts)
| | 2020 | | | 2019 | | | 2023 | | | 2022 | | | ASSETS | | | | | | | | | | | | | | Cash and cash equivalents | | $ | 70.9 | | | $ | 41.7 | | | $ | 67.1 | | | $ | 45.2 | | | Trade accounts receivable – net | | | 292.5 | | | | 338.6 | | | | 398.0 | | | | 367.5 | | | Inventories | | | 207.4 | | | | 200.7 | | | | 324.9 | | | | 281.2 | | | Other current assets | | | 62.5 | | | | 65.8 | | | | 56.4 | | | | 63.7 | | | Total current assets | | | 633.3 | | | | 646.8 | | | | 846.4 | | | | 757.6 | | | Property, plant and equipment – net | | | 448.0 | | | | 484.7 | | | | 314.5 | | | | 315.4 | | | Intangible assets – net | | | 106.3 | | | | 116.2 | | | | 81.1 | | | | 90.3 | | | Goodwill | | | 166.1 | | | | 168.5 | | | | 165.6 | | | | 168.1 | | | Deferred income taxes | | | 104.8 | | | | 97.1 | | | | 83.7 | | | | 27.2 | | | Other noncurrent assets | | | 77.6 | | | | 24.7 | | | | 74.6 | | | | 68.4 | | | Total assets | | $ | 1,536.1 | | | $ | 1,538.0 | | | $ | 1,565.9 | | | $ | 1,427.0 | | | | | | | | | | | | | | | | | | | | | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | | | | | | | | | | Short-term debt | | $ | 14.8 | | | $ | 18.9 | | | $ | 3.7 | | | $ | 7.7 | | | Long-term debt – current portion | | | 15.6 | | | | 48.6 | | | | 19.7 | | | | 21.7 | | | Accounts payable | | | 227.4 | | | | 280.9 | | | | 332.8 | | | | 325.8 | | | Accrued compensation and employee benefits | | | 65.0 | | | | 81.7 | | | | 89.8 | | | | 85.1 | | | Other current liabilities | | | 49.2 | | | | 39.9 | | | | 61.1 | | | | 54.2 | | | Total current liabilities | | | 372.0 | | | | 470.0 | | | | 507.1 | | | | 494.5 | | | Long-term debt | | | 452.0 | | | | 382.2 | | | | 329.3 | | | | 348.4 | | | Deferred income taxes | | | 8.1 | | | | 8.2 | | | | 4.8 | | | | 5.9 | | | Pensions | | | 130.9 | | | | 101.7 | | | | 40.2 | | | | 47.2 | | | Other noncurrent liabilities | | | 79.5 | | | | 34.8 | | | | 84.9 | | | | 72.9 | | | Total liabilities | | | 1,042.5 | | | | 996.9 | | | | 966.3 | | | | 968.9 | | | Commitments and contingencies (see Note 20) | | | | | | | | | | |
| | | |
| | | Shareholders’ equity: | | | | | | | | | | | | | | | | | | Preferred stock, $0.025 par value, authorized 16.0 million shares, issued - NaN | | | - | | | | - | | | | Common stock, $0.625 par value, authorized 80.0 million shares, issued 53.4 million and 52.8 million shares | | | 33.3 | | | | 33.0 | | | 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 | | | 245.1 | | | | 238.6 | | | | 270.8 | | | | 261.6 | | | Retained earnings | | | 469.9 | | | | 472.1 | | | | 497.5 | | | | 344.4 | | | Accumulated other comprehensive loss | | | (223.3 | ) | | | (178.4 | ) | | | (161.1 | ) | | | (149.5 | ) | | Treasury stock, at cost, 2.5 million and 2.1 million shares | | | (37.1 | ) | | | (31.4 | ) | | Treasury stock, at cost, 3.3 million and 2.8 million shares | | | | (49.0 | ) | | | (40.0 | ) | | Total Modine shareholders’ equity | | | 487.9 | | | | 533.9 | | | | 592.8 | | | | 450.7 | | | Noncontrolling interest | | | 5.7 | | | | 7.2 | | | | 6.8 | | | | 7.4 | | | Total equity | | | 493.6 | | | | 541.1 | | | | 599.6 | | | | 458.1 | | | Total liabilities and equity | | $ | 1,536.1 | | | $ | 1,538.0 | | | $ | 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, 2020, 20192023, 2022 and 20182021 (In millions)
| | 2020 | | | 2019 | | | 2018 | | | 2023 | | | 2022 | | | 2021 | | | Cash flows from operating activities: | | | | | | | | | | | | | | | | | | | | Net (loss) earnings | | $ | (2.0 | ) | | $ | 85.9 | | | $ | 23.8 | | | | 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 | | | 77.1 | | | | 76.9 | | | | 76.7 | | | | 54.5 | | | | 54.8 | | | | 68.6 | | | Impairment charges | | | 8.6 | | | | 0.4 | | | | 2.5 | | | | (Gain) loss on sale of assets | | | (0.8 | ) | | | 1.7 | | | | - | | | | Impairment charges (reversals) – net | | | | - | | | | (55.7 | ) | | | 166.8 | | | Loss on sale of assets | | | | - | | | | 6.6 | | | | - | | | Stock-based compensation expense | | | 6.6 | | | | 7.9 | | | | 9.5 | | | | 6.6 | | | | 5.7 | | | | 6.3 | | | Deferred income taxes | | | 1.0 | | | | (4.4 | ) | | | 12.1 | | | | (59.6 | ) | | | (3.8 | ) | | | 67.9 | | | Other – net | | | 5.6 | | | | 5.3 | | | | 9.0 | | | | 4.8 | | | | 3.1 | | | | 6.3 | | | Changes in operating assets and liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | Trade accounts receivable | | | 36.6 | | | | (15.3 | ) | | | (26.1 | ) | | | (40.7 | ) | | | (55.6 | ) | | | (17.1 | ) | | Inventories | | | (12.0 | ) | | | (22.0 | ) | | | (12.5 | ) | | | (49.4 | ) | | | (70.7 | ) | | | (5.0 | ) | | Accounts payable | | | (37.7 | ) | | | 16.6 | | | | 25.2 | | | | 10.2 | | | | 55.1 | | | | 44.0 | | | Accrued compensation and employee benefits | | | (15.2 | ) | | | (10.1 | ) | | | 16.4 | | | | 6.4 | | | | 9.8 | | | | 15.7 | | | Other assets | | | 14.7 | | | | (11.8 | ) | | | (5.0 | ) | | | 19.6 | | | | (2.4 | ) | | | 27.5 | | | Other liabilities | | | (24.6 | ) | | | (27.8 | ) | | | (7.4 | ) | | | 1.5 | | | | (21.7 | ) | | | (21.7 | ) | | Net cash provided by operating activities | | | 57.9 | | | | 103.3 | | | | 124.2 | | | | 107.5 | | | | 11.5 | | | | 149.8 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | | | | | | | Expenditures for property, plant and equipment | | | (71.3 | ) | | | (73.9 | ) | | | (71.0 | ) | | | (50.7 | ) | | | (40.3 | ) | | | (32.7 | ) | | Proceeds from dispositions of assets | | | 6.2 | | | | 0.3 | | | | 0.3 | | | | Proceeds from sale of investment in affiliate | | | 3.8 | | | | - | | | | - | | | | 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 | | | 4.1 | | | | 4.9 | | | | 4.8 | | | | 3.4 | | | | 3.6 | | | | 3.4 | | | Purchases of short-term investments | | | (3.3 | ) | | | (3.8 | ) | | | (5.5 | ) | | | (3.4 | ) | | | (3.9 | ) | | | (3.6 | ) | | Other – net | | | - | | | | (0.3 | ) | | | (0.2 | ) | | | - | | | | 1.9 | | | | 0.9 | | | Net cash used for investing activities | | | (60.5 | ) | | | (72.8 | ) | | | (71.6 | ) | | | (50.4 | ) | | | (51.0 | ) | | | (31.3 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | | | | | | | Borrowings of debt | | | 692.4 | | | | 231.2 | | | | 171.0 | | | | 374.3 | | | | 351.8 | | | | 32.7 | | | Repayments of debt | | | (649.5 | ) | | | (251.9 | ) | | | (222.9 | ) | | | (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 | | | (1.3 | ) | | | (1.8 | ) | | | (0.9 | ) | | | (0.6 | ) | | | (0.9 | ) | | | - | | | Purchase of treasury stock under share repurchase program | | | (2.4 | ) | | | (0.6 | ) | | | - | | | | Financing fees paid | | | (2.8 | ) | | | - | | | | - | | | | (0.6 | ) | | | (0.2 | ) | | | (0.8 | ) | | Other – net | | | (3.1 | ) | | | (2.8 | ) | | | 2.7 | | | | 1.3 | | | | (0.5 | ) | | | 3.0 | | | Net cash provided by (used for) financing activities | | | 33.3 | | | | (25.9 | ) | | | (50.1 | ) | | | Net cash (used for) provided by financing activities | | | | (33.3 | ) | | | 39.2 | | | | (145.1 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | Effect of exchange rate changes on cash | | | (1.6 | ) | | | (2.7 | ) | | | 3.0 | | | | (2.0 | ) | | | (0.4 | ) | | | 1.4 | | | Net increase in cash, cash equivalents and restricted cash | | | 29.1 | | | | 1.9 | | | | 5.5 | | | | Cash, cash equivalents and restricted cash - beginning of year | | | 42.2 | | | | 40.3 | | | | 34.8 | | | | Cash, cash equivalents and restricted cash - end of year | | $ | 71.3 | | | $ | 42.2 | | | $ | 40.3 | | | | 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’ EQUITY For the years ended March 31, 2020, 20192023, 2022 and 20182021 (In millions)
| | Common stock | | | Additional paid-in | | | Retained | | | Accumulated other | | | Treasury stock, | | | Non-controlling | | | | | | Common stock | | | Additional paid-in | | | Retained | | | Accumulated other comprehensive | | | Treasury stock, at | | | Non- controlling | | | | | | | | Shares | | | Amount | | | capital | | | earnings | | | comprehensive loss | | | at cost | | | interest | | | Total | | | Shares | | | Amount | | | capital | | | earnings | | | loss | | | cost | | | interest | | | Total | | | Balance, March 31, 2017 | | | 51.8 | | | $ | 32.4 | | | $ | 216.4 | | | $ | 372.4 | | | $ | (181.8 | ) | | $ | (25.4 | ) | | $ | 7.2 | | | $ | 421.2 | | | | Net earnings attributable to Modine | | | - | | | | - | | | | - | | | | 22.2 | | | | - | | | | - | | | | - | | | | 22.2 | | | | 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 | | | - | | | | - | | | | - | | | | - | | | | 41.5 | | | | - | | | | 0.5 | | | | 42.0 | | | | - | | | | - | | | | - | | | | - | | | | 62.1 | | | | - | | | | 0.5 | | | | 62.6 | | | Stock options and awards | | | 0.5 | | | | 0.3 | | | | 3.9 | | | | - | | | | - | | | | - | | | | - | | | | 4.2 | | | | 0.9 | | | | 0.6 | | | | 3.6 | | | | - | | | | - | | | | - | | | | - | | | | 4.2 | | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1.7 | ) | | | - | | | | (1.7 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1.1 | ) | | | - | | | | (1.1 | ) | | Adoption of new accounting guidance (Note 1) | | | - | | | | - | | | | 0.1 | | | | 0.3 | | | | - | | | | - | | | | - | | | | 0.4 | | | | 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 | | | - | | | | - | | | | 9.5 | | | | - | | | | - | | | | - | | | | - | | | | 9.5 | | | | - | | | | - | | | | 5.7 | | | | - | | | | - | | | | - | | | | - | | | | 5.7 | | | Dividend paid to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.9 | ) | | | (0.9 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.9 | ) | | | (0.9 | ) | | Net earnings attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1.6 | | | | 1.6 | | | | Balance, March 31, 2018 | | | 52.3 | | | | 32.7 | | | | 229.9 | | | | 394.9 | | | | (140.3 | ) | | | (27.1 | ) | | | 8.4 | | | | 498.5 | | | | Adoption of new accounting guidance (Note 1) | | | - | | | | - | | | | - | | | | (7.6 | ) | | | - | | | | - | | | | - | | | | (7.6 | ) | | | Net earnings attributable to Modine | | | - | | | | - | | | | - | | | | 84.8 | | | | - | | | | - | | | | - | | | | 84.8 | | | 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 | | | - | | | | - | | | | - | | | | - | | | | (38.1 | ) | | | - | | | | (0.5 | ) | | | (38.6 | ) | | | - | | | | - | | | | - | | | | - | | | | (11.6 | ) | | | - | | | | (0.5 | ) | | | (12.1 | ) | | Stock options and awards | | | 0.5 | | | | 0.3 | | | | 0.8 | | | | - | | | | - | | | | - | | | | - | | | | 1.1 | | | | 0.6 | | | | 0.4 | | | | 2.6 | | | | - | | | | - | | | | - | | | | - | | | | 3.0 | | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (4.3 | ) | | | - | | | | (4.3 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | (9.0 | ) | | | - | | | | (9.0 | ) | | Stock-based compensation expense | | | - | | | | - | | | | 7.9 | | | | - | | | | - | | | | - | | | | - | | | | 7.9 | | | | - | | | | - | | | | 6.6 | | | | - | | | | - | | | | - | | | | - | | | | 6.6 | | | Dividend paid to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1.8 | ) | | | (1.8 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.6 | ) | | | (0.6 | ) | | Net earnings attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1.1 | | | | 1.1 | | | | Balance, March 31, 2019 | | | 52.8 | | | | 33.0 | | | | 238.6 | | | | 472.1 | | | | (178.4 | ) | | | (31.4 | ) | | | 7.2 | | | | 541.1 | | | | Net loss attributable to Modine | | | - | | | | - | | | | - | | | | (2.2 | ) | | | - | | | | - | | | | - | | | | (2.2 | ) | | | Other comprehensive loss | | | - | | | | - | | | | - | | | | - | | | | (44.9 | ) | | | - | | | | (0.4 | ) | | | (45.3 | ) | | | Stock options and awards | | | 0.6 | | | | 0.3 | | | | (0.1 | ) | | | - | | | | - | | | | - | | | | - | | | | 0.2 | | | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (5.7 | ) | | | - | | | | (5.7 | ) | | | Stock-based compensation expense | | | - | | | | - | | | | 6.6 | | | | - | | | | - | | | | - | | | | - | | | | 6.6 | | | | Dividend paid to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1.3 | ) | | | (1.3 | ) | | | Net earnings attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 0.2 | | | | 0.2 | | | | Balance, March 31, 2020 | | | 53.4 | | | $ | 33.3 | | | $ | 245.1 | | | $ | 469.9 | | | $ | (223.3 | ) | | $ | (37.1 | ) | | $ | 5.7 | | | $ | 493.6 | | | 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.
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 products and solutions to diversified global markets and customers. Thecustomers in a wide array of commercial, industrial, and building heating, ventilating, air conditioning, and refrigeration (“HVAC&R”) markets. In addition, the Company is a leading provider of engineered heat transfer systems and high-quality heat transfer components for use in on- and off-highway original equipment manufacturer (“OEM”) vehicular applications. In addition, the Company is a global leader in thermal management technology and solutions for sale into a wide array of commercial, industrial, and building heating, ventilating, air conditioning, and refrigeration (“HVAC&R”) markets. The Company’s primary product groups include i) powertrain coolingheat transfer; ii) HVAC & refrigeration; iii) data center cooling; iv) air-cooled; v) liquid-cooled; and engine cooling; ii) coils, coolers, and coatings; and iii) heating, ventilation and air conditioning. vi) advanced solutions.
COVID-19: In March 2020, the World Health Organization declared the outbreak of the novel coronavirus, COVID-19, a pandemic. See Note 20 for additional information regarding the risks and uncertainties to our business resulting from this global pandemic.
SaleDisposition of facilityAustrian Air-cooled Automotive Business in Germany:Fiscal 2022
During fiscal 2020,On April 30, 2021, the Company completed the sale ofsold its Austrian a previously-closed manufacturing facility in Germany for a selling price of $6.0 million. As a result of this transaction, the Company recorded a gain of $0.8 million within the Vehicular Thermal Solutions segment. The Company reported this gain within the gain on sale of assets line on the consolidated statements of operations.
Sale of Nikkei Heat Exchanger Company, Ltd. (“NEX”): During fiscal 2020, the Company completed the sale of its 50 percent ownership interest in NEX for a selling price of $3.8 million. As a result of this sale, the Company recorded a gain of $0.1 million, which included the write-off of accumulated foreign currency translation gains of $0.6 million, within other income and expense on the consolidated statements of operations. Priorir-cooled automotive business to its sale, the Company accounted for its investment in NEX using the equity method. Utilizing the equity method, the Company reported its investment at cost, plus or minus a proportionate share of undistributed net earnings, and included Modine’s share of the affiliate’s net earnings in other income and expense. See Note 12 for additional information.
Sale of AIAC Air Conditioning South Africa (Pty) Ltd.: During fiscal 2019, the Company completed the sale of its AIAC Air Conditioning South Africa (Pty) Ltd. business, which was reported within the Building HVAC Systems segment, for a selling price of $0.5 million.Schmid Metall GmbH. As a result of this transaction, the Company recorded a loss of $1.7$6.6 million during fiscal 2022, which included the write-off of accumulated foreign currency translation$1.7 million of net actuarial losses of $0.8 million.related to its pension plan. The Company reported this loss within the loss on sale of assets line on the consolidated statementsstatement of operations. AnnualUpon 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 attributable toof this disposed 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 of $0.3 million within the Climate Solutions segment to write down the property to fair value less than $2.0 million.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 CEO. The Board of Directors subsequently conducted a search for his successor and, effective December 1, 2020, appointed Neil D. Brinker as President and CEO.
As a result of Mr. Burke’s departure and in connection with the search for and transition to his successor, the Company recorded costs totaling $6.7 million during fiscal 2021. These costs, which were recorded as selling, general and administrative (“SG&A”) expenses at Corporate, primarily consisted of severance and benefit-related expenses based upon the terms of Mr. Burke’s transition and separation agreement and costs directly associated with the CEO search, partially offset by the impact of Mr. Burke’s forfeited stock-based compensation awards. 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:Recognition The Company recognizes revenue based upon consideration specified in a contract and as it satisfies performance obligations by transferring control over its products to its customers, 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. A portion of the Company’s revenue is recognized over time, based upon estimated progress towardstoward satisfaction of the contractual performance obligations. See Note 23 for additional information.
Shipping and handling costs: 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: 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 recordsmaintains an allowance for doubtfulcredit losses, representing its estimate of expected losses associated with its trade accounts for estimated uncollectible receivables based upon historical experience or specific customer economic data.receivable. The Company recorded anbases 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 doubtful accounts of $1.9credit losses was $2.2 million and $1.6$1.7 million, at March 31, 2020respectively. The changes to the Company’s allowance for credit losses during fiscal 2023 and 2019, respectively, representing its estimated uncollectible receivables. 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 2020, 2019,2023, 2022, and 2018,2021, the Company sold $75.4$150.6 million, $85.1$126.4 million, and $65.8$88.7 million, respectively, of accounts receivable to accelerate cash receipts. During fiscal 2020, 2019,2023, 2022, and 2018,2021, the Company recorded a loss on the sale ofcosts totaling $1.2 million, $0.3 million, and $0.2 million, respectively, related to selling accounts receivable of $0.5 million, $0.6 million, and $0.4 million, respectively, in the consolidated statements of operations.
Warranty
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
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 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.years. At March 31, 20202023 and 2019,2022, Company-owned tooling totaled $23.3$17.1 million and $24.2$18.3 million, respectively.
In certain instances, tooling is customer-owned.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. TheIf the customer has agreed to reimburse the Company, accounts for unbilled customer-owned tooling costs are recorded as a receivable within other current assets when the customer has guaranteed reimbursement to the Company.assets. No significant arrangements exist where customer-owned tooling costs were not accompanied by guaranteed reimbursement. At March 31, 20202023 and 2019, cost reimbursement receivables related to2022, customer-owned tooling receivables totaled $7.8$10.9 million and $11.6$12.3 million, respectively.
Stock-based compensation: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 45 for additional information.
Research and development:Development The Company expenses research and development costs as incurred within SG&A expenses. During fiscal 2020, 2019,2023, 2022, and 2018,2021, research and development costs charged to operations totaled $59.5 $44.0 million, $69.8$50.3 million, and $65.8$46.3 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’ 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 forward 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 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 19 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 78 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 potential common shares if their inclusion would have an anti-dilutive effect. Certain outstanding restricted stock awards provide recipients with 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 89 for additional information.
Cash and cash equivalents: Cash Equivalents The Company considers all highly-liquid investments with original maturities of three months or less to be cash equivalents. Under the Company’s cash management system, cash balances at certain banks are funded when checks are presented for payment. To the extent checks issued, but not yet presented for payment, exceed the balance on hand at the specific bank against which they were written, the Company reports the amount of those checks within accounts payable in the consolidated balance sheets.
Short-term investments: Investments The Company invests in time deposits with original maturities of more than three months but not 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, 20202023 and 2019,2022, the Company’s short-term investments totaled $3.2$3.5 million and $4.3$3.7 million, respectively.
Inventories
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 lives of the 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 $8.7$13.6 million $17.9, $9.0 million, and $15.8$7.9 million were accrued within accounts payable at March 31, 2020, 2019,2023, 2022 and 2018,2021, respectively.
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, 20202023 and as a result, recorded a $0.5 million impairment charge withindetermined the VTS segment.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. During fiscal 2020, the Company recorded impairment charges totaling $8.1 million related to long-lived assets. See Note 5 for additional information.
Assets heldHeld for sale: Sale The Company considers assets to beclassifies 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,value; (ii) the asset is available for immediate sale in its present condition,condition; (iii) an active program to locate a buyer and other actions required to complete the sale have been initiated,initiated; (iv) the sale of the asset is expected to be completed within one yearyear; and (v) it is unlikely that significant changes will be made to the plan. Upon designationclassification as held for sale, the Company records the carrying value of the assetsasset at the lower of its carrying value or its estimated fair value, less costs to sell, within other noncurrent assets. Thesell. In addition, the Company ceases to record depreciation expense at the time of designation asfor assets held for sale. The carrying value of assets heldSee Note 2 for sale totaled $0.6 million and $1.1 million at March 31, 2020 and 2019, respectively.additional information.
Deferred compensation trusts: Compensation Trusts The Company maintains deferred compensation trusts to fund future obligations under its non-qualified deferred compensation plans. The trusts’ investments in third-party debt and equity securities are presented within other noncurrent assets in the consolidated balance sheets.
Self-insurance reserves:Reserves The Company retains a portion of the financial risk for certain 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.
Environmental liabilities:Liabilities The Company records liabilities for environmental assessments and remediation activities in the period in which its responsibility is probable and the costs can be reasonably estimated. The Company records environmental indemnification assets from third parties, including prior owners, when recovery is probable. To the extent that the required remediation procedures change, or additional contamination is identified, the Company’s estimated environmental liabilities may also change. See Note 20 for additional information.
Supplemental 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:information related to the Company’s leases.
| | Years ended March 31, | | | | | 2020 | | | 2019 | | | 2018 | | | Interest paid | | $ | 21.4 | | | $ | 22.3 | | | $ | 23.4 | | | Income taxes paid | | | 18.8 | | | | 22.2 | | | | 20.1 | |
New Accounting Guidance Adopted in Fiscal 2020:
LeasesSupplier Finance Programs
In February 2016,September 2022, the Financial Accounting Standards Board (“FASB”) issued new comprehensive lease accounting guidance that supersedes existing leasewill require companies that use supplier finance programs to disclose information about the 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 fiscal 2024 financial statements, with the exception of the roll forward disclosure requirement, which will become effective one year later. The Company is currently evaluating the new disclosures, but does not expect the guidance will have a material impact on its consolidated financial statements.
Income Tax Simplification In December 2019, the FASB issued new guidance designed to simplify the accounting for income taxes. The new guidance eliminated certain exceptions related to the approach for intraperiod tax allocations and requires balance sheet recognitionthe methodology for most leases.deferred tax liabilities. The Company adopted this guidance effectiveas of April 1, 2019 using a modified-retrospective transition method, under which it elected not to adjust comparative periods.2021. The Company elected the package of practical expedients permitted under the new guidance, and, as a result, the Company did not reassess the classification of existing leases or initial direct costs thereof, or whether existing contracts contain leases. In addition, the Company elected accounting policies to not record short-term leases on the balance sheet and to not separate lease and non-lease components. The Company did not elect the hindsight practical expedient.
The Company assessed its global lease portfolio and implemented a new lease accounting software solution and new processes and controls to account for leases in accordance with the new guidance. The Company’s most significant leases represent leases of real estate, such as manufacturing facilities, warehouses, and office buildings. The Company also leases certain manufacturing and IT equipment and vehicles. Upon adoption of this new guidance on April 1, 2019, the Company recognized right-of-use assets for operating leases totaling $61.3 million and corresponding current and noncurrent operating lease liabilities of $12.4 million and $48.9 million, respectively. In addition, the Company assessed 2 existing build-to-suit arrangements, for which it had recorded property, plant and equipment and long-term debt on its consolidated balance sheet as of March 31, 2019. The Company determined these arrangements represent operating leases under the new accounting guidance. As a result, the Company derecognized the previously-recorded balances and recorded $5.2 million of operating lease right-of-use assets and corresponding lease liabilities. As a result of adopting the new guidance, there was not a significant impact on the Company’s accounting for its previously-recorded capital leases, which are now classified as finance leases under the new guidance. In addition, there was no impact to retained earnings. Also, the adoption did not have a material impact on the Company’s consolidated statement of operations or consolidated statement of cash flows. See Note 16 for additional information regarding the Company’s leases.financial statements.
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive IncomeCredit Losses
In February 2018,June 2016, the FASB issued new guidance related to the accounting for credit losses for certain stranded income tax effects in accumulated other comprehensive income (loss) resulting from tax reform legislation that was enacted infinancial assets, including trade accounts receivable and contract assets. The new guidance modified the U.S. in December 2017. This guidance provided companies the optioncredit loss model to reclassify stranded income tax effects to retained earnings.measure and recognize credit losses based upon expected losses rather than incurred losses. The Company adopted this guidance as of April 1, 2019 and chose not to reclassify stranded income tax effects; therefore, the2020. The adoption of this guidance did not impact the Company’s consolidated financial statements.
New Accounting Guidance Adopted in Fiscal 2019:
Revenue Recognition
In May 2014, the FASB issued new guidance that outlines a comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The core principle of the new guidance is that companies are to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company adopted this new guidance for fiscal 2019 using the modified-retrospective transition method.
The Company assessed customer contracts and evaluated contractual provisions in light of the new guidance. Through its evaluation process, the Company identified a limited number of customer contracts that provide an enforceable right to payment for customized products, which require revenue recognition prior to the product being shipped to the customer. As a result of its adoption of the new guidance, the Company recorded an increase of $0.7 million to retained earnings as of April 1, 2018, along with related balance sheet reclassifications. The increase to retained earnings represented $3.0 million of net sales that, had the new guidance been in effect, the Company would have recognized as of March 31, 2018. See Note 2 for additional information regarding revenue recognition.
Income Taxes: Intra-Entity Transfers of Assets Other than Inventory
In October 2016, the FASB issued new guidance related to income tax accounting for intercompany asset transfers. This new guidance requires companies to recognize the income tax effects of intercompany asset transfers other than inventory at the transaction date. The income tax effects of these transfers were previously deferred. The Company adopted this new guidance for fiscal 2019 using the modified-retrospective transition method. Upon adoption, the Company recorded a decrease to retained earnings of $8.3 million as of April 1, 2018.
New Accounting Guidance Adopted in Fiscal 2018:
Stock-based Compensation
In March 2016, the FASB issued new guidance to simplify several aspects of accounting for stock-based payment transactions. The Company adopted this guidance beginning in its first quarter of fiscal 2018. The Company elected to account for forfeitures in the period in which they occur and recorded a cumulative-effect adjustment to equity. In addition, the Company prospectively adopted the guidance requiring all excess tax benefits or deficiencies to be recognized as income tax expense or benefit when share-based awards are settled. The provisions of this guidance did not have a material impact on the Company'sCompany’s consolidated financial statements.balance sheets, statements of operations or statements of cash flows.
Note 2: Assets Held for Sale
On November 2, 2020, the Company signed a definitive agreement to sell its liquid-cooled automotive business to Dana Incorporated (“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 sale 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, of adopting this new guidance, the Company recorded a $0.4remeasured the long-lived assets reverting back to held and used classification at the lower of their (i) carrying value, as if held for sale classification had not been met; or (ii) fair value at the date of the decision not to sell and reversed $57.2 million increase to both deferred taxof held for sale impairment charges during the third quarter of fiscal 2022. The long-lived assets primarily consisted of property, plant and equipment assets and equitywere fully impaired while classified as held for sale. For purposes of April 1, 2017. 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 cost valuation approaches and utilized third-party information from various industry-accepted sources, including applicable government-published statistics and data from appraisal and resale service providers. The market approach focused on prices for comparable assets in arm’s length transactions. For land and building assets, for example, sales of similar properties near the Company’s facilities were analyzed. For machinery and equipment assets, the Company referenced available third-party information regarding the selling prices of similar equipment. The cost approach focused on the amount for which an asset could be replaced or reproduced. The cost of an asset was then adjusted downward based on various factors including, but not limited to, age, location, and physical condition. After estimating the fair values of the assets reverting back to held and used classification, the Company compared the fair value for each asset to its carrying value. Carrying value represented each asset’s carrying value before the initial impairment charge, reduced for depreciation that would have been recorded if the asset had not been classified as held for sale. The Company then adjusted each asset to the lower of fair value or carrying value, resulting in the reversal of $57.2 million of previous impairment charges. In addition, the Company resumed depreciating the property, plant and equipment assets of the liquid-cooled automotive business based on the remeasured asset values during the third quarter of fiscal 2022.
The $57.2 million held for sale impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net held for sale impairment charges recorded 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 evaluations, the Company recorded a total of $8.6 million of impairment charges during the first and second quarters of fiscal 2022. These impairment charges reduced the net carrying value of property, plant and equipment additions during each quarter to zero. 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.
Note 2:3: Revenue Recognition
Effective April 1, 2018, the Company adopted new revenue recognition accounting guidance; see Note 1 for additional information .
The Company generates revenue from selling innovative thermal management products and solutions to diversified global markets and customers. The Company recognizes revenue based upon consideration specified in a contract and as it satisfies performance obligations by transferring control over its products to its customers, 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 doubtful accounts for estimated uncollectible receivablescredit 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:
Vehicular ThermalClimate Solutions (“VTS”) The VTSClimate Solutions segment principally generates revenue from providing engineeredselling heat transfer systemsproducts, heating, ventilating, air conditioning, and componentsrefrigeration (“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 use in on-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 off-highway original equipment. Thisdata 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 powertrainproducts and engine coolingsolutions 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 including, but not limited to,include radiators, charge air coolers, condensers, and engine cooling modules. Liquid-cooled products include engine oil coolers, EGRcharge air coolers, condensers, and fuel coolers, to original equipment manufacturers (“OEMs”) in the automotive, commercial vehicle, and off-highway markets in the Americas, Europe, and Asia regions.exhaust gas recirculation coolers. In addition, the VTSPerformance Technologies segment designs customer-owned tooling for OEMsprovides advanced solutions, which are designed to improve battery range and also serves Brazil’s automotivevehicle life, to zero-emission and hybrid commercial vehicle, aftermarkets.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 VTSPerformance 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 VTS 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 VTSPerformance 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 VTSthe 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 towardstoward satisfaction of the performance obligations. The VTSPerformance 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.
Commercial and Industrial Solutions (“CIS”)
The CIS segment principally generates revenue from providing thermal management products, including customized coils and coolers, to the heating, ventilating, air conditioning, and refrigeration (“HVAC&R”) markets in North America, Europe, and Asia. In addition, the segment applies corrosion protection solutions, which are referred to as coatings, to heat-transfer equipment.
For the sale of coils and coolers, individual customer purchase orders generally represent the Company’s contract with its customers. With the exception of a small number of customers, the applicable customer contracts do not provide the Company with an enforceable right to payment for performance completed to date. As a result, the CIS segment recognizes revenue for its sale of coils and coolers primarily at the time control is transferred to the customer based upon shipping terms, which is generally upon shipment.
For both sales to customers whose contract cancellation terms provide an enforceable right to payment and sales from the coatings businesses, in which the customers control the heat-transfer equipment being enhanced by the coating application, the CIS segment recognizes revenue over time based upon its estimated progress towards satisfaction of the performance obligations. The segment measures progress by evaluating the production status towards completion of ordered products or services not yet shipped to its customers.
Building HVAC Systems (“BHVAC”)
The BHVAC segment principally generates revenue from providing a variety of heating, ventilating, and air conditioning products, primarily for commercial buildings and related applications in North America and the U.K., as well as mainland Europe and the Middle East.
Heating products are manufactured in the U.S. and are generally 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 BHVAC segment recognizes revenue at the time control is transferred to the customer, generally the independent distributor, based upon shipping terms, which is generally upon shipment.
Ventilation and air conditioning products are highly-specified to a customer’s needs; however, the underlying sales contracts do not provide the Company with an enforceable right to payment for performance completed to date. As a result, the BHVAC segment recognizes revenue for these products at the time control is transferred to the customer based upon shipping terms, which is generally upon shipment.
Disaggregation of Revenue The tabletables below presentspresent revenue to external customers for each of the Company’s businessoperating segments, Climate Solutions and Performance Technologies. Each segment’s revenue is disaggregated by primary end market,product group, by geographic location and based upon the timing of revenue recognition:recognition.
| | Year ended March 31, 2020 | | | Year ended March 31, 2019 | | | | | VTS | | | CIS | | | BHVAC | | | Segment Total | | | VTS | | | CIS | | | BHVAC | | | Segment Total | | | Primary end market: | | | | | | | | | | | | | | | | | | | | | | | | | | Automotive | | $ | 508.8 | | | $ | - | | | $ | - | | | $ | 508.8 | | | $ | 542.8 | | | $ | - | | | $ | - | | | $ | 542.8 | | | Commercial vehicle | | | 323.7 | | | | - | | | | - | | | | 323.7 | | | | 387.6 | | | | - | | | | - | | | | 387.6 | | | Off-highway | | | 253.9 | | | | - | | | | - | | | | 253.9 | | | | 314.1 | | | | - | | | | - | | | | 314.1 | | | Commercial HVAC&R | | | - | | | | 463.1 | | | | 176.6 | | | | 639.7 | | | | - | | | | 506.3 | | | | 167.7 | | | | 674.0 | | | Data center cooling | | | - | | | | 107.5 | | | | 42.7 | | | | 150.2 | | | | - | | | | 145.7 | | | | 41.3 | | | | 187.0 | | | Industrial cooling | | | - | | | | 43.5 | | | | - | | | | 43.5 | | | | - | | | | 47.8 | | | | - | | | | 47.8 | | | Other | | | 90.8 | | | | 9.8 | | | | 1.8 | | | | 102.4 | | | | 107.2 | | | | 7.8 | | | | 3.4 | | | | 118.4 | | | Net sales | | $ | 1,177.2 | | | $ | 623.9 | | | $ | 221.1 | | | $ | 2,022.2 | | | $ | 1,351.7 | | | $ | 707.6 | | | $ | 212.4 | | | $ | 2,271.7 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Geographic location: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Americas | | $ | 554.4 | | | $ | 345.9 | | | $ | 139.1 | | | $ | 1,039.4 | | | $ | 613.7 | | | $ | 413.6 | | | $ | 124.9 | | | $ | 1,152.2 | | | Europe | | | 449.3 | | | | 232.6 | | | | 82.0 | | | | 763.9 | | | | 538.2 | | | | 244.8 | | | | 87.5 | | | | 870.5 | | | Asia | | | 173.5 | | | | 45.4 | | | | - | | | | 218.9 | | | | 199.8 | | | | 49.2 | | | | - | | | | 249.0 | | | Net sales | | $ | 1,177.2 | | | $ | 623.9 | | | $ | 221.1 | | | $ | 2,022.2 | | | $ | 1,351.7 | | | $ | 707.6 | | | $ | 212.4 | | | $ | 2,271.7 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Timing of revenue recognition: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Products transferred at a point in time | | $ | 1,146.4 | | | $ | 518.2 | | | $ | 221.1 | | | $ | 1,885.7 | | | $ | 1,308.5 | | | $ | 571.1 | | | $ | 212.4 | | | $ | 2,092.0 | | | Products transferred over time | | | 30.8 | | | | 105.7 | | | | - | | | | 136.5 | | | | 43.2 | | | | 136.5 | | | | - | | | | 179.7 | | | Net sales | | $ | 1,177.2 | | | $ | 623.9 | | | $ | 221.1 | | | $ | 2,022.2 | | | $ | 1,351.7 | | | $ | 707.6 | | | $ | 212.4 | | | $ | 2,271.7 | |
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 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, 2020 | | | March 31, 2019 | | | March 31, 2023 | | | March 31, 2022 | | | Contract assets | | $ | 21.7 | | | $ | 22.6 | | | $ | 19.3 | | | $ | 26.8 | | | Contract liabilities | | | 5.6 | | | | 4.0 | | | | 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 $0.9$7.5 million decrease in contract assets during fiscal 20202023 primarily resulted from a decrease in capitalized costs related to customer-owned tooling contracts, partially offset by an increase in contract assets for revenue recognized over time.
Contract liabilities, included within other current liabilities in the consolidated balance sheets, consist of payments received in advance of satisfying performance obligations under customer contracts, including contracts for customer-owned tooling. The $1.6$9.7 million increase in contract liabilities during fiscal 2020 was2023 primarily related to customer contracts for which payment had beenresulted from payments received in advance of the Company’s satisfaction of performance obligations.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 3:4: Fair Value Measurements
Fair value is defined as the price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. Fair value measurements are classified under the following hierarchy:
Level 1 – Quoted prices for identical instruments in active markets. Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets. Level 3 – Model-derived valuations in which one or more significant inputs are not observable.
When available, the Company uses quoted market prices to determine fair value and classifies such measurements as Level 1. In some cases, where market prices are not available, the Company uses observable market-based inputs to calculate fair value, in which case the measurements are classified as Level 2. If quoted or observable market prices are not available, the Company determines fair value based upon valuation models that use, where possible, market-based data such as interest rates, yield curves or currency rates. These measurements are classified as Level 3.
The carrying values of cash, cash equivalents, restricted cash, short-term investments, trade accounts receivable, accounts payable, and short-term debt approximate fair value due to the short-term nature of these instruments. In addition, the Company assesses the fair value of a disposal group for each reporting period it is held for sale. See Note 2 for additional information regarding assets held for sale. The fair value of the Company’s long-term debt is disclosed in Note 17.
The Company holds investments in deferred compensation trusts to fund obligations under certain non-qualified deferred compensation plans. The Company records the fair value of these investments within other noncurrent assets on its consolidated balance sheets. The Company classifies money market investments held by the trusts within Level 2 of the valuation hierarchy. The Company classifies all other investments held by the trusts within Level 1 of the valuation hierarchy, as it uses quoted market prices to determine the investments’ fair value. The Company’s deferred compensation obligations, which are recorded as other noncurrent liabilities, are recorded at the fair values of the investments held by the trust. TheAt March 31, 2023 and 2022, the fair values of the investments and obligations for the Company’s deferred compensation plans each totaled $3.8$2.3 million and $6.0$2.9 million, asrespectively.
Plan assets related to the Company’s pension plans were classified as follows:
| | March 31, 2020 | | | March 31, 2023 | | | | | Level 1 | | | Level 2 | | | Total | | | Level 1 | | | Level 2 | | | Total | | | | | | | | | | | | | | | | | | | | | | | Money market investments | | $ | - | | | $ | 2.4 | | | $ | 2.4 | | | $ | - | | | $ | 1.9 | | | $ | 1.9 | | | Fixed income securities | | | - | | | | 8.7 | | | | 8.7 | | | | Pooled equity funds | | | 17.9 | | | | - | | | | 17.9 | | | | 34.9 | | | | - | | | | 34.9 | | | U.S. government and agency securities | | | - | | | | 13.1 | | | | 13.1 | | | | Other | | | 0.1 | | | | 0.7 | | | | 0.8 | | | | - | | | | 0.4 | | | | 0.4 | | | Fair value excluding investments measured at net asset value | | | 18.0 | | | | 24.9 | | | | 42.9 | | | | 34.9 | | | | 2.3 | | | | 37.2 | | | Investments measured at net asset value | | | | | | | | | | | 88.2 | | | | | | | | | | | | 116.1 | | | Total fair value | | | | | | | | | | $ | 131.1 | | | | | | | | | | | $ | 153.3 | |
| | March 31, 2019 | | | March 31, 2022 | | | | | Level 1 | | | Level 2 | | | Total | | | Level 1 | | | Level 2 | | | Total | | | | | | | | | | | | | | | | | | | | | | | Money market investments | | $ | - | | | $ | 3.9 | | | $ | 3.9 | | | $ | - | | | $ | 2.2 | | | $ | 2.2 | | | Fixed income securities | | | - | | | | 9.4 | | | | 9.4 | | | | - | | | | 9.1 | | | | 9.1 | | | Pooled equity funds | | | 27.7 | | | | - | | | | 27.7 | | | | 40.4 | | | | - | | | | 40.4 | | | U.S. government and agency securities | | | - | | | | 12.3 | | | | 12.3 | | | | - | | | | 11.8 | | | | 11.8 | | | Other | | | 0.1 | | | | 0.9 | | | | 1.0 | | | | 0.1 | | | | 1.4 | | | | 1.5 | | | Fair value excluding investment measured at net asset value | | | 27.8 | | | | 26.5 | | | | 54.3 | | | | 40.5 | | | | 24.5 | | | | 65.0 | | | Investment measured at net asset value | | | | | | | | | | | 100.8 | | | | Investments measured at net asset value | | | | | | | | | | | | 114.9 | | | Total fair value | | | | | | | | | | $ | 155.1 | | | | | | | | | | | $ | 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 pooled equity funds based upon quoted prices from active markets and classified them within Level 1 of the valuation hierarchy. The Company determined the fair value of certain fixed 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, 20202023 and 2019,2022, the Company held 0no Level 3 assets within its pension plans.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
As a practical expedient, the Company valued certain investments, including pooled equity, fixed income and a real estate fund,funds, using their net asset value (NAV)(“NAV”) per unit, and therefore, has not classified these investments within the fair value hierarchy. The terms and conditions for redemptions vary for the investments valued at NAV. The real estate and fixed income investment fundsfund may be redeemed quarterly and monthly, respectively, with a 90-day and 60-day notice period, respectively.period. Other investments valued at NAV do not have significantly-restrictive redemption frequency or notice period requirements. The Company does not intend to sell or otherwise dispose of these investments at prices different than the NAV per unit.
Note 4:5: 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 stock awards, stock options, and performance-based stock awards granted for retention and performance, (2) a discretionary equity program for other management and key employees, and (3) stock awards for non-employee directors. The Company’s Board of Directors and the Officer NominationHuman Capital and Compensation Committee, as applicable, have discretionary authority to set the terms of the stock-based awards. Grants to employees during fiscal 20202023 were issued under the Company’s 2017Amended and Restated 2020 Incentive Compensation 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, 2020,2023, approximately 1.82.2 million shares authorized under the 2017Amended 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 $6.6$6.6 million $7.9, $5.7 million, and $9.5$6.3 million in fiscal 2020, 2019,2023, 2022, and 2018,2021, respectively.
Stock Options:Options The Company recorded $1.3$1.2 million $1.2, $1.1 million, and $1.2$0.9 million of compensation expense related to stock options in fiscal 2020, 2019,2023, 2022, and 2018,2021, respectively. During fiscal 2020, 2019, and 2018, theThe grant date fair value of stock options that vested during fiscal 2023, 2022, and 2021,was $1.2 million.$1.0 million, $0.9 million, and $1.3 million, respectively. As of March 31, 2020,2023, the total compensation expense not yet recognized related to non-vested stock options was $2.4$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:
| | Years ended March 31, | | | Years ended March 31, | | | | | 2020 | | | 2019 | | | 2018 | | | 2023 | | | 2022 | | | 2021 | | | Fair value of options | | $ | 5.56 | | | $ | 7.81 | | | $ | 7.30 | | | $ | 6.99 | | | $ | 8.79 | | | $ | 3.46 | | | Expected life of awards in years | | | 6.3 | | | | 6.3 | | | | 6.4 | | | | 6.0 | | | | 6.1 | | | | 6.1 | | | Risk-free interest rate | | | 2.2 | % | | | 2.8 | % | | | 1.9 | % | | | 3.0 | % | | | 1.1 | % | | | 0.4 | % | | Expected volatility of the Company's stock | | | 39.2 | % | | | 39.7 | % | | | 44.3 | % | | | Expected dividend yield on the Company's stock | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % | | | 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 | % |
Stock options expire no later than 10 years after the grant date and have an exercise price equal to the fair market value of Modine’s common stock on the date of grant. The risk-free interest rate was based upon 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 upon 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 upon 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.
A summary of stock option activity for fiscal 20202023 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 | | | 1.2 | | | $ | 12.24 | | | | | | | | | | Outstanding, beginning of year | | | | 1.0 | | | $ | 12.12 | | | | | | | | | Granted | | | 0.3 | | | | 13.26 | | | | | | | | | | 0.2 | | | | 12.40 | | | | | | | | | Exercised | | | - | | | | 7.13 | | | | | | | | | | (0.2 | ) | | | 11.77 | | | | | | | | | Forfeited or expired | | | (0.1 | ) | | | 12.68 | | | | | | | | | | (0.1 | ) | | | 12.26 | | | | | | | | | Outstanding, ending | | | 1.4 | | | $ | 12.49 | | | | 5.6 | | | $ | - | | | | Outstanding, end of year | | | | 0.9 | | | $ | 12.28 | | | | 7.1 | | | $ | 9.6 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Exercisable, March 31, 2020 | | | 0.9 | | | $ | 11.28 | | | | 3.9 | | | $ | - | | | Exercisable, March 31, 2023 | | | | 0.4 | | | $ | 12.46 | | | | 5.5 | | | $ | 4.3 | |
AggregateThe aggregate intrinsic value represents the difference between the closing price of Modine’s common shares on the last trading day of fiscal 20202023 over the exercise price of the stock options, multiplied by the number of options outstanding or exercisable. As of March 31, 2020,The aggregate intrinsic value is not recorded for financial statement purposes, and this value will change based upon daily changes in the exercise price of outstanding options exceeded the closing price of ModineModine’s common shares and, as a result, the options had no intrinsic value.shares.
Additional information related to stock options exercised is as follows:
| | 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 | |
Additional information related to stock options exercised is as follows:
| | Years ended March 31, | | | | | 2020 | | | 2019 | | | 2018 | | | Intrinsic value of stock options exercised | | $ | 0.1 | | | $ | 0.7 | | | $ | 4.9 | | | Proceeds from stock options exercised | | | 0.1 | | | | 1.1 | | | | 4.3 | |
Restricted Stock:The Company recorded $4.5$5.4 million, $4.3$5.0 million, and $3.9$4.3 million of compensation expense related to restricted stock in fiscal 2020, 2019,2023, 2022, and 2018,2021, respectively. The grant date fair value of restricted stock awards that vested during fiscal 2020, 2019,2023, 2022, and 20182021 was $4.4$4.7 million, $4.3$4.4 million, and $3.9$4.5 million, respectively. At March 31, 2020,2023, the Company had $5.1$6.4 million of unrecognized compensation expense related to non-vested restricted stock, which it expects to recognize over a weighted-average period of 2.61.8 years. The Company values restricted stock awards using the closing market price 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 20202023 was as follows:
| | Shares | | | Weighted-average price | | | Shares | | | Weighted-average price | | | Non-vested balance, beginning | | | 0.5 | | | $ | 14.95 | | | | Non-vested balance, beginning of year | | | | 0.7 | | | $ | 11.61 | | | Granted | | | 0.4 | | | | 13.54 | | | | 0.5 | | | | 13.60 | | | Vested | | | (0.3 | ) | | | 14.02 | | | | (0.3 | ) | | | 11.85 | | | Forfeited | | | (0.1 | ) | | | 14.99 | | | | (0.1 | ) | | | 10.58 | | | Non-vested balance, ending | | | 0.5 | | | $ | 14.48 | | | | Non-vested balance, end of year | | | | 0.8 | | | $ | 12.95 | |
Restricted Stock – Performance-Based Shares:Shares The Company recorded $0.8 million, $2.4 million,granted performance-based cash awards in fiscal 2023, 2022, and $4.4 million2021 in lieu of compensation expense related toperformance-based stock awards. For performance-based stock awards, in fiscal 2020, 2019, and 2018, respectively. At March 31, 2020, the Company had $1.1 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 1.9 years. The Company values performance-based stockthe awards using the closing market price 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.
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. The performance componentsmetrics 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 programs initiatedthree-yearperformance period, commencing with the fiscal year of grant. The performance metrics for the performance-based cash awards granted in fiscal 20202022 and 2019fiscal 2023 are based upon both a target three-year average consolidated cash flow return on invested capital 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. The performance components of the program initiated in fiscal 2018 are based upon both a target three-year average consolidated return on capital employed and a target three-year average annual revenue growth at the end of a three-year performance period.
Note 5:6: Restructuring Activities
During fiscal 20202023, restructuring and 2019,repositioning expenses primarily consisted of severance-related expenses for targeted headcount reductions in each the Climate Solutions and Performance Technologies segments and supported the Company’s 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.
During fiscal 2022, the Company committed to restructuring actions intended to reduce SG&A and operational 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 Performance Technologies segment and primarily related to targeted headcount reductions in Europe. In addition, the Company implemented targeted headcount reductions in the Climate Solutions segment. Also in fiscal 2022, the Company incurred equipment transfer costs within the Performance Technologies segment.
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 VTSPerformance Technologies segment and supportsupported the Company’s objective to reduceof reducing operational and SG&A cost structures. Also,During fiscal 2021, the Company is in the process of transferring product lines totransferred production from its CIS manufacturing facility in Mexico in orderZhongshan, China to achieve operational improvements and organizational efficiencies.
During fiscal 2018, the Company ceased production at its Gailtal, Austriaanother Climate Solutions segment manufacturing facility primarily to reduce excess capacity and lower manufacturing costs in Europe.China. As a result of this facility closure,plant consolidation, the Company recorded $8.3 million of restructuring expenses within the CIS segment, primarily related to employee severance and related benefits. Fiscal 2018 restructuring activities also included plant consolidation activities, targeted headcount reductions, and certain product line transfers in Europe within the VTS segment. In addition, the Company recorded restructuring expenses associated with the discontinuance of its geothermal product line within the BHVAC segment.
During fiscal 2021, the Company approved headcount reductions in the VTS and CIS segments and, as a result, expects to record approximately $4.0$3.7 million of severance expenses during the first quarter of fiscal 2021. Other plant consolidation activities in fiscal 2021 included transferring product lines to the Company’s Climate Solutions manufacturing facility in Mexico.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Restructuring and repositioning expenses were as follows:
| | Years ended March 31, | | | Years ended March 31, | | | | | 2020 | | | 2019 | | | 2018 | | | 2023 | | | 2022 | | | 2021 | | | Employee severance and related benefits | | $ | 10.2 | | | $ | 8.7 | | | $ | 13.0 | | | $ | 3.5 | | | $ | 22.1 | | | $ | 11.7 | | | Other restructuring and repositioning expenses | | | 2.0 | | | | 0.9 | | | | 3.0 | | | | 1.5 | | | | 2.0 | | | | 1.7 | | | Total | | $ | 12.2 | | | $ | 9.6 | | | $ | 16.0 | | | $ | 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, | | | | | 2020 | | | 2019 | | | 2023 | | | 2022 | | | Beginning balance | | $ | 10.0 | | | $ | 11.0 | | | $ | 20.2 | | | $ | 4.0 | | | Additions | | | 10.2 | | | | 8.7 | | | | 3.5 | | | | 22.1 | | | Payments | | | (15.1 | ) | | | (9.1 | ) | | | (12.4 | ) | | | (5.7 | ) | | Reclassified from held for sale | | | | - | | | | 0.4 | | | Effect of exchange rate changes | | | (0.1 | ) | | | (0.6 | ) | | | (0.7 | ) | | | (0.6 | ) | | Ending balance | | $ | 5.0 | | | $ | 10.0 | | | $ | 10.6 | | | $ | 20.2 | |
During fiscal 2020,2022 and 2021, the Company identified potential impairment indicators related to manufacturing facilities in Austria and Germany within the VTS segment. The Company anticipates the future cash flowsrecorded $56.0 million of these asset groups will be negatively impacted by planned wind downs of certain commercial vehicle and automotive programs. In response, the Company performed an impairment evaluation and recordeda net asset impairment reversal and $166.8 million of impairment charges, totaling $7.5 millionrespectively, within its VTS segment to write down property and equipment assets to fair value. The Company determined fair value using Level 3 inputs, primarily consisting of appraisals, which considered the market rental value, market conditions, physical condition of the assets, salability in the marketplace and estimated scrap values, based on the specialized nature of the machinery and equipment.Performance Technologies segment. See Note 2 for additional information.
Also during fiscal 2020,2022, the Company recorded a $0.6 millionan impairment charge of $0.3 million to reduce the carrying value of the previously-closed CIS Austriana previously closed Climate Solutions facility to its current estimated fair value, less costs to sell. During fiscal 2019 and 2018, the Company recorded asset impairment charges of $0.4 million and $1.3 million, respectively, related to this closed facility.
Note 6:7: Other Income and Expense
Other income and expense consisted of the following:
| | Years ended March 31, | | | | | 2020 | | | 2019 | | | 2018 | | | Equity in earnings of non-consolidated affiliate (a) | | $ | 0.2 | | | $ | 0.7 | | | $ | 0.2 | | | Interest income | | | 0.4 | | | | 0.4 | | | | 0.4 | | | Foreign currency transactions (b) | | | (2.4 | ) | | | (2.3 | ) | | | (0.6 | ) | | Net periodic benefit cost (c) | | | (3.0 | ) | | | (2.9 | ) | | | (3.3 | ) | | Total other expense - net | | $ | (4.8 | ) | | $ | (4.1 | ) | | $ | (3.3 | ) |
| | 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) | During fiscal 2020, the Company sold its ownership interest in Nikkei Heat Exchanger Company, Ltd. As a result of the sale, the Company recorded a gain of $0.1 million, which is included within the fiscal 2020 amount. See Note 12 for additional information.
|
| (b) | 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) | (c) | Net periodic benefit cost for the Company’s pension and postretirement plans is exclusive of service cost. cost. |
Note 7:8: Income Taxes
The U.S. and foreign components of earnings or loss before income taxes and the provisionbenefit or benefitprovision for income taxes consisted of the following:
| | Years ended March 31, | | | Years ended March 31, | | | | | 2020 | | | 2019 | | | 2018 | | | 2023 | | | 2022 | | | 2021 | | | Components of earnings (loss) before income taxes: | | | | | | | | | | | | | | | | | | | | United States | | $ | (26.1 | ) | | $ | 22.4 | | | $ | 2.5 | | | $ | 12.5 | | | $ | 0.4 | | | $ | (48.7 | ) | | Foreign | | | 36.5 | | | | 58.4 | | | | 60.8 | | | | 112.8 | | | | 101.1 | | | | (70.6 | ) | | Total earnings before income taxes | | $ | 10.4 | | | $ | 80.8 | | | $ | 63.3 | | | | Total earnings (loss) before income taxes | | | $ | 125.3 | | | $ | 101.5 | | | $ | (119.3 | ) |
| Income tax provision (benefit): | | | | | | | | | | | | Income tax (benefit) provision: | | | | | | | | | | | | Federal: | | | | | | | | | | | | | | | | | | | | Current | | $ | (3.4 | ) | | $ | (20.4 | ) | | $ | 11.6 | | | $ | 1.5 | | | $ | 0.1 | | | $ | (0.1 | ) | | Deferred | | | (1.7 | ) | | | (4.2 | ) | | | 23.3 | | | | (47.5 | ) | | | - | | | | 58.3 | | | State: | | | | | | | | | | | | | | | | | | | | | | | | | | Current | | | (0.1 | ) | | | 0.7 | | | | (0.3 | ) | | | 2.3 | | | | 1.1 | | | | 0.4 | | | Deferred | | | (2.3 | ) | | | 1.9 | | | | 2.0 | | | | (11.4 | ) | | | - | | | | 9.2 | | | Foreign: | | | | | | | | | | | | | | | | | | | | | | | | | | Current | | | 14.9 | | | | 19.0 | | | | 16.1 | | | | 27.5 | | | | 17.8 | | | | 22.0 | | | Deferred | | | 5.0 | | | | (2.1 | ) | | | (13.2 | ) | | | (0.7 | ) | | | (3.8 | ) | | | 0.4 | | | Total income tax provision (benefit) | | $ | 12.4 | | | $ | (5.1 | ) | | $ | 39.5 | | | | Total income tax (benefit) provision | | | $ | (28.3 | ) | | $ | 15.2 | | | $ | 90.2 | |
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Act. Shortly after the Tax Act was enacted, the SEC issued accounting guidance which provided a one-year measurement period during which a company could complete its accounting for the impacts of the Tax Act. To the extent a company’s accounting for certain income tax effects of the Tax Act was incomplete, the company could determine a reasonable estimate for those effects and record a provisional estimate in its financial statements. If a company could not determine a provisional estimate to be included in the financial statements, it was to continue applying the provisions of the tax laws that were in effect immediately prior to the Tax Act being enacted.
During fiscal 2018, the Company recorded provisional discrete tax charges totaling $38.0 million related to the Tax Act. The Company adjusted its U.S. deferred tax assets by $19.0 million due to the reduction in the U.S. federal corporate tax rate. This net reduction in deferred tax assets also included the estimated impact on the Company’s net state deferred tax assets. In addition, the Company recorded a $19.0 million charge for the transition tax required under the Tax Act.
During fiscal 2019, the Company completed its accounting for the Tax Act, which resulted in an income tax benefit totaling $7.7 million. The Company utilized its deferred tax attributes against the transition tax and finalized its fiscal 2018 U.S. federal income tax return. As a result, the Company decreased the provisional charge recorded for the reduction in the U.S. federal corporate tax rate by $9.3 million, since more deferred tax assets were utilized to offset taxable income at a higher fiscal 2018 U.S. federal corporate tax rate. The Company also decreased the transition tax liability to $18.9 million, a reduction of $0.1 million. In addition, the Company recorded a charge of $1.7 million for a reduction to state deferred tax assets.
The Tax Act included a new provision designed to tax global intangible low taxed income (“GILTI”) starting in fiscal 2019. The Company elected to record the tax effects of the GILTI provision as a period expense in the applicable tax year. To determine whether its net operating loss carryforward deferred tax assets are expected to be realized, the Company considers the applicable tax law ordering. Based upon this approach, net operating loss carryforwards are deemed to be realizable if they will reduce the expected tax liability when utilized, regardless of whether the 50% GILTI deduction or applicable tax credits may have been available.
The Company’s accounting policy is to allocate the income tax provision between net earnings and other comprehensive income. The Company applies its accounting for income taxes by tax jurisdiction, and in periods in which there is a loss before income taxes and pre-tax income in other comprehensive income, it first allocates the income tax provision to other comprehensive income, and then records a related tax benefit in the income tax provision.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The reconciliation between the U.S. federal statutory rate and the Company’s effective tax rate was as follows:
| | Years ended March 31, | | | Years ended March 31, | | | | | 2020 | | | 2019 | | | 2018 | | | 2023 | | | 2022 | | | 2021 | | | Statutory federal tax | | | 21.0 | % | | | 21.0 | % | | | 31.5 | % | | | 21.0 | % | | | 21.0 | % | | | 21.0 | % | | State taxes, net of federal benefit | | | (12.0 | ) | | | 3.6 | | | | 2.9 | | | | (0.1 | ) | | | 1.4 | | | | 0.9 | | | Taxes on non-U.S. earnings and losses | | | 32.9 | | | | 3.9 | | | | (3.8 | ) | | | 5.8 | | | | 3.5 | | | | (9.1 | ) | | Valuation allowances | | | 156.9 | | | | 4.0 | | | | (5.6 | ) | | | (42.9 | ) | | | (8.8 | ) | | | (92.9 | ) | | Tax credits | | | (36.7 | ) | | | (26.1 | ) | | | (17.3 | ) | | | (4.5 | ) | | | (3.4 | ) | | | 2.2 | | | Compensation | | | 4.0 | | | | (0.1 | ) | | | (0.8 | ) | | | 0.7 | | | | 0.6 | | | | (1.3 | ) | | Tax rate or law changes | | | 3.6 | | | | (12.0 | ) | | | 60.1 | | | | (0.2 | ) | | | 0.6 | | | | (0.2 | ) | | Uncertain tax positions, net of settlements | | | (37.9 | ) | | | 0.4 | | | | (0.8 | ) | | | 0.4 | | | | (0.2 | ) | | | 0.1 | | | Notional interest deductions | | | (12.5 | ) | | | (2.5 | ) | | | (3.2 | ) | | | (1.7 | ) | | | (2.7 | ) | | | 1.3 | | | Dividends and taxable foreign inclusions | | | (11.0 | ) | | | 1.6 | | | | 0.2 | | | | 0.9 | | | | 1.6 | | | | 3.0 | | | Other | | | 10.9 | | | | (0.1 | ) | | | (0.8 | ) | | | (2.0 | ) | | | 1.4 | | | | (0.6 | ) | | Effective tax rate | | | 119.2 | % | | | (6.3 | %) | | | 62.4 | % | | | (22.6 | %) | | | 15.0 | % | | | (75.6 | %) |
The DuringCompany’s fiscal 2020, the Company recorded net income2023 effective tax charges totaling $2.9 million as a result of legal entity restructuring completed in preparation of a potential sale of the automotive business and a $1.4 millionrate was favorably impacted by an income tax benefit resulting fromrelated to the recognition of a tax incentive in Italy. Also in fiscal 2020, the Company changed its determination of whether it was more likely than not certainvaluation allowance on deferred tax assets in the U.S. The effective tax rates in both fiscal 2022 and in a foreign jurisdiction would be realized and, as a result, adjusted the respective valuation allowances and recorded an income tax charge of $8.4 million and an income tax benefit of $1.3 million, respectively. In addition, the Company recorded a net increase of deferred tax asset valuation allowances totaling $9.2 million related to other tax jurisdictions and recorded a $4.5 million income tax benefit associated with the reduction in unrecognized tax benefits resulting from a lapse in statutes of limitations and settlements.
During fiscal 2019, the Company recorded income tax benefits totaling $7.7 million2021 were significantly impacted by impairment charges or reversals, largely related to the Tax Act, as discussed above; recordedliquid-cooled automotive business, and income tax charges or benefits totaling $14.5 million as a result of amending previous-year tax returnsrelated to recognize foreign tax credits that are expected to be realized based upon future sources of income;valuation allowances. See Note 2 for information regarding the impairment charges and recorded a $2.5 millionreversals. The income tax benefitcharges or benefits related to a manufacturing deduction in the United States. Also in fiscal 2019, the Company changed its determination of whether it was more likely than not certain deferred tax assets of two separate subsidiaries in a foreign jurisdiction would be realized and, as a result, adjusted the respective valuation allowances and recorded an income tax benefit totaling $1.0 million. In addition, the Company recorded a net increase of deferred tax asset valuation allowances totaling $4.3 million related to other tax jurisdictions and recorded a $2.2 million income tax benefit associated with the reduction in unrecognized tax benefits resulting from a lapse in statutes of limitations.are described below.
During fiscal 2018, the Company recorded provisional charges totaling $38.0 million related to the Tax Act, as discussed above, and recognized a $9.0 million Hungarian development tax credit. Also in fiscal 2018, the Company reversed a portion61
The Company has recordedrecords valuation allowances against its net deferred tax assets to the extent it has determineddetermines 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. As further discussed in Note 20, the COVID-19 pandemic has resulted in risks and uncertainties to our business. Future events or circumstances, such as lower taxable income or unfavorable changes in the financial outlook of the Company’s operations in certain jurisdictions, could necessitate the establishment of further valuation allowances, which could have a material adverse effect on the Company’s results of operations and financial condition.allowances.
The tax effects of temporary differences that gave rise to deferred tax assets and liabilities were as follows:
| | March 31, | | | March 31, | | | | | 2020 | | | 2019 | | | 2023 | | | 2022 | | | Deferred tax assets: | | | | | | | | | | | | | | Accounts receivable | | $ | 0.3 | | | $ | 0.2 | | | $ | 0.9 | | | $ | 0.8 | | | Inventories | | | 4.5 | | | | 3.4 | | | | 6.0 | | | | 6.5 | | | Plant and equipment | | | 4.7 | | | | 1.8 | | | | 17.2 | | | | 19.9 | | | Lease liabilities | | | 15.7 | | | | - | | | | 15.9 | | | | 13.5 | | | Pension and employee benefits | | | 45.1 | | | | 32.7 | | | | 24.1 | | | | 27.5 | | | Net operating and capital losses | | | 70.2 | | | | 73.5 | | | | 55.4 | | | | 53.9 | | | Credit carryforwards | | | 56.8 | | | | 60.3 | | | | 49.0 | | | | 48.5 | | | Research and experimental expenditures | | | | 8.0 | | | | - | | | Other, principally accrued liabilities | | | 8.1 | | | | 10.0 | | | | 13.2 | | | | 13.5 | | | Total gross deferred tax assets | | | 205.4 | | | | 181.9 | | | | 189.7 | | | | 184.1 | | | Less: valuation allowances | | | (46.9 | ) | | | (43.4 | ) | | | (61.6 | ) | | | (112.2 | ) | | Net deferred tax assets | | | 158.5 | | | | 138.5 | | | | 128.1 | | | | 71.9 | | | | | | | | | | | | | | | | | | | | | Deferred tax liabilities: | | | | | | | | | | | | | | | | | | Plant and equipment | | | 13.1 | | | | 15.1 | | | | 7.5 | | | | 8.6 | | | Lease assets | | | 15.6 | | | | - | | | | 15.7 | | | | 13.2 | | | Goodwill | | | 4.8 | | | | 4.8 | | | | 4.8 | | | | 4.9 | | | Intangible assets | | | 26.4 | | | | 28.8 | | | | 20.1 | | | | 22.4 | | | Other | | | 1.9 | | | | 0.9 | | | | 1.1 | | | | 1.5 | | | Total gross deferred tax liabilities | | | 61.8 | | | | 49.6 | | | | 49.2 | | | | 50.6 | | | Net deferred tax assets | | $ | 96.7 | | | $ | 88.9 | | | $ | 78.9 | | | $ | 21.3 | |
Unrecognized tax benefits were as follows:
| | Years ended March 31, | | | Years ended March 31, | | | | | 2020 | | | 2019 | | | 2023 | | | 2022 | | | Beginning balance | | $ | 13.8 | | | $ | 13.6 | | | $ | 9.3 | | | $ | 9.6 | | | Gross increases - tax positions in prior period | | | 0.3 | | | | 1.6 | | | | 0.2 | | | | 0.1 | | | Gross decreases - tax positions in prior period | | | (1.0 | ) | | | (0.2 | ) | | | (0.1 | ) | | | (0.2 | ) | | Gross increases - tax positions in current period | | | 1.1 | | | | 1.1 | | | | 0.9 | | | | 1.0 | | | Settlements | | | (2.1 | ) | | | (0.1 | ) | | | Lapse of statute of limitations | | | (2.4 | ) | | | (2.2 | ) | | | (0.6 | ) | | | (1.2 | ) | | Ending balance | | $ | 9.7 | | | $ | 13.8 | | | $ | 9.7 | | | $ | 9.3 | |
The Company’s liability for unrecognized tax benefits as of March 31, 20202023 was $9.7 million and, if recognized, $7.9$7.8 million would have an effective tax rate impact. The Company estimates a $0.6$2.0 million net decrease in unrecognized tax benefits during fiscal 20212024 mainly due to lapses in statutes of limitations and settlements.limitations. If recognized, these reductions would not have a significantan 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 20202023, 2022 and 2019,2021, interest and penalties included within income tax expense in the consolidated statements of operations were not significant. At March 31, 20202023 and 2019,2022, accrued interest and penalties totaled $0.5$0.8 million and $1.1$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, 2020,2023, the Company was under income tax examination in a number of jurisdictions. The following tax years remain subject to examination for the Company’s major tax jurisdictions:
| Germany | Fiscal 20112017 - Fiscal 20192022 | | Italy | Calendar 2015Fiscal 2018 - Fiscal 20192022 | | United States | Fiscal 20172020 - Fiscal 20192022 |
At March 31, 2020, the Company had federal and state tax credits of $61.6 million that, if not utilized against U.S. taxes, will expire between fiscal 2021 and 2040. The Company also had state and local tax loss carryforwards totaling $149.8 million that, if not utilized against state apportioned taxable income, will expire between fiscal 2021 and 2040. In addition, the Company had tax loss and foreign attribute carryforwards totaling $314.7 million in various tax jurisdictions throughout the world. Certain of the carryforwards in the U.S. and in foreign jurisdictions are offset by valuation allowances. If not utilized against taxable income, $8.1 million of these carryforwards will expire between fiscal 2021 and 2034, and $306.6 million, mainly related to Germany and Italy, will not expire due to an unlimited carryforward period.
At March 31, 2023, the Company had federal and state tax credits of $60.4 million that, if not utilized against U.S. taxes, will expire between fiscal 2024 and 2043. The Company also had state and local tax loss carryforwards totaling $136.7 million. If not utilized against state apportioned taxable income, certain state and local carryforwards will expire between fiscal 2024 and 2042, while some will not expire due to an unlimited carryforward period. In addition, the Company had tax loss and foreign attribute carryforwards totaling $285.0 million in various tax jurisdictions throughout the world. Certain of the carryforwards in foreign jurisdictions are offset by valuation allowances. If not utilized against taxable income, $54.9 million of these carryforwards will expire between fiscal 2024 and 2034, and $230.1 million, mainly related to Germany and Italy, will not expire due to an unlimited carryforward period.
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 has not recorded foreign withholding taxes or deferred income taxes for these earnings. The Company has estimated the net amount of unrecognized foreign withholding tax and deferred tax liabilities would total approximately $7.0$12.0 million if the accumulated foreign earnings were distributed; however, the actual tax cost would be dependent on circumstances existing when remittance occurs.
Note 8:9: Earnings Per Share
The components of basic and diluted earnings per share were as follows:
| | Years ended March 31, | | | | | 2020 | | | 2019 | | | 2018 | | | Basic Earnings Per Share: | | | | | | | | | | | Net (loss) earnings attributable to Modine | | $ | (2.2 | ) | | $ | 84.8 | | | $ | 22.2 | | | Less: Undistributed earnings attributable to unvested shares | | | - | | | | (0.4 | ) | | | (0.2 | ) | | Net (loss) earnings available to Modine shareholders | | $ | (2.2 | ) | | $ | 84.4 | | | $ | 22.0 | | | | | | | | | | | | | | | | | Weighted-average shares outstanding - basic | | | 50.8 | | | | 50.5 | | | | 49.9 | | | | | | | | | | | | | | | | | Net (loss) earnings per share - basic | | $ | (0.04 | ) | | $ | 1.67 | | | $ | 0.44 | | | | | | | | | | | | | | | | | Diluted Earnings Per Share: | | | | | | | | | | | | | | Net (loss) earnings attributable to Modine | | $ | (2.2 | ) | | $ | 84.8 | | | $ | 22.2 | | | Less: Undistributed earnings attributable to unvested shares | | | - | | | | (0.2 | ) | | | (0.1 | ) | | Net (loss) earnings available to Modine shareholders | | $ | (2.2 | ) | | $ | 84.6 | | | $ | 22.1 | | | | | | | | | | | | | | | | | Weighted-average shares outstanding - basic | | | 50.8 | | | | 50.5 | | | | 49.9 | | | Effect of dilutive securities | | | - | | | | 0.8 | | | | 1.0 | | | Weighted-average shares outstanding - diluted | | | 50.8 | | | | 51.3 | | | | 50.9 | | | | | | | | | | | | | | | | | Net (loss) earnings per share - diluted | | $ | (0.04 | ) | | $ | 1.65 | | | $ | 0.43 | |
| | 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 fiscal 2020, 20192023, 2022 and 2018,2021, the calculation of diluted earnings per share excluded 1.10.5 million, 0.40.5 million, and 0.21.0 million, stock options, respectively, because they were anti-dilutive. For fiscal 20202023, 2022 and 2019,2021, the calculation of diluted earnings per share excluded 0.50.2 million, 0.2 million, and 0.30.4 million restricted stock awards, respectively, because they were anti-dilutive. For fiscal 2020,2021 the total number of potentially-dilutive securities was 0.30.2 million. However, these securities were not included in the computation of diluted net loss per share since to do so would have decreased the loss per share.
Note 9:10: Cash, Cash Equivalents and Restricted Cash
Cash, cash equivalents and restricted cash consisted of the following:
| | March 31, | | | March 31, | | | | | 2020 | | | 2019 | | | 2023 | | | 2022 | | | Cash and cash equivalents | | $ | 70.9 | | | $ | 41.7 | | | $ | 67.1 | | | $ | 45.2 | | | Restricted cash | | | 0.4 | | | | 0.5 | | | | 0.1 | | | | 0.2 | | | Total cash, cash equivalents and restricted cash | | $ | 71.3 | | | $ | 42.2 | | | $ | 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.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 10:11: Inventories
Inventories consisted of the following:
| | March 31, | | | | | 2020 | | | 2019 | | | Raw materials | | $ | 123.6 | | | $ | 122.8 | | | Work in process | | | 34.6 | | | | 32.2 | | | Finished goods | | | 49.2 | | | | 45.7 | | | Total inventories | | $ | 207.4 | | | $ | 200.7 | |
| | 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 | |
Note 11:12: Property, Plant and Equipment
Property, plant and equipment, including depreciable lives, consisted of the following:
| | March 31, | | | March 31, | | | | | 2020 | | | 2019 | | | 2023 | | | 2022 | | | Land | | $ | 19.7 | | | $ | 20.7 | | | $ | 16.4 | | | $ | 16.8 | | | Buildings and improvements (10-40 years) | | | 276.7 | | | | 285.9 | | | | Machinery and equipment (3-15 years) | | | 870.3 | | | | 848.7 | | | | Office equipment (3-10 years) | | | 95.2 | | | | 92.0 | | | 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 | | | 40.5 | | | | 57.4 | | | | 47.5 | | | | 31.2 | | | | | | 1,302.4 | | | | 1,304.7 | | | | 1,274.8 | | | | 1,278.2 | | | Less: accumulated depreciation | | | (854.4 | ) | | | (820.0 | ) | | | (960.3 | ) | | | (962.8 | ) | | Net property, plant and equipment | | $ | 448.0 | | | $ | 484.7 | | | $ | 314.5 | | | $ | 315.4 | |
Depreciation expense totaled $68.2$46.5 million, $67.9$46.4 million, and $67.0$60.1 million for fiscal 2020, 2019,2023, 2022, and 2018,2021, respectively.
Gains and losses related to the disposal of property, plant and equipment are recorded within SG&A expenses. For fiscal 2020, 2019,2023 and 2018,2021, losses related to the disposal of property, plant and equipment totaled $0.6 million, $0.9$0.1 million and $0.7 million, respectively.
Note 12: Investment in Affiliate For fiscal 2022, gains related to the disposal of property, plant and equipment totaled $0.1 million.
During fiscal 2020, the Company completed the sale of its 50 percent ownership interest in Nikkei Heat Exchanger Company, Ltd. (“NEX”) for a selling price of $3.8 million. As a result of this sale, the Company recorded a gain of $0.1 million, which included the write-off of accumulated foreign currency translation gains of $0.6 million, within other income and expense on the consolidated statement of operations.
Prior to the sale, the Company accounted for its investment in this non-consolidated affiliate using the equity method. The Company included its investment in NEX of $3.8 million within other noncurrent assets on the March 31, 2019 consolidated balance sheet. The Company reported its equity in earnings from NEX within other income and expense in the consolidated statements of operations, using a one-month reporting delay. The Company’s share of NEX’s earnings for fiscal 2020, 2019, and 2018 was $0.1 million, $0.7 million, and $0.2 million, respectively.
Note 13: Intangible Assets
Intangible assets consisted of the following:
| | March 31, 2020 | | | March 31, 2019 | | | | | Gross Carrying Value | | | Accumulated Amortization | | | Net Intangible Assets | | | Gross Carrying Value | | | Accumulated Amortization | | | Net Intangible Assets | | | Customer relationships | | $ | 60.8 | | | $ | (12.6 | ) | | $ | 48.2 | | | $ | 61.5 | | | $ | (9.1 | ) | | $ | 52.4 | | | Trade names | | | 58.3 | | | | (16.2 | ) | | | 42.1 | | | | 58.9 | | | | (13.5 | ) | | | 45.4 | | | Acquired technology | | | 23.6 | | | | (7.6 | ) | | | 16.0 | | | | 23.9 | | | | (5.5 | ) | | | 18.4 | | | Total intangible assets | | $ | 142.7 | | | $ | (36.4 | ) | | $ | 106.3 | | | $ | 144.3 | | | $ | (28.1 | ) | | $ | 116.2 | |
The Company recorded $8.9 million, $9.0 million, and $9.7 million of amortization expense during fiscal 2020, 2019, and 2018, respectively. The Company estimates that it will record $8.4 million of amortization expense in fiscal 2021 and approximately $8.0 million of annual amortization expense in fiscal 2022 through 2025.
During fiscal 2018, the BHVAC segment discontinued its geothermal product line and, as a result, recorded a $1.2 million impairment charge for acquired technology intangible assets.
| | 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 $8.0 million, $8.4 million, and $8.5 million of amortization expense during fiscal 2023, 2022, and 2021, respectively. The Company estimates that it will record approximately $8.0 million of annual amortization expense in fiscal 2024 through 2028.
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.
| | VTS | | | CIS | | | BHVAC | | | Total | | | Balance, March 31, 2018 | | $ | 0.5 | | | $ | 158.3 | | | $ | 15.0 | | | $ | 173.8 | | | Effect of exchange rate changes | | | - | | | | (4.4 | ) | | | (0.9 | ) | | | (5.3 | ) | | Balance, March 31, 2019 | | | 0.5 | | | | 153.9 | | | | 14.1 | | | | 168.5 | | | Impairment charge | | | (0.5 | ) | | | - | | | | - | | | | (0.5 | ) | | Effect of exchange rate changes | | | - | | | | (1.3 | ) | | | (0.6 | ) | | | (1.9 | ) | | Balance, March 31, 2020 | | $ | - | | | $ | 152.6 | | | $ | 13.5 | | | $ | 166.1 | |
| | 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. Annually, the Company conducts itsTo test goodwill for impairment, assessment during the fourth quarter by applying a fair value-based test. For purposes of its assessment, the Company determines the fair value of each reporting unit based upon the present value of estimated future cash flows.flows and compares the fair value of each reporting unit with its carrying value. The Company’s determination of fair value involves judgment and the use of significant estimates and assumptions, including assumptions regarding the revenue growth rates and operating profit margins used to calculate estimated future cash flows and risk-adjusted discount rates, business trends and market conditions.rates.
As a result of its annual goodwill impairment testtests performed during the fourth quarteras of fiscal 2020,March 31, 2023, the Company determined that the fair value of each of the reporting units within its CISClimate Solutions and BHVACPerformance Technologies segments exceeded their respective book values. The Company determined, however, that the goodwill recorded within its VTS segment was fully impaired and recorded a $0.5 million impairment charge as a result. The impairment charge was primarily caused by a recent decline in the estimated fair value of the automotive business within the VTS segment.
At both March 31, 20202023 and 2019,2022, accumulated goodwill impairment losses totaled $40.8 million and $40.3 million, respectively, within the VTS segment. Performance Technologies segment.
Note 15: Product Warranties and Other Commitments
Product warrantiesWarranties : Many 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 and adjusts its warranty accruals if it becomes probable that expected claims will differ from previous estimates.
Changes in accrued warranty costs were as follows:
| | Years ended March 31, | | | Years ended March 31, | | | | | 2020 | | | 2019 | | | 2023 | | | 2022 | | | Beginning balance | | $ | 9.2 | | | $ | 9.3 | | | $ | 6.3 | | | $ | 5.2 | | | Warranties recorded at time of sale | | | 5.3 | | | | 5.5 | | | | 5.4 | | | | 5.5 | | | Adjustments to pre-existing warranties | | | (1.6 | ) | | | 2.2 | | | | 0.9 | | | | (1.3 | ) | | Settlements | | | (4.8 | ) | | | (7.3 | ) | | | (5.6 | ) | | | (4.4 | ) | | Reclassified from held for sale | | | | - | | | | 1.3 | | | Effect of exchange rate changes | | | (0.2 | ) | | | (0.5 | ) | | | (0.1 | ) | | | - | | | Ending balance | | $ | 7.9 | | | $ | 9.2 | | | $ | 6.9 | | | $ | 6.3 | |
Indemnification agreements: 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, 20202023 was not material.
Commitments Commitments: At March 31, 2020,2023, the Company had capital expenditure commitments of $12.0 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 VTSPerformance 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.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 16: Leases
Effective April 1, 2019, the Company adopted new lease accounting guidance and, as a result, recorded $61.3 million of right-of-use (“ROU”) assets and corresponding lease liabilities for operating leases on its consolidated balance sheet. The consolidated financial statements for fiscal 2020 reflect the adoption of this new guidance; however, fiscal 2019, fiscal 2018 and prior-years have not been adjusted. See Note 1 for additional information regarding the Company’s adoption of the new guidance.
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 based uponto calculate the information available atROU asset and lease commencement.liability. In determining the incremental borrowing rate, the Company considers its current collateralized borrowing rate, the term of the lease, and the economic environmentsenvironment 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 and recognizes payments for these leases as lease expense.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 office buildings.offices. In addition, the Company leases certain manufacturing and IT equipment and vehicles. The Company’s most significant leases have remaining lease terms of 1 to 1511 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 any material residual value guarantees or material restrictive covenants.
Lease Assets and Liabilities: Liabilities The following table provides a summary of leases recorded on the consolidated balance sheet. sheets.
| Balance Sheet Location | | March 31, 2020 | | Balance Sheet Location | | March 31, 2023 | | | March 31, 2022 | | | Lease Assets | | | | | | | | | | | | | | Operating lease ROU assets | Other noncurrent assets | | $ | 61.4 | | Other noncurrent assets | | $ | 59.1 | | | $ | 52.1 | | | Finance lease ROU assets (a) | Property, plant and equipment - net | | 8.5 | | Property, plant and equipment - net | | | 7.1 | | | | 7.7 | | | | | | | | | | | | | | | | | | Lease Liabilities | | | | | | | | | | | | | | | Operating lease liabilities | Other current liabilities | | $ | 10.9 | | Other current liabilities
| | $ | 11.8 | | | $ | 12.7 | | | Operating lease liabilities | Other noncurrent liabilities | | 50.3 | | Other noncurrent liabilities | | | 48.9 | | | | 41.2 | | | Finance lease liabilities | Long-term debt - current portion | | 0.4 | | Long-term debt - current portion | | | 0.4 | | | | 0.4 | | | Finance lease liabilities | Long-term debt | | 3.3 | | Long-term debt | | | 2.3 | | | | 2.8 | |
| (a) | Finance lease ROU assets were recorded net of accumulated amortization of $1.8$3.2 million and $2.8 million as of March 31, 2020.2023 and 2022, respectively. |
Components of Lease Expense: 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 | |
63| (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 | |
The components of lease expense were as follows:
| | Year ended March 31, 2020 | | | Operating lease expense (a) | | $ | 21.2 | | | Finance lease expense: | | | | | | Depreciation of ROU assets | | | 0.5 | | | Interest on lease liabilities | | | 0.2 | | | Total lease expense | | $ | 21.9 | |
| (a) | In fiscal 2020, operating lease expense included short-term lease expense of $4.1 million. Variable lease expense was not significant. |
Supplemental Cash Flow Information
| | Year ended March 31, 2020 | | | Cash paid for amounts included in the measurement of lease liabilities: | | | | | Operating cash flows for operating leases | | $ | 14.7 | | | Financing cash flows for finance leases | | | 0.5 | | | | | | | | | ROU assets obtained in exchange for lease liabilities | | | | | | Operating leases | | $ | 9.0 | | | Finance leases | | | 0.2 | |
Lease Term and Discount Rates
| | March 31, 2020 | | Weighted-average remaining lease term: | | | | Operating leases | | 9.3 years | | Finance leases | | 8.8 years | | | | | | Weighted-average discount rate: | | | | Operating leases | | | 3.5 | % | Finance leases | | | 4.7 | % |
| | 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 under New Lease Accounting Guidance: Future minimum rental payments for leases with initial non-cancellable lease terms in excess of one year were as follows at March 31, 2020:2023:
| Fiscal Year | | Operating Leases | | | Finance Leases | | | Operating Leases | | | Finance Leases | | | 2021 | | $ | 12.8 | | | $ | 0.5 | | | | 2022 | | | 11.4 | | | | 0.5 | | | | 2023 | | | 9.3 | | | | 0.5 | | | | 2024 | | | 6.3 | | | | 0.5 | | | $ | 13.8 | | | $ | 0.5 | | | 2025 | | | 5.8 | | | | 0.5 | | | | 11.5 | | | | 0.5 | | | 2026 and beyond | | | 26.2 | | | | 2.0 | | | | 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 | | | 71.8 | | | | 4.5 | | | | 70.3 | | | | 3.1 | | | Less: Interest | | | (10.6 | ) | | | (0.8 | ) | | | (9.6 | ) | | | (0.4 | ) | | Present value of lease liabilities | | $ | 61.2 | | | $ | 3.7 | | | $ | 60.7 | | | $ | 2.7 | |
Note 17: Indebtedness 64
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.
Maturity of Lease Liabilities under Previous Lease Accounting Guidance: Future minimum rental payments for operating leases with initial non-cancellable lease terms in excess of one year were as follows at March 31, 2019:
| Fiscal Year | | | | | 2020 | | $ | 14.2 | | | 2021 | | | 12.4 | | | 2022 | | | 9.1 | | | 2023 | | | 7.1 | | | 2024 | | | 4.7 | | | 2025 and beyond | | | 22.9 | | | Total | | $ | 70.4 | |
The Company recorded $19.3 million and $18.5 million of rental expense related to operating leases in fiscal 2019 and 2018, respectively.
Note 17: IndebtednessLong-term debt consisted of the following:
| 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 finance lease obligations. |
In June 2019,Long-term debt, including the Company executedcurrent 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 Fourth Amended and Restated Credit Agreement with a syndicate of banks that provides for a multi-currency $250.0 million revolving credit, facility expiring in June 2024, which modified the Company’s then-existing revolver that would have expired in November 2021. In addition, this credit agreement provided for both U.S. dollar- and euro-denominated term loan facilities, with repayments continuing into fiscal 2025. These term loans replaced the previously-existing term loans with repayments scheduled through fiscal 2022. As a result of the credit agreement modification, the Company deferred debt issuance costs of $1.1 million, which are being amortized over the term of the debt. Borrowings under both the revolving creditswingline and term loan facilities bear interest at a variable rate, based upon the applicable reference rate and including a margin percentage dependent upon the Company’s leverage ratio, as described below. At March 31, 2020,2023, the weighted-average interest ratesrate for revolving credit facility borrowings and the term loans were 3.0 percent and 2.8 percent, respectively. At March 31, 2020, the Company’s revolving credit facility borrowings totaled $127.2 million and domestic letters of credit totaled $5.3 million, resulting in available borrowings under the revolving credit facility of $117.5 million.
In January 2020, the Company issued $100.0 million of 5.9 percent Senior Notes with repayments ending in fiscal 2029. The Company used the majority of the proceeds to satisfy the remaining principal balance of the 6.8 percent Senior Notes, which were scheduled to mature in August 2020. As a result of the credit agreement modification, the Company deferred debt issuance costs of $1.7 million, which are being amortized over the term of the debt.
was 6.0 percent. Based upon the terms of the credit agreement, the Company determined thatclassifies borrowings under its revolving credit facility should be classifiedand swingline facilities as long-term debt. Accordingly,and short-term debt, respectively, on its consolidated balance sheets.
At March 31, 2023, the Company has reclassifiedhad no outstanding borrowings related to the revolving credit and swingling facilities and domestic letters of $47.1credit 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 facility fromand swingline facilities totaled $64.9 million and $7.0 million, respectively.
The Company also maintains credit agreements for its foreign subsidiaries. The outstanding short-term borrowings related to long-term debt on thethese foreign credit agreements totaled $3.7 million and $0.7 million at March 31, 2019 balance sheet2023 and within the related disclosures.March 31, 2022, respectively.
Long-term debt consisted
Indebtedness under the Company’s credit agreement and Senior Note agreements is secured by liens on substantially all domestic assets. These agreements further require compliance with various covenants that may limit the Company’s ability to incur 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 the following:certain asset sales. | io | Fiscal year of maturity | | March 31, 2020 | | | March 31, 2019 | | | | | | | | | | | | Term loans | 2025 | | $ | 189.4 | | | $ | 238.4 | | | Revolving credit facility | 2025 | | | 127.2 | | | | 47.1 | | | 5.9% Senior Notes | 2029 | | | 100.0 | | | | - | | | 5.8% Senior Notes | 2027 | | | 50.0 | | | | 50.0 | | | 6.8% Senior Notes | 2021 | | | - | | | | 85.0 | | | Other (a) | | | | 6.0 | | | | 14.3 | | | | | | | 472.6 | | | | 434.8 | | | Less: current portion | | | | (15.6 | ) | | | (48.6 | ) | | Less: unamortized debt issuance costs | | | | (5.0 | ) | | | (4.0 | ) | | Total long-term debt | | | $ | 452.0 | | | $ | 382.2 | |
| (a) | Other long-term debt primarily includes borrowings by foreign subsidiaries and finance lease obligations. |
Long-term debt matures as follows:
| Fiscal Year | | | | | 2021 | | $ | 15.6 | | | 2022 | | | 21.7 | | | 2023 | | | 21.7 | | | 2024 | | | 21.7 | | | 2025 | | | 273.6 | | | 2026 & beyond | | | 118.3 | | | Total | | $ | 472.6 | |
The Company also maintainsFinancial covenants within its credit agreements for its foreign subsidiaries, with outstanding short-term borrowings at March 31, 2020 and 2019 of $14.8 million and $18.9 million, respectively.
Provisions in the Company’s credit agreement, Senior Note agreements, and various foreign credit agreements require the Company to maintain compliance with various covenants and include certain cross-default clauses. Under its primary credit agreements in the U.S., the Company has provided liens on substantially all domestic assets. Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales. In addition, at the time of each incremental borrowing under the revolving credit facility, the Company is required to represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on its business, property, or results of operations.
The Company is subject to a leverage ratio covenant, which requires the Company to limit its consolidated indebtedness, less a portion of its cash balance,balances, both as defined by the credit agreements, in relation to itsno more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”.). The leverage ratio covenant limit was 3.25 to 1 through the fourth quarter of fiscal 2020. The Company ismust also subject to an interest expense coveragemaintain a ratio covenant, 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, 2020.covenants.
In May 2020, the Company executed amendments to its primary credit agreements in the U.S. Under the amended agreements, the leverage ratio covenant limit is temporarily raised. The leverage ratio covenant limit in fiscal 2021 is 4.00 to 1, 4.75 to 1, 5.25 to 1, and 5.75 to 1 for the first, second, third, and fourth quarters, respectively. In fiscal 2022, the leverage ratio covenant limit is 4.75 to 1, 3.75 to 1, and 3.50 to 1 for the first, second and third quarters, respectively, and subsequently returns to 3.25 to 1 for the fourth quarter of fiscal 2022.
The Company estimates the fair value of long-term debt using discounted future cash flows at rates offered to the Company for similar debt instruments of comparable maturities. As of March 31, 20202023 and 2019,2022, the carrying value of the Company’s long-term debt approximated fair value, with the exception of the Senior Notes, which had an aggregate fair value of approximately $131.3$125.9 million and $137.2$138.9 million, respectively. The fair value of the Company’s long-term debt is categorized as Level 2 within the fair value hierarchy. Refer to Note 34 for the definition of a Level 2 fair value measurement.
Note 18: Pension and Employee Benefit Plans
Defined Contribution Employee Benefit Plans:
The Company maintains a domestic 401(k) plan that allows employees to contribute a portion of their salary to help them save for retirement. The Company currently matches employee contributions up to 4.5 percent of their compensationcompensation. During fiscal 2021, as part of its response to the negative impacts of the COVID-19 pandemic, the Company suspended matching employee contributions for participants.part of the year. The Company’s expense for defined contribution employee benefit plans during fiscal 2020, 2019,2023, 2022, and 20182021 was $6.6 $6.9 million, $6.4 million, and $5.2$3.0 million, respectively.
In addition, the Company maintains non-qualified deferred compensation plans 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:
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 substantially unfunded in accordance with local laws.
Pension Plans
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Defined Benefit Employee Benefit 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 domestic employees hired on or before December 31, 2003 and provide benefits based primarily upon years of service and average compensation for salaried and some hourly employees. Benefits for other hourly employees are based upon a monthly retirement benefit amount. 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 Austria, and Italy and are closed to new participants. The Company previously 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.
TheIn connection with funding relief provisions within the American Rescue Plan Act of 2021, the Company contributed $3.5 million, $8.0 million, and $13.4 milliondid not make cash contributions to its U.S. pension plans during fiscal 2020, 2019,2023. The Company contributed $3.5 million and 2018,$19.3 million to its U.S. pension plans during fiscal 2022 and 2021, respectively. In addition, the Company contributed $2.3$1.5 million, $5.9$1.5 million, and $2.6$2.2 million to its non-U.S. pension plans during fiscal 2020, 2019,2023, 2022, and 2018,2021, respectively. These contributions are reported in the change in other liabilities in the consolidated statements of cash flows.
Postretirement plans: 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 2020, 2019,2023, 2022, and 20182021 was $0.3 million, $0.3 million, and $0.2 million, respectively.million.
Measurement date: 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, were as follows:
| | Years ended March 31, | | | Years ended March 31, | | | | | 2020 | | | 2019 | | | 2023 | | | 2022 | | | Change in benefit obligation: | | | | | | | | | | | | | | Benefit obligation at beginning of year | | $ | 258.8 | | | $ | 273.6 | | | $ | 228.6 | | | $ | 260.6 | | | Service cost | | | 0.4 | | | | 0.5 | | | | 0.2 | | | | 0.3 | | | Interest cost | | | 9.1 | | | | 9.6 | | | | 8.1 | | | | 7.3 | | | Actuarial loss | | | 15.5 | | | | 1.7 | | | Actuarial gain
| | | | (25.8 | ) | | | (16.5 | ) | | Benefits paid | | | (18.2 | ) | | | (22.8 | ) | | | (16.1 | ) | | | (16.0 | ) | | Curtailment gain (a) | | | (0.3 | ) | | | - | | | | Disposition of air-cooled automotive business | | | | - | | | | (5.5 | ) | | Effect of exchange rate changes | | | (0.6 | ) | | | (3.8 | ) | | | (0.1 | ) | | | (1.6 | ) | | Benefit obligation at end of year | | $ | 264.7 | | | $ | 258.8 | | | $ | 194.9 | | | $ | 228.6 | | | | | | | | | | | | | | | | | | | | | Change in plan assets: | | | | | | | | | | | | | | | | | | Fair value of plan assets at beginning of year | | $ | 155.1 | | | $ | 157.7 | | | $ | 179.9 | | | $ | 183.3 | | | Actual return on plan assets | | | (11.6 | ) | | | 6.3 | | | | (12.0 | ) | | | 7.6 | | | Benefits paid | | | (18.2 | ) | | | (22.8 | ) | | | (16.1 | ) | | | (16.0 | ) | | Employer contributions | | | 5.8 | | | | 13.9 | | | | 1.5 | | | | 5.0 | | | Fair value of plan assets at end of year | | $ | 131.1 | | | $ | 155.1 | | | $ | 153.3 | | | $ | 179.9 | | | Funded status at end of year | | $ | (133.6 | ) | | $ | (103.7 | ) | | $ | (41.6 | ) | | $ | (48.7 | ) | | | | | | | | | | | | | | | | | | | | Amounts recognized in the consolidated balance sheets: | | | | | | | | | | | | | | | | | | Current liability | | $ | (2.7 | ) | | $ | (2.0 | ) | | $ | (1.4 | ) | | $ | (1.5 | ) | | Noncurrent liability | | | (130.9 | ) | | | (101.7 | ) | | | (40.2 | ) | | | (47.2 | ) | | | | $ | (133.6 | ) | | $ | (103.7 | ) | | $ | (41.6 | ) | | $ | (48.7 | ) |
| (a) | The $0.3 million curtailment gain, which is associated with headcount reductions in Europe within the VTS segment, will be recognized as a component of net periodic benefit cost following the completion of the headcount reductions. See Note 5 for additional information on the Company’s restructuring activities. |
As of March 31, 2020, 2019,2023, 2022, and 2018,2021, the benefit obligation associated with the Company’s non-U.S. pension plans totaled $35.7$21.2 million, $36.5$26.5 million, and $43.4$36.4 million, respectively. In fiscal 2020, the $0.8The $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 resulteddue to net actuarial gains during the year from an increase in discount rates and employer contributions of $2.2 million for benefits paid to plan participants duringwhich decreased the year,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 $0.9$0.7 million. In fiscal 2019,2022, the $6.9$9.9 million decrease was primarily due to the sale of the air-cooled automotive business in Austria, which resulted from employer contributions of $5.9in a $5.5 million for benefits paid to plan participantsdecrease. In addition, net actuarial gains during the year, and 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 $1.1$0.6 million.
The accumulated benefit obligation for pension plans was $194.4 million and $228.1 million as of March 31, 2023 and 2022, respectively. The net actuarial loss related to the pension plans recognized in accumulated other comprehensive loss was $123.5 million and $131.5 million as of March 31, 2023 and 2022, respectively.
The accumulated benefit obligation for pension plans was $263.1 million and $256.9 million as of March 31, 2020 and 2019, respectively. The net actuarial loss related to the pension plans recognized in accumulated other comprehensive loss was $191.5 million and $159.1 million as of March 31, 2020 and 2019, respectively.
Costs for the Company’s global pension plans included the following components:
| | Years ended March 31, | | | Years ended March 31, | | | | | 2020 | | | 2019 | | | 2018 | | | 2023 | | | 2022 | | | 2021 | | | Components of net periodic benefit cost: | | | | | | | | | | | | | | | | | | | | Service cost | | $ | 0.4 | | | $ | 0.5 | | | $ | 0.5 | | | $ | 0.2 | | | $ | 0.3 | | | $ | 0.4 | | | Interest cost | | | 9.1 | | | | 9.6 | | | | 9.9 | | | | 8.1 | | | | 7.3 | | | | 7.9 | | | Expected return on plan assets | | | (12.0 | ) | | | (12.3 | ) | | | (11.9 | ) | | | (11.6 | ) | | | (12.9 | ) | | | (11.5 | ) | | Amortization of net actuarial loss | | | 6.0 | | | | 5.6 | | | | 5.6 | | | | 5.7 | | | | 6.9 | | | | 6.9 | | | Settlements (a) | | | 0.2 | | | | 0.2 | | | | 0.3 | | | | - | | | | - | | | | 0.2 | | | Curtailment gain (a) | | | - | | | | - | | | | (0.3 | ) | | | Net periodic benefit cost | | $ | 3.7 | | | $ | 3.6 | | | $ | 4.1 | | | $ | 2.4 | | | $ | 1.6 | | | $ | 3.9 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Other changes in benefit obligation recognized in other comprehensive income (loss): | | | | | | | | | | | | | | | Net actuarial loss | | $ | (38.7 | ) | | $ | (7.7 | ) | | $ | (5.8 | ) | | | Amortization of net actuarial loss | | | 6.2 | | | | 5.8 | | | | 5.9 | | | | Total recognized in other comprehensive income (loss) | | $ | (32.5 | ) | | $ | (1.9 | ) | | $ | 0.1 | | | 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 and curtailment gain 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 amortized $6.2$5.7 million, $5.6$8.6 million, and $5.6 $7.1million of net actuarial loss in fiscal 2020, 2019,2023, 2022, and 2018,2021, respectively. In each Exclusive of these years,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$1.0 million of the amortization was attributable to the Company’s non-U.S. pension plans. The Company estimates $6.9 millionplans in each of net actuarial loss for its pension plans will be amortized from accumulated other comprehensive loss into net periodic benefit cost during fiscal 2021. The fiscal 2021 estimated amortization includes less than $1.0 million related to the Company’s non-U.S. pension plans.these years.
The Company used a discount rate of 3.4%5.2% and 4.0%3.9% as of March 31, 20202023 and 2019,2022, respectively, for determining its benefit obligations under its U.S. pension plans. The Company used a weighted-average discount rate of 1.0%3.8% and 1.4%1.8% as of March 31, 20202023 and 2019,2022, respectively, for determining its benefit obligations under its non-U.S. pension plans. The Company used a discount rate of 4.0%3.9%, 4.0%3.2%, and 4.1%3.4% to determine its costs under its U.S. pension plans for fiscal 2020, 2019,2023, 2022, and 2018,2021, respectively. The Company used a weighted-average discount rate of 1.7%2.9%, 1.9%1.6%, and 1.9%1.4% to determine its costs under its non-U.S. pension plans for fiscal 2020, 2019,2023, 2022, and 2018,2021, 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. pension 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, 20202023 and 20192022 were as follows:
| | Target allocation | | | Plan assets | | | Target allocation | | | Plan assets | | | | | | | | 2020 | | | 2019 | | | | | | 2023 | | | 2022 | | | Equity securities | | | 65 | % | | | 60 | % | | | 66 | % | | | 76 | % | | | 76 | % | | | 74 | % | | Debt securities | | | 21 | % | | | 22 | % | | | 19 | % | | | 18 | % | | | 15 | % | | | 17 | % | | Real estate investments | | | 13 | % | | | 16 | % | | | 12 | % | | | 5 | % | | | 8 | % | | | 8 | % | | Cash and cash equivalents | | | 1 | % | | | 2 | % | | | 3 | % | | | 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, 20202023 and 2019,2022, the Company’s pension plans did not directly own shares of Modine common stock.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The Company employs a total return investment approach, whereby a mix of investments are used to maximize the long-term growth of 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 2020, 2019,2023, U.S. pension plan expense, the expected rate of return on plan assets was 7.0 percent. For fiscal 2022, and 20182021 U.S. pension plan expense, the expected rate of return on plan assets was 7.5 percent. For fiscal 20212024 U.S. pension plan expense, the Company has assumed a rate of return on plan assets of 7.56.5 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 contribute approximately $20 millionmake cash contributions to theseits U.S. plans during fiscal 2021.2024.
Estimated pension benefit payments for the next ten fiscal years are as follows:
| Fiscal Year | | Estimated Pension Benefit Payments | | | 2021 | | $ | 17.2 | | | 2022 | | | 16.8 | | | 2023 | | | 16.7 | | | 2024 | | | 16.7 | | | 2025 | | | 16.8 | | | 2026-2030 | | | 80.6 | |
| 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 | |
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 as a hedge, and, if so, on the nature of the hedging activity.
Commodity derivatives: Derivatives The Company periodically enters into over-the-counter forward contracts related to forecasted purchases of aluminum and copper. The Company’s strategy in entering into these contracts is to reduce its exposure to changing market prices of these commodities. The Company designates certain commodity forward contracts 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 accumulated other comprehensive income (loss) (“AOCI”) within shareholders’ equity and subsequently recognizes the gains and losses within cost of 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 forward contracts to hedge specific foreign currency-denominated assets and 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, the Company records unrealized gains and losses related to changes in fair value 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.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The fair value of the Company’s derivative financial instruments recorded in the consolidated balance sheets were as follows:
| _ | Balance Sheet Location | | March 31, 2020 | | | March 31, 2019 | | | Derivatives designated as hedges: | | | | | | | | | Commodity derivatives | Other current assets | | $ | - | | | $ | 0.6 | | | Commodity derivatives | Other current liabilities | | | 1.3 | | | | 0.3 | | | Foreign exchange contracts | Other current assets | | | 0.1 | | | | 0.2 | | | | | | | | | | | | | | Derivatives not designated as hedges: | | | | | | | | | | | Foreign exchange contracts | Other current liabilities | | $ | - | | | $ | 0.5 | |
| _ | 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 associated with derivative financial instruments that the Company designated for hedge accounting during the years ended March 31 were as follows:
| | Gain (loss) recognized in other comprehensive income | | Statement of Operations | | Gain (loss) reclassified from AOCI | | | Gain (loss) recognized in other comprehensive income | | Statement of Operations | | Gain (loss) reclassified from AOCI | | | | | 2020 | | | 2019 | | | 2018 | | Location | | 2020 | | | 2019 | | | 2018 | | | 2023 | | | 2022 | | | 2021 | | Location | | 2023 | | | 2022 | | | 2021 | | | Commodity derivatives | | $ | (2.6 | ) | | $ | (0.3 | ) | | $ | 0.2 | | Cost of sales | | $ | (0.8 | ) | | $ | (0.4 | ) | | $ | - | | | $ | (1.6 | ) | | $ | 1.1 | | | $ | 2.2 | | Cost of sales
| | $ | (1.0 | ) | | $ | 1.2 | | | $ | - | | | Foreign exchange contracts | | | (0.1 | ) | | | (0.4 | ) | | | 0.1 | | Net sales | | | (0.1 | ) | | | (0.4 | ) | | | 0.1 | | | | 1.6 | | | | - | | | | - | | Net sales | | | 0.6 | | | | - | | | | - | | | Foreign exchange contracts | | | 0.2 | | | | 1.0 | | | | - | | Cost of sales | | | 0.4 | | | | 0.6 | | | | - | | | | 0.4 | | | | 0.6 | | | | (0.1 | ) | Cost of sales | | | 0.7 | | | | 0.4 | | | | (0.1 | ) | | Total gains (losses) | | $ | (2.5 | ) | | $ | 0.3 | | | $ | 0.3 | | | | $ | (0.5 | ) | | $ | (0.2 | ) | | $ | 0.1 | | | $ | 0.4 | | | $ | 1.7 | | | $ | 2.1 | | | | $ | 0.3 | | | $ | 1.6 | | | $ | (0.1 | ) |
The amounts associated with derivative financial instruments that the Company did not designate for hedge accounting were as follows:
| Statement of Operations Location | | Years ended March 31, | | | _ | | | 2020 | | | 2019 | | | 2018 | | | Commodity derivatives | Cost of sales | | $ | - | | | $ | - | | | $ | 0.4 | | | Foreign exchange contracts | Net sales | | | (0.1 | ) | | | (0.7 | ) | | | (0.1 | ) | | Foreign exchange contracts | Other income (expense) - net | | | (0.1 | ) | | | (0.3 | ) | | | (0.5 | ) | | Total losses | | | $ | (0.2 | ) | | $ | (1.0 | ) | | $ | (0.2 | ) |
| 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
COVID-19
In March 2020,Supply Chain Disruptions and Inflationary Market Conditions
Market and economic dynamics, including the World Health Organization declared the outbreakimpacts of the novel coronavirus, COVID-19 a pandemic. The spreadpandemic, have contributed to global supply chain challenges and inflationary market conditions. Since the fourth quarter of COVID-19fiscal 2022, the military conflict between Russia and Ukraine and the resulting work and travel restrictions, including international border closings, have disrupted, and may continue to disrupt, global supply chains and have negatively impacted the global economy. As a result of this pandemic, the Company has experienced significant impacts on its operations and has suspended production at certain manufacturing facilities in China, India, Italy, Spain, Germany, the Netherlands, Austria, Hungary, the U.S., Mexico and Brazil due to local government requirements or customer shutdowns and is operating other facilitiesrelated sanctions imposed by governments in the U.S. and abroad at reduced capacity levels. Although the temporarily-closed facilities have since reopened, many are operating at a significantly reduced volume because of low customer demand. also impacted these market conditions. The Company is focused on protecting the health and wellbeing of its employees and the communities in which it operates, while also ensuring the continuity of its business operations and timely delivery of quality products and services to its customers. Beginning largely in April 2020 and in an effort to mitigatemitigating the negative impacts of COVID-19,labor 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 has taken actions, including, but not limited to, production staffing adjustments, furloughs, shortened work weeks,cannot reasonably estimate the full impact that the supply chain challenges and temporary salary reductions at all levels of our organization. In addition, the Company is focused on reducing operatingother related economic and administrative expenses.
The Company’s consolidated financial statements reflect estimates and assumptions made by management, including assumptions regarding the future impacts of the COVID-19 pandemic, that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenue and expenses during the reporting periods presented. For example, assets particularly sensitive to assumptions that could be adversely impacted by the COVID-19 pandemic include goodwill and deferred tax assets. While the Company believes it used appropriate estimates and assumptions to prepare the consolidated financial statements, actual amounts could differ materially and future events or circumstances couldmarket dynamics will have a potential negative effect on the assumptions used. If the Company, its suppliers, or its customers experience further shutdowns or other significant business disruptions associated with the COVID-19 pandemic, its ability to conduct business in the manner and on the timelines presently planned could be materially and negatively impacted, which could have a material adverse effect on the Company’s business, financial position, results of operations and cash flows.flows in the future.
Market Risk
The Company sells a broad range of products that provide thermal solutions to customers operating in diverse markets, including the automotive, commercial vehicle, off-highway, and commercial, industrial, and building HVAC&R markets. The COVID-19 pandemic has negatively impacted these markets; the duration and severity of the impacts of COVID-19 on these markets are currently uncertain.
Credit 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 2020, 1 customer within the VTS segment2023 and 2022, no customers accounted for more than ten percent of the Company’s total sales. In fiscal 2019 and 2018, 2 customers within the VTS segment each2021, 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 were 4539 percent, 5039 percent, and 4843 percent of total sales in fiscal 2020, 2019,2023, 2022, and 2018,2021, respectively. At March 31, 20202023 and 2019, 342022, 37 percent and 3829 percent, respectively, of the Company'sCompany’s trade accounts receivable were due from the Company'sCompany’s top 10ten customers. These customers operate primarily in the automotive, commercial vehicle, off-highway, automotive and light vehicle, data center cooling, and commercial air conditioning and refrigeration markets. CollateralThe 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 nor has experienced a significant increase in credit losses in connection with the COVID-19 pandemic.served.
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 financial ratings that are acceptable to the Company.
Counterparty Risk The Company manages counterparty risk 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 Company has recorded environmental investigation and remediation accruals related to soil and groundwater contamination at manufacturing facilities in the United States,U.S., one of which the Company currently owns and operates, and at its former manufacturing facility in the Netherlands, along with accruals for lesser environmental matters at certain other facilities in the United States and Brazil.Netherlands. These accruals generallyprimarily relate to soil and groundwater contamination at facilities where past operations followed practices and procedures that were considered acceptable under then-existing regulations, or where the Company is a successor to the obligations of prior owners, and current laws and regulations require investigative and/or remedial work to ensure sufficient environmental compliance. In instances where a range of loss can be reasonably estimated for a probable environmental liability, but no amount within the range is a better estimate than any other amount, the Company accrues the minimum of the range. The Company’s accruals for these environmental matters totaled $18.2$17.6 million and $18.9$18.2 million at March 31, 20202023 and 2019,2022, 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 liabilities related to these matters and revise the estimated accruals, if necessary. BasedWhile 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.
Other Litigation In the normal course of business, the Company and its subsidiaries are named as defendants in various lawsuits and enforcement proceedings by private parties, governmental agencies and/or others in which claims are asserted against Modine. The Company believes that any additional loss in excess of amounts already accrued would not have a material effect on the Company’s consolidated balance sheet, results of operations, and cash flows. In addition, management expects that the liabilities which may ultimately result from such lawsuits or proceedings, if any, would not have a material adverse effect on the Company’s financial position.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 21: Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss were as follows:
| | Foreign Currency Translation | | | Defined Benefit Plans | | | Cash Flow Hedges | | | Total | | | Balance, March 31, 2019 | | $ | (42.6 | ) | | $ | (136.3 | ) | | $ | 0.5 | | | $ | (178.4 | ) | | | | | | | | | | | | | | | | | | | | Other comprehensive loss before reclassifications | | | (18.2 | ) | | | (38.7 | ) | | | (2.5 | ) | | | (59.4 | ) | | Reclassifications: | | | | | | | | | | | | | | | | | | Amortization of unrecognized net loss (a) | | | - | | | | 5.8 | | | | - | | | | 5.8 | | | Realized losses - net (b) | | | - | | | | - | | | | 0.5 | | | | 0.5 | | | Foreign currency translation gains (c) | | | (0.6 | ) | | | - | | | | - | | | | (0.6 | ) | | Income taxes | | | - | | | | 8.3 | | | | 0.5 | | | | 8.8 | | | Total other comprehensive loss | | | (18.8 | ) | | | (24.6 | ) | | | (1.5 | ) | | | (44.9 | ) | | | | | | | | | | | | | | | | | | | | Balance, March 31, 2020 | | $ | (61.4 | ) | | $ | (160.9 | ) | | $ | (1.0 | ) | | $ | (223.3 | ) |
| | 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 | | | Cash Flow Hedges | | | Total | | | Foreign Currency Translation | | | Defined Benefit Plans | | | Cash Flow Hedges | | | Total | | | Balance, March 31, 2018 | | $ | (5.5 | ) | | $ | (134.9 | ) | | $ | 0.1 | | | $ | (140.3 | ) | | Balance, March 31, 2021 | | | $ | (31.0 | ) | | $ | (130.8 | ) | | $ | 0.6 | | | $ | (161.2 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Other comprehensive income (loss) before reclassifications | | | (37.9 | ) | | | (7.1 | ) | | | 0.3 | | | | (44.7 | ) | | | (8.1 | ) | | | 11.5 | | | | 1.7 | | | | 5.1 | | | Reclassifications: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Amortization of unrecognized net loss (a) | | | - | | | | 5.4 | | | | - | | | | 5.4 | | | | - | | | | 6.5 | | | | - | | | | 6.5 | | | Realized losses - net (b) | | | - | | | | - | | | | 0.2 | | | | 0.2 | | | | Foreign currency translation losses (d) | | | 0.8 | | | | - | | | | - | | | | 0.8 | | | | Unrecognized net pension loss in disposed business (c) | | | | - | | | | 1.7 | | | | - | | | | 1.7 | | | Realized gains - net (b) | | | | - | | | | - | | | | (1.6 | ) | | | (1.6 | ) | | Income taxes | | | - | | | | 0.3 | | | | (0.1 | ) | | | 0.2 | | | | - | | | | - | | | | - | | | | - | | | Total other comprehensive income (loss) | | | (37.1 | ) | | | (1.4 | ) | | | 0.4 | | | | (38.1 | ) | | | (8.1 | ) | | | 19.7 | | | | 0.1 | | | | 11.7 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance, March 31, 2019 | | $ | (42.6 | ) | | $ | (136.3 | ) | | $ | 0.5 | | | $ | (178.4 | ) | | 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 18 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 investment in NEXpension plan as a component of the loss on sale recorded during fiscal 2020, the Company wrote off $0.6 million of accumulated foreign currency translation gains. |
| (d) | As a result of the sale of a business in South Africa during fiscal 2019, the Company wrote off $0.8 million of accumulated foreign currency translation losses.2022. See Note 1 for additional information. |
Note 22: Segment and Geographic Information
The Company’s product lines consist of heat-transfer componentssystems and systems.components. The Company serves vehicular and commercial, industrial, and building HVAC&R markets and vehicular markets.
The Company’s VTSClimate Solutions segment represents itsprovides heat transfer products, heating, ventilating, air conditioning and refrigeration products and data center cooling solutions to global customers. The Company’s Performance Technologies segment designs and manufactures air-and liquid-cooled technology for vehicular, businessstationary power, and primarily servesindustrial applications. In addition, the automotive,Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and off-highway markets. In addition, the VTS segment serves the automotive customers and commercial vehicle aftermarket in Brazil. The Company’s CIS segment provides coils, coolers,coatings products and coating solutions to customers throughout the world. The Company’s BHVAC segment provides heating, ventilating and air conditioning products to customers throughout the world.application services.
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, 2020,2022, the Company began managing its automotive business separate fromoperations under two operating segments, Climate Solutions and Performance Technologies. The Climate Solutions segment includes the other businesses withinpreviously-reported BHVAC and CIS segments, with the VTSexception 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 is managingbelieves 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 automotive business as a separate segment as the Company targets the sale or eventual exitCompany’s consolidated financial position, results of the businesses in this segment. Beginning for fiscal 2021, the Company will report theoperations, and cash flows. Segment financial resultsinformation for the automotive business asprior periods has been recast to conform to the Automotive segment. The remaining portion of the previous VTS segment will be named the Heavy-Duty Equipment segment and will include the heavy-duty commercial vehicle and off-highway businesses.current presentation.
The following is a summary of net sales, gross profit, and operating income by 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 | |
The following is a summary of net sales, gross profit, and operating income by segment:
| | 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, 2020 | | | | | External Sales | | | Inter-segment Sales | | | Total | | | Net sales: | | | | | | | | | | | VTS | | $ | 1,136.0 | | | $ | 41.2 | | | $ | 1,177.2 | | | CIS | | | 620.1 | | | | 3.8 | | | | 623.9 | | | BHVAC | | | 219.4 | | | | 1.7 | | | | 221.1 | | | Segment total | | | 1,975.5 | | | | 46.7 | | | | 2,022.2 | | | Corporate and eliminations | | | - | | | | (46.7 | ) | | | (46.7 | ) | | Net sales | | $ | 1,975.5 | | | $ | - | | | $ | 1,975.5 | |
| | Year ended March 31, 2019 | | | | | External Sales | | | Inter-segment Sales | | | Total | | | Net sales: | | | | | | | | | | | VTS | | $ | 1,298.9 | | | $ | 52.8 | | | $ | 1,351.7 | | | CIS | | | 704.7 | | | | 2.9 | | | | 707.6 | | | BHVAC | | | 209.1 | | | | 3.3 | | | | 212.4 | | | Segment total | | | 2,212.7 | | | | 59.0 | | | | 2,271.7 | | | Corporate and eliminations | | | - | | | | (59.0 | ) | | | (59.0 | ) | | Net sales | | $ | 2,212.7 | | | $ | - | | | $ | 2,212.7 | |
| | Year ended March 31, 2018 | | | Year ended March 31, 2021 | | | | | External Sales | | | Inter-segment Sales | | | Total | | | External Sales | | | Inter-segment Sales | | | Total | | | Net sales: | | | | | | | | | | | | | | | | | | | | VTS | | $ | 1,239.3 | | | $ | 56.4 | | | $ | 1,295.7 | | | | CIS | | | 674.4 | | | | 1.3 | | | | 675.7 | | | | BHVAC | | | 189.4 | | | | 1.8 | | | | 191.2 | | | | | | $ | 731.1 | | | $ | 0.1 | | | $ | 731.2 | | | | | | 1,077.3 | | | | 31.5 | | | | 1,108.8 | | | Segment total | | | 2,103.1 | | | | 59.5 | | | | 2,162.6 | | | | 1,808.4 | | | | 31.6 | | | | 1,840.0 | | | Corporate and eliminations | | | - | | | | (59.5 | ) | | | (59.5 | ) | | | - | | | | (31.6 | ) | | | (31.6 | ) | | Net sales | | $ | 2,103.1 | | | $ | - | | | $ | 2,103.1 | | | $ | 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, | | | Years ended March 31, | | | | | 2020 | | | 2019 | | | 2018 | | | 2023 | | | 2022 | | | 2021 | | | Gross profit: | |
| | Years ended March 31, | | | Operating income: | | 2020 | | | 2019 | | | 2018 | | | VTS | | $ | 27.6 | | | $ | 64.8 | | | $ | 84.2 | | | CIS | | | 32.9 | | | | 53.4 | | | | 28.5 | | | BHVAC | | | 36.4 | | | | 26.9 | | | | 20.3 | | | Segment total | | | 96.9 | | | | 145.1 | | | | 133.0 | | | Corporate and eliminations (a) | | | (59.0 | ) | | | (35.4 | ) | | | (40.8 | ) | | Operating income | | $ | 37.9 | | | $ | 109.7 | | | $ | 92.2 | |
| | 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. During fiscal 2020 and 2019, the Company recorded $39.2 million and $7.1 million, respectively, of costs directly associated with its review of strategic alternatives for the VTS segment’s automotive business, including costs to separate and prepare the business for potential sale. |
The following is a summary of totalsegment assets, by segment:comprised entirely of trade accounts receivable and inventories, and other assets:
| | March 31, | | | | | 2020 | | | 2019 | | | VTS | | $ | 683.9 | | | $ | 749.9 | | | CIS | | | 617.7 | | | | 604.2 | | | BHVAC | | | 102.3 | | | | 89.4 | | | Corporate and eliminations | | | 132.2 | | | | 94.5 | | | Total assets | | $ | 1,536.1 | | | $ | 1,538.0 | |
| | 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 | |
| (a) | Represents cash and cash equivalents, other current assets, property plant and equipment, intangible assets, goodwill, deferred income taxes, and other noncurrent assets for the 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: | | 2020 | | | 2019 | | | 2018 | | | VTS | | $ | 53.2 | | | $ | 56.2 | | | $ | 61.4 | | | CIS | | | 15.0 | | | | 16.4 | | | | 9.0 | | | BHVAC | | | 3.1 | | | | 1.3 | | | | 0.6 | | | Total capital expenditures | | $ | 71.3 | | | $ | 73.9 | | | $ | 71.0 | |
| | 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: | | 2020 | | | 2019 | | | 2018 | | | VTS | | $ | 49.7 | | | $ | 49.5 | | | $ | 48.2 | | | CIS | | | 24.0 | | | | 23.9 | | | | 24.3 | | | BHVAC | | | 3.4 | | | | 3.5 | | | | 4.2 | | | Total depreciation and amortization expense | | $ | 77.1 | | | $ | 76.9 | | | $ | 76.7 | |
| | 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 | |
| (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. |
The following is a summary of net sales by geographicalgeographic area, based upon the location of the selling unit:
| | Years ended March 31, | | | | | 2020 | | | 2019 | | | 2018 | | | United States | | $ | 941.9 | | | $ | 1,032.3 | | | $ | 911.4 | | | Italy | | | 187.4 | | | | 217.3 | | | | 211.5 | | | China | | | 168.5 | | | | 172.1 | | | | 156.0 | | | Hungary | | | 142.4 | | | | 165.6 | | | | 153.9 | | | Germany | | | 97.5 | | | | 123.1 | | | | 132.6 | | | Austria | | | 93.0 | | | | 116.2 | | | | 151.7 | | | Other | | | 344.8 | | | | 386.1 | | | | 386.0 | | | Net sales | | $ | 1,975.5 | | | $ | 2,212.7 | | | $ | 2,103.1 | |
The following is a summary of property, plant and equipment by geographical area:
| | March 31, | | | | | 2020 | | | 2019 | | | United States | | $ | 114.6 | | | $ | 117.7 | | | China | | | 56.8 | | | | 57.6 | | | Hungary | | | 55.4 | | | | 55.3 | | | Mexico | | | 50.0 | | | | 56.3 | | | Italy | | | 49.8 | | | | 52.4 | | | Germany | | | 27.0 | | | | 32.8 | | | Austria | | | 26.0 | | | | 36.9 | | | Other | | | 68.4 | | | | 75.7 | | | Total property, plant and equipment | | $ | 448.0 | | | $ | 484.7 | |
The following is a summary of net sales by end market:
| | Years ended March 31, | | | | | 2020 | | | 2019 | | | 2018 | | | Commercial HVAC&R | | $ | 639.7 | | | $ | 674.0 | | | $ | 648.3 | | | Automotive | | | 508.8 | | | | 542.8 | | | | 526.0 | | | Commercial vehicle | | | 323.7 | | | | 387.6 | | | | 381.7 | | | Off-highway | | | 253.9 | | | | 314.1 | | | | 271.2 | | | Data center cooling | | | 150.2 | | | | 187.0 | | | | 137.6 | | | Industrial cooling | | | 43.5 | | | | 47.8 | | | | 67.6 | | | Other | | | 55.7 | | | | 59.4 | | | | 70.7 | | | Net sales | | $ | 1,975.5 | | | $ | 2,212.7 | | | $ | 2,103.1 | |
| | 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 | |
Note 23: Quarterly Financial Data (Unaudited)
The following is a summary of quarterly financial data:property, plant and equipment by geographic area:
| | Fiscal 2020 quarters ended | | | | | | | | June | | | Sept. | | | Dec. | | | March | | | Fiscal 2020 | | | | | | | | | | | | | | | | | | | | Net sales | | $ | 529.0 | | | $ | 500.2 | | | $ | 473.4 | | | $ | 472.9 | | | $ | 1,975.5 | | | Gross profit | | | 83.4 | | | | 75.7 | | | | 73.5 | | | | 74.9 | | | | 307.5 | | | Net earnings (loss) (a) | | | 8.2 | | | | (4.8 | ) | | | 1.0 | | | | (6.4 | ) | | | (2.0 | ) | | Net earnings (loss) attributable to Modine (a) | | | 8.0 | | | | (4.7 | ) | | | 1.2 | | | | (6.7 | ) | | | (2.2 | ) | | Net earnings (loss) per share attributable to Modine shareholders: | | | | | | | | | | | | | | | | | | | | | | Basic | | $ | 0.16 | | | $ | (0.09 | ) | | $ | 0.02 | | | $ | (0.13 | ) | | $ | (0.04 | ) | | Diluted | | | 0.16 | | | | (0.09 | ) | | | 0.02 | | | | (0.13 | ) | | | (0.04 | ) |
| | 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 | |
| | Fiscal 2019 quarters ended | | | | | | | | June | | | Sept. | | | Dec. | | | March | | | Fiscal 2019 | | | | | | | | | | | | | | | | | | | | Net sales | | $ | 566.1 | | | $ | 548.9 | | | $ | 541.0 | | | $ | 556.7 | | | $ | 2,212.7 | | | Gross profit | | | 94.3 | | | | 87.9 | | | | 91.7 | | | | 91.6 | | | | 365.5 | | | Net earnings (b) | | | 22.5 | | | | 38.7 | | | | 18.3 | | | | 6.4 | | | | 85.9 | | | Net earnings attributable to Modine (b) | | | 22.0 | | | | 38.5 | | | | 18.0 | | | | 6.3 | | | | 84.8 | | | Net earnings per share attributable to Modine shareholders: | | | | | | | | | | | | | | | | | | | | | | Basic | | $ | 0.43 | | | $ | 0.76 | | | $ | 0.36 | | | $ | 0.12 | | | $ | 1.67 | | | Diluted | | | 0.43 | | | | 0.75 | | | | 0.35 | | | | 0.12 | | | | 1.65 | |
| (a) | During fiscal 2020, restructuring expenses totaled $1.8 million, $2.3 million, $2.6 million, and $5.5 million for the quarters ended June 30, 2019, September 30, 2019, December 31, 2019, and March 31, 2020, respectively (see Note 5). During the third quarter of fiscal 2020, the Company sold a previously-closed manufacturing facility in Germany and, as a result, recorded a gain of $0.8 million (see Note 1). During the fourth quarter of fiscal 2020, the Company recorded asset impairment charges totaling $8.6 million related to long-lived assets and goodwill (see Note 5 and Note 14). During fiscal 2020, costs associated with the Company’s review of strategic alternatives for the VTS segment’s automotive business totaled $8.3 million, $11.9 million, $14.0 million, and $5.0 million for the quarters ended June 30, 2019, September 30, 2019, December 31, 2019, and March 31, 2020, respectively. During fiscal 2020, the Company adjusted its valuation allowances on deferred tax assets in the U.S and in Brazil. As a result, the Company recorded net income tax charges totaling $3.0 million and $4.1 million in the third and fourth quarters, respectively. Also during fiscal 2020, the Company recorded a net income tax charge totaling $2.9 million, $2.7 million of which was recorded in the third quarter, as a result of legal entity restructuring completed in preparation of a potential sale of the automotive business (see Note 7).
|
| (b) | During fiscal 2019, restructuring expenses totaled $0.2 million, $0.5 million, and $8.9 million for the quarters ended June 30, 2018, December 31, 2018, and March 31, 2019, respectively (see Note 5). During the second quarter of fiscal 2019, the Company sold its South African business within the BHVAC segment and, as a result, recorded a loss of $1.7 million (see Note 1). During the third quarter of fiscal 2019, the Company recorded a $0.4 million impairment charge related to a manufacturing facility in Austria (see Note 5). During the third and fourth quarter of fiscal 2019, the Company incurred $1.2 million and $5.9 million of costs associated with its review of strategic alternatives for the VTS segment’s automotive business. The Company’s income tax benefit for fiscal 2019 includes net benefits of $24.4 million and net charges of $2.2 million in the second and third quarters, respectively, related to the Tax Act and the recognition of foreign tax credits (see Note 7). During fiscal 2019, the Company adjusted its valuation allowances on deferred tax assets related to two separate subsidiaries in China and, as a result, recorded a $2.0 million income tax benefit and a $1.0 million income tax charge in the first and second quarters, respectively (see Note 7). |
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors and Shareholders of
Modine Manufacturing CompanyCompany:
Opinions on the Consolidated Financial Statements and Internal Control overOver Financial Reporting
We have audited the accompanying consolidated financial statements, including the related notes, as listed in the index appearing under Item 15(a)(1), and the financial statement schedule listed in the index appearing under Item 15(a)(2),balance sheet of Modine Manufacturing Company and its subsidiaries (the “Company”)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, referred to as the “consolidatedconsolidated financial statements”)statements). We also have audited the Company'sCompany’s internal control over financial reporting as of March 31, 2020,2023, based on criteria established in Internal Control -– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 31, 2020 and 2019,2023, and the results of its operations and its cash flows for each of the three years in the periodyear ended March 31, 20202023, in conformity with accounting principlesU.S. generally accepted in the United States of America.accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2020,2023 based on criteria established in Internal Control -– Integrated Framework (2013) issued by the COSO.
Changes in Accounting Principles
As discussed in Note 1 toCommittee of Sponsoring Organizations of the consolidated financial statements, the Company changed the manner in which it accounts for leases in fiscal 2020 and the manner in which it accounts for intra-entity transfers of assets other than inventory in fiscal 2019.Treadway Commission.
Basis for Opinions
The Company'sCompany’s management is responsible for these consolidated financial statements, 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 Over Financial Reporting appearing under Item 9A.Reporting. Our responsibility is to express opinionsan opinion on the Company’s consolidated financial statements and an opinion on the Company'sCompany’s internal control over financial reporting 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 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 regarding the amounts and disclosures in the consolidated financial statements. Our auditsaudit 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. 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.
Definition and Limitations of Internal Control overOver 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 MattersMatter
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 (i)that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (ii)(2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit mattersmatter 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.
Goodwill Impairment Assessment – CIS Reporting UnitsRealizability of certain domestic deferred tax assets
As describeddiscussed in Notes 1 and 148 to the consolidated financial statements, the Company’s consolidated goodwill balance was $166.1 millionCompany 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, 2020, and2023 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 goodwill associated with the CIS reporting units was $152.6 million. Management assesses goodwill for impairment annually as ofyear ended March 31, of each year, 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. Management determines the fair value of a reporting unit based upon the present value of estimated future cash flows. Determining the fair value of a reporting unit involves judgment and the use of significant estimates and assumptions by management, which include assumptions regarding the revenue growth rates and operating profit margins used to calculate estimated future cash flows, the risk-adjusted discount rates, business trends and market conditions.2023.
The principal considerations for our determination that performing procedures relating toWe identified the goodwill impairment assessmentevaluation of the CIS reporting units isrealizability of certain domestic deferred tax assets, specifically certain federal carryforward assets, as a critical audit mattermatter. 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 there was significant judgment by management when determining the fair valueprimary 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 reporting units. This in turn ledrealizability of the federal carryforward assets, including controls related to a high degreethe projections of auditor judgment, subjectivity, and effort in performing procedures and evaluating evidence relating to management’s estimated future cash flows and significant assumptions, including revenue growth rates, operating profit margins,taxable income and the risk-adjusted discount rates. In addition,application of tax laws to utilize the audit effort involvedfederal carryforward assets. We evaluated the usereasonableness of professionals with specialized skillmanagement’s projections of future taxable income, including positive and knowledge to assist in performing these procedures and evaluatingnegative evidence used, by comparing the audit evidence obtained.projections to:
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidatedrecent financial statements. These procedures included testing the effectiveness of controls relating to the goodwill impairment assessment, including controls over the estimated fair valueprofitability trends of the CIS reporting units. These procedures also included, among others, testing management’s process for developing the fair value estimates; evaluating the appropriateness of the discounted cash flow model; testing the completeness, accuracy, and relevance of underlying data used in the model; and evaluating the significant assumptions used by management including revenue growth rates, operating profit margins, and risk-adjusted discount rates. Evaluating management’s assumptions related to revenue growth rates and operating profit margins involved evaluating whether the assumptions used were reasonable considering (i) the current and past performance of the reporting units, (ii) the consistency with external market and Company industry data and (iii) whether these assumptions were consistent with economic trends, and evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used
We assessed the Company’s ability to assist in the evaluationproject future earnings based on comparisons of the Company’s discounted cash flow modelprevious annual projections to actual results. We performed a sensitivity analysis over the amount and certain significant assumptions, includingtiming of future taxable income to assess the risk-adjusted discount rates.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/ PricewaterhouseCoopersKPMG LLP Milwaukee, Wisconsin
May 29, 2020
We have served as the Company’s auditor since 1935.2022. Milwaukee, Wisconsin May 25, 2023
Report of Independent Registered Public Accounting Firm
77To 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 Company'sCompany’s disclosure controls and procedures were effective, at a reasonable assurance level, as of March 31, 2020.2023.
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, assessed the effectiveness of the Company’s internal control over financial reporting as of March 31, 2020.2023. In making its assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in “Internal Control—Integrated Framework (2013).” Based upon this assessment, management concluded that, as of March 31, 2020,2023, 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, 20202023 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 20202023 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 20202023 Annual Meeting of Shareholders to be held on July 23, 2020August 17, 2023 (the “2020“2023 Annual Meeting Proxy Statement”) under the caption “Election of Directors.”
Executive Officers. The information in response to this Item appears under the caption "Information“Information about our Executive Officers"Officers” in this Form 10-K.
Code of Conduct. The Company incorporates by reference the information appearing in the 20202023 Annual Meeting Proxy Statement under the caption “Corporate Governance – Code of Conduct.” The Company'sCompany’s Code of 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 20202023 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 20202023 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 20202023 Annual Meeting Proxy Statement under the caption “Shareholder Nominations and Recommendations of Director Candidates.”
Delinquent Section 16(a) Reports. Reports The Company incorporates by reference the information appearing in the 20202023 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 20202023 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 20202023 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 20202023 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 20202023 Annual Meeting Proxy Statement under the caption “Independent Auditor’sAuditors’ Fees for Fiscal 20202023 and 2019.2022.”
PART IV
| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. |
(a) | (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, 2020, 20192023, 2022 and 20182021 | 42 | Consolidated Statements of Comprehensive Income for the years ended March 31, 2020, 20192023, 2022 and 20182021 | 43 | Consolidated Balance Sheets at March 31, 20202023 and 20192022 | 44 | Consolidated Statements of Cash Flows for the years ended March 31, 2020, 20192023, 2022 and 20182021 | 45 | Consolidated Statements of Shareholders'Shareholders’ Equity for the years ended March 31, 2020, 20192023, 2022 and 20182021 | 46 | | Notes to Consolidated Financial Statements | 47-7547-81 | Report of Independent Registered Public Accounting Firm (KPMG PCAOB ID 185) | 76-7782
| 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, 2020, 20192023, 2022 and 20182021 | 8187 | | | | 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. | 82-8588-91 | | | | 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)
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS For the years ended March 31, 2020, 20192023, 2022 and 20182021 (In millions)
| | | | | Additions | | | | | | Description | | Balance at Beginning of Period | | | Charged (Benefit) to Costs and Expenses | | | Charged to Other Accounts | | | Balance at End of Period | | | | | | | | | | | | | | | | | 2020: Valuation Allowance for Deferred Tax Assets | | $ | 43.4 | | | $ | 4.5 | | | $ | (1.0 | )(a) | | $ | 46.9 | | | | | | | | | | | | | | | | | | | | | 2019: Valuation Allowance for Deferred Tax Assets | | $ | 48.9 | | | $ | (1.6 | ) | | $ | (3.9 | )(a) | | $ | 43.4 | | | | | | | | | | | | | | | | | | | | | 2018: Valuation Allowance for Deferred Tax Assets | | $ | 49.6 | | | $ | (6.7 | ) | | $ | 6.0 | (a) | | $ | 48.9 | |
| | | | | 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. The fiscal 2018 amounts also included increases associated with the Company’s acquisition of Luvata HTS. |
MODINE MANUFACTURING COMPANY (THE “REGISTRANT”) (COMMISSION FILE NO. 1-1373)
TO 20202023 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 October 24, 2019January 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.hereto | | | | | | | | | | | | | 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 (“August 12, 2010 8-K”) | | | | | | | | | | | | 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 8-K | | | | | | | | | | | | | 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 | | | | | | | | | | | | 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 | | | | | | | | | | | | 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 | | |
| | 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”) | | | | | | | | | | | | 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 | | | | | | | | | | | | 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”) | | | | | | | | | | | | | Credit FacilitySecond Amendment to Second Amended and Restated Note Purchase and Private Shelf Agreement among Modine Holding GmbH, Modine Europe GmbH and Deutsche Bank AG dated as of April 27, 2012.May 19, 2020. | | Exhibit 4.104.2 to Registrant’s Form 10-K for the fiscal year ended March 31, 2012May 19, 2020 8-K | | | | | | | | | |
| | ThirdAmendment No. 2 to Fourth Amended and Restated Credit Agreement dated as of November 15, 2016.May 18, 2021. | | Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated November 15, 2016May 18, 2021 (“November 15, 2016May 18, 2021 8-K”) | | | | | | | | | | | | | Third Amendment to Second Amended and Restated Note Purchase and Private Shelf Agreement dated as of November 15, 2016.May 18, 2021. | | Exhibit 4.2 to November 15, 2016 May 18, 2021 8-K | | | | | | | | | | | | | DescriptionFifth Amended and Restated Credit Agreement dated as of October 12, 2022. | | Exhibit 4.1 to Registrant’s securitiesCurrent Report on Form 8-K dated October 12, 2022 | | | | X | | | | | | | | | | | Fourth Amendment to Second Amended and Restated CreditNote Purchase and Private Shelf Agreement dated as of June 28, 2019.November 21, 2022. | | Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated June 28, 201910-Q for the third quarter ended December 31, 2022 | | | | | | | | | | | | | Second Amended and Restated Note Purchase and Private Shelf Agreement datedDirector Emeritus Retirement Plan effective April 1, 1992 (and frozen as of August 6, 2019July 1, 2000). | | Exhibit 4.110(a) to Registrant’s Form 10-Q10-K for the third quarterfiscal year ended DecemberMarch 31, 20192002 | | | | | | | | | | | | | First Amendment to Second AmendedForm of Change in Control and Restated Note PurchaseTermination Agreement (amended and Private Shelf Agreement dated as of January 31, 2020restated) between the Registrant and officers other than Neil Brinker. | | Exhibit 4.210(f) to Registrant’s Form 10-Q10-K for the third quarterfiscal year ended DecemberMarch 31, 20192004 | | | | | | | | | | | | | Amendment No. 1 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”) | | | | | | | | | | 4.19Executive Supplemental Retirement Plan (as amended). | | 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 | | | | | | | | | | | | Director Emeritus Retirement Plan effective April 1, 1992 (and frozen as of July 1, 2000). | | Exhibit 10(a)10(f) to Registrant’s Form 10-K for the fiscal year ended March 31, 2002 | | | | | | | | | | | | 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 | | |
| | 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 | | | | | | | | | | | | | Form of Change in Control and Termination Agreement (amended and restated) between the Registrant and officers other than Thomas A. Burke.Deferred Compensation Plan (as amended). | | Exhibit 10(f)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 10-K for the year ended March 31, 20048-K dated July 17, 2014 | | | | | | | | | | | | | Executive Supplemental Retirement Plan (as amended).Form of Fiscal 2023 Performance Cash Award Agreement. | | Exhibit 10(f)10.1 to Registrant'sthe Registrant’s Form 10-K10-Q for the fiscal yearfirst quarter ended March 31, 2000June 30, 2022 (“June 30, 2022 10-Q”) | | | | | | | | | | | | | Deferred Compensation Plan (as amended).Form of Fiscal 2023 Incentive Stock Option Award Agreement. | | Exhibit 10(y)10.2 to 2003 10-KJune 30, 2022 10-Q | | | | | | | | | | | | | 2008 Incentive Compensation Plan
(Amended and Restated effective May 7, 2014).Form of Fiscal 2023 Non-Qualified Stock Option Award Agreement..
| | Exhibit 10.110.3 to Registrant's Current Report on Form 8-K dated July 17, 2014June 30, 2022 10-Q | | | | | | | | | | | | | Form of Fiscal 2020 Performance2023 Restricted Stock Unit Award Agreement.Agreement.. | | Exhibit 10.110.4 to Registrant’s Form 10-Q for the quarter ended June 30, 20192022 10-Q | | | | | | | | | | | | | Form of Fiscal 2020 Incentive2023 Modine Non-Employee Director Restricted Stock OptionUnit Award Agreement.Agreement with Deferral. | | Exhibit 10.210.6 to Registrant’s Form 10-Q for the quarter ended June 30, 20192022 10-Q | | | | | | | | | | | | | Form of Fiscal 20202023 Modine Non-Employee Director Restricted Stock Unit Award Agreement.Agreement without Deferral. | | Exhibit 10.310.7 to Registrant’s Form 10-Q for the quarter ended June 30, 20192022 10-Q | | | | | | | | | | | | | FormChange in Control Agreement dated as of Fiscal 2020 Non-Qualified Stock Option Award Agreement.June 4, 2021, by and between Modine Manufacturing Company and Neil D. Brinker. | | Exhibit 10.410.1 to Registrant’s Current Report on Form 10-Q for the quarter ended8-K dated June 30, 20194, 2021 | | | | | | | | | | | | | 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.Neil Brinker. | | Exhibit 10.17 to Registrant'sRegistrant’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 | | | | | | | | | | | | | FormTransition and Separation Agreement between Thomas A. Burke and Modine Manufacturing Company effective as of Fiscal 2020 Non-Employee Director Restricted Stock Unit Award.August 4, 2020. | | Exhibit 10.110.6 to the Registrant’s Form 10-Q for the second quarter ended September 30, 20192020 | | | | | | | | | | | | | Separation[Corrected] Offer Letter for Dennis P. Appel dated as of September 26, 2019.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, 20192020 | | | | | | | | | | | | | Release Agreement executed as of October 17, 2019, between Modine Manufacturing Company2020 Incentive Compensation Plan (Amended and Dennis P. Appel.Restated effective July 21, 2022). | | Exhibit 10.210.1 to the Registrant’s Current Report on Form 10-Q for the quarter ended December 31, 2019 8-K dated July 21, 2022 | | | | | | | | | | | | | EmploymentForm of Retention Agreement forLetter, effective August 31, 2020, between the Company and each of Michael B. Lucareli, Scott Wollenberg, dated as of July 26, 2019.L. Bowser and Sylvia A. Stein. | | Exhibit 10.510.1 to the Registrant’s Current Report on Form 10-Q for the quarter ended June 30, 20198-K dated August 31, 2020 | | | | | | | | | | |
| | ListOffer Letter dated as of subsidiaries ofJuly 2, 2021, by and between the Registrant.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”) | | | | X | | | | | | | | | | | ConsentOffer Letter dated as of independent registered public accounting firm.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 Thomas A. Burke,Neil D. Brinker, President and Chief Executive Officer. | | | | X | | | | | | | | | | | Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Finance and Chief Financial Officer. | | | | X | | | | | | | | | | | Section 1350 Certification of Thomas A. Burke,Neil D. Brinker, President and Chief Executive Officer. | | | | X | | | | | | | | | | | Section 1350 Certification of Michael B. Lucareli, Executive Vice President, Finance and Chief Financial Officer. | | | | X | | | | | | | | | 101.INS | | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). | | | | X | | | | | | | | | 101.SCH | | Inline XBRL Taxonomy Extension Schema Document.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.LAB101.PRE | | Inline XBRL Taxonomy Extension LabelPresentation Linkbase Document. | | | | X | | | | | | | | | 101.PRE104 | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | | | | X | | | | | | | | 104 | | Cover Page Interactive Data Filepage interactive data file (formatted as inline XBRL and contained in ExhibitExhibits 101). | | | | 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. |
** | 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 29, 202025, 2023 | Modine Manufacturing Company | | | | | | By: | /s/ Thomas A. BurkeNeil D. Brinker | | | | Thomas A. Burke, Neil D. Brinker, President
| | | and Chief Executive Officer | | | | (Principal (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 | | Thomas A. BurkeNeil D. Brinker | May 29, 202025, 2023 | President, Chief Executive Officer and Director | | (Principal Executive Officer) | | | | | | /s/ Michael B. Lucareli | | Michael B. Lucareli | May 29, 202025, 2023 | Executive Vice President, Finance and Chief Financial Officer | | (Principal Financial and Accounting Officer) | | | | | | /s/ Marsha C. Williams | | Marsha C. Williams | May 29, 202025, 2023 | Director | | | | /s/ David J. Anderson | | David J. Anderson | May 29, 2020 | DirectorChairperson, Board of Directors | | | | | | /s/ Eric D. Ashleman | | Eric D. Ashleman | May 29, 202025, 2023 | Director | |
| | | /s/ Suresh V. Garimella |
| Suresh V. Garimella | May 25, 2023 | Director | | | | | /s/ David G. BillsKatherine C. Harper | | David G. BillsKatherine C. Harper | | Director | | | | /s/ Charles P. Cooley | | Charles P. Cooley | May 29, 2020 | Director | | | | /s/ Suresh V. Garimella | | Suresh V. Garimella | May 29, 2020 | Director | | | | | | /s/ Larry O. Moore |
| Larry O. Moore | May 29, 202025, 2023 | Director | | | | | | /s/ Christopher W. Patterson |
| Christopher W. Patterson | May 29, 202025, 2023 | Director | | | | | /s/ David J. Wilson | | David J. Wilson | May 25, 2023 | Director | | | | | /s/ William A. Wulfsohn |
| William A. Wulfsohn | May 25, 2023 | Director | | | | | | /s/ Christine Y. Yan |
| Christine Y. Yan | May 29, 202025, 2023 | Director | |
s | | | % of sales | | |
Year Ended March 31, 2023 Compared with Year Ended March 31, 2022
Fiscal 20202023 net sales of $1,976$2,298 million were $237$248 million, or 1112 percent, lowerhigher than the prior year, primarily due to lowerhigher sales volume in both of our VTS and CIS segments and favorable commercial pricing, including adjustments in response to raw material price increases. These increases were partially offset by a $46$111 million unfavorable impact of foreign currency exchange rate changes, partially offset by higher salesrates. Sales in our BHVAC segment. Sales decreased $175the Performance Technologies and Climate Solutions segments increased $144 million and $84$101 million, in our VTS and CIS segments, respectively. Sales increased $9 million in our BHVAC segment.
Fiscal 20202023 cost of sales of $1,668$1,909 million decreased $179increased $168 million, or 10 percent, primarily due to lowerhigher sales volume and higher raw material prices, which increased $34 million. These increases were partially offset by a $39$95 million favorable impact of foreign currency exchange rate changes.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 an $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 90110 basis points to 84.4 percent and was negatively impacted by approximately 80 basis points due to higher labor and inflationary costs and, to a lesser extent, by sales mix. These negative impacts were partially offset by favorable material costs, which impacted costs of sales by approximately 30 basis points. The favorable material costs primarily resulted from lower commodity pricing, which more than offset the negative impacts of tariffs. In addition, we recorded $3 million of costs at Corporate for program and equipment transfers associated with the separation of the VTS segment’s automotive business in preparation for a potential sale.84.9 percent.
As a result of lowerhigher sales and higher cost of sales as a percentage of sales, fiscal 20202022 gross profit decreased $58increased $16 million and gross margin declined 90110 basis points to 15.615.1 percent.
Fiscal 20202022 SG&A expenses increased $6$4 million. The increase in SG&A expenses was primarily due to separation and projecthigher 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 recorded at Corporate associated withrelated to our review of strategic alternatives for the VTS segment’s automotive business, which increased approximately $29 million. This increase was partially offset bybusinesses and lower compensation-related expenses,strategic reorganization costs, which decreased approximately $13$4 million lower environmental charges related to previously-owned manufacturing facilities in the U.S., which decreased approximatelyand $3 million, and a $4 million favorable impactrespectively. The lower strategic reorganization costs primarily resulted from foreign currency exchange rate changes.lower severance expenses for executive management positions.
Restructuring expenses totaled $12of $24 million duringin fiscal 2020 and2022 increased $2$11 million compared with the prior year. The fiscal 2020 restructuringyear, primarily due to higher severance-related expenses primarily consisted of severance expenses related to targeted headcount reductions in the VTSPerformance Technologies segment, and equipment transfer and plant consolidation costspartially offset by lower severance-related expenses in the CISClimate Solutions segment. The fiscal 2020 headcount reductions were in response to lower market demand and in support of our objective to reduce operational and SG&A cost structures. During
In fiscal 2021, we approved headcount reductionsrecorded $167 million of impairment charges to write down the long-lived assets in the VTSliquid-cooled and CIS segmentsAustrian 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, we expect to record approximately $4 millionrecorded a net impairment reversal of severance expenses during the first quarter of fiscal 2021.$56 million.
During fiscal 2020,We sold our Austrian air-cooled automotive business on April 30, 2021. As a result of the sale, we recorded impairment charges totaling $9a $7 million primarily related to two manufacturing facilities in the VTS segment.loss on sale at Corporate during fiscal 2022.
Operating income of $38$119 million during fiscal 2020 decreased $722022 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. This decreaseyear, the fiscal 2022 operating income was primarily due to an increasefavorably impacted by higher gross profit. Operating income was negatively impacted by higher restructuring expenses, the loss on sale of $32 million of separation and project costs associated with our review of strategic alternatives for ourthe Austrian air-cooled automotive business, and lower earnings in our VTS and CIS segments, which decreased $37 million and $20 million, respectively, partially offset by higher earnings in our BHVAC segment, which increased $9 million.SG&A expenses.
The provision for income taxes was $12$15 million and $90 million in fiscal 2020, compared with a benefit for income taxes of $52022 and 2021, respectively. The $75 million in fiscal 2019. The $17 million changedecrease was primarily due to the absence of income tax benefits totaling $25 million recorded in the prior year and income tax charges totaling $10 million in the current year, partially offset by lower operating earnings in fiscal 2020. The $25 million of income tax benefits recorded in fiscal 2019 related to the recognition of tax assets for foreign tax credits and a manufacturing deduction in the U.S. and our accounting for the Tax Act. The $10$117 million of income tax charges recorded in fiscal 2020 were comprised of net charges totaling $7 million resulting from adjustments of2021 to increase the valuation allowances on certain 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 jurisdictionjurisdictions. 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 $3$9 million associated with legal entity restructuring in preparation for a potential sale of our automotive business. See Note 7resulting from the allocation of the Notes to Consolidated Financial Statements for additional information.income tax provision between net earnings and other comprehensive income.
Segment Results of Operations
A detailed comparison of our segment financial results for fiscal 2019 and 2018 can be found in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section in the Company’s 2019 Annual Report on Form 10-K filed with the SEC on May 23, 2019.
Effective April 1, 2020,2022, 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 automotive business separate fromconsolidated financial position, results of operations, and cash flows. We have recast the other businesses within the VTS segment. We are managing the automotive business as a separate segment as we target the sale or eventual exit of the automotive businesses. Beginningfinancial information for fiscal 2022 and 2021 we will reportto conform to the financial results for the automotive business as the Automotive segment. The remaining portion of the previous VTS segment will be named the Heavy-Duty Equipment segment and will include the heavy-duty commercial vehicle and off-highway businesses.fiscal 2023 presentation.
VTS
| | | Years ended March 31, | | | | | 2020 | | | 2019 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 1,177 | | | | 100.0 | % | | $ | 1,352 | | | | 100.0 | % | | Cost of sales | | | 1,032 | | | | 87.7 | % | | | 1,165 | | | | 86.2 | % | | Gross profit | | | 145 | | | | 12.3 | % | | | 187 | | | | 13.8 | % | | Selling, general and administrative expenses | | | 100 | | | | 8.5 | % | | | 113 | | | | 8.3 | % | | Restructuring expenses | | | 10 | | | | 0.8 | % | | | 9 | | | | 0.7 | % | | Impairment charges | | | 8 | | | | 0.7 | % | | | - | | | | - | | | Gain on sale of assets | | | (1 | ) | | | -0.1 | % | | | - | | | | - | | | Operating income | | $ | 28 | | | | 2.3 | % | | $ | 65 | | | | 4.8 | % |
Climate Solutions
VTS net sales decreased $175 million, or 13 percent, in fiscal 2020 compared with the prior year, primarily due to lower sales volume, a $31 million unfavorable impact of foreign currency exchange rate changes, and, to a lesser extent, unfavorable customer pricing largely resulting from contractually-scheduled price-downs. Sales to commercial vehicle, off-highway, and automotive customers decreased $64 million, $60 million, and $34 million, respectively. These sales declines largely result from weakness in global vehicular markets and the planned wind-down of certain commercial vehicle programs.| | | 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 | % |
VTS cost ofYear Ended March 31, 2023 Compared with Year Ended March 31, 2022
Climate Solutions net sales decreased $133increased $101 million, or 11 percent, primarily due to lower sales volume and a $26 million favorable impact of foreign currency exchange rate changes. As a percentage of sales, cost of sales increased 150 basis points to 87.7 percent. Beyond the unfavorable impact of the lower sales volume, higher labor and inflationary costs and unfavorable customer pricing negatively impacted cost of sales by approximately 90 basis points and 70 basis points, respectively. Higher depreciation costs, primarily resulting from recent manufacturing capacity expansion in China and Hungary, also negatively impacted cost of sales to a lesser extent. These negative impacts were partially offset by favorable material costs, which impacted cost of sales by approximately 30 basis points, improved operating efficiencies and cost savings from procurement initiatives. The favorable material costs primarily resulted from lower commodity pricing, which more than offset the negative impacts of tariffs.
As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $42 million and gross margin declined 150 basis points to 12.3 percent.
VTS SG&A expenses decreased $13 million compared with the prior year yet increased 20 basis points as a percentage of sales. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $9 million, lower environmental charges related to previously-owned manufacturing facilities in the U.S, which decreased approximately $3 million, and a $3 million favorable impact of foreign currency exchange rate changes.
Restructuring expenses during fiscal 2020 increased $1 million, primarily due to higher severance expenses resulting from targeted headcount reductions in Europe and in the Americas.
During fiscal 2020, we recorded asset impairment charges totaling $8 million, primarily related to manufacturing facilities in Austria and Germany to write down property and equipment assets to fair value. We anticipate future cash flows at these facilities will be negatively impacted by planned wind downs of certain commercial vehicle and automotive programs.
During fiscal 2020, we completed the sale of a previously-closed manufacturing facility in Germany and, as a result, recorded a gain of $1 million.
Operating income in fiscal 2020 decreased $37 million to $28 million, primarily due to lower gross profit and higher impairment charges, partially offset by lower SG&A expenses.
| CIS | | | | | | | Years ended March 31, | | | | | 2020 | | | 2019 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 624 | | | | 100.0 | % | | $ | 708 | | | | 100.0 | % | | Cost of sales | | | 531 | | | | 85.1 | % | | | 593 | | | | 83.8 | % | | Gross profit | | | 93 | | | | 14.9 | % | | | 115 | | | | 16.2 | % | | Selling, general and administrative expenses | | | 57 | | | | 9.2 | % | | | 61 | | | | 8.6 | % | | Restructuring expenses | | | 2 | | | | 0.3 | % | | | - | | | | - | | | Impairment charges | | | 1 | | | | 0.1 | % | | | - | | | | 0.1 | % | | Operating income | | $ | 33 | | | | 5.3 | % | | $ | 53 | | | | 7.5 | % |
CIS net sales decreased $84 million, or 12 percent, in fiscal 2020 compared with the prior year, primarily due to lower sales volume and a $12 million unfavorable impact of foreign currency exchange rate changes. Sales to commercial HVAC&R and data center cooling customers decreased $43 million and $38 million, respectively.
CIS cost of sales decreased $62 million, or 10 percent, primarily due to lower sales volume and an $11 million favorable foreign currency exchange rate impact. As a percentage of sales, cost of sales increased 130 basis points to 85.1 percent, primarily due to the unfavorable impact of lower sales volume and unfavorable sales mix.
As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $22 million and gross margin declined 130 basis points to 14.9 percent.
CIS SG&A expenses decreased $4 million compared with the prior year yet increased 60 basis points as a percentage of sales. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $2 million, and the favorable impact of cost-control initiatives.
Restructuring expenses during fiscal 2020 increased $2 million, primarily due to higher equipment transfer and plant consolidation costs. We are currently transferring product lines to our manufacturing facility in Mexico in order to achieve operational improvements and organizational efficiencies.
During fiscal 2020, we recorded a $1 million asset impairment charge related to a previously-closed manufacturing facility in Austria.
Operating income in fiscal 2020 decreased $20 million to $33 million, primarily due to lower gross profit, partially offset by lower SG&A expenses.
| BHVAC | | | | | | | Years ended March 31, | | | | | 2020 | | | 2019 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 221 | | | | 100.0 | % | | $ | 212 | | | | 100.0 | % | | Cost of sales | | | 150 | | | | 67.7 | % | | | 149 | | | | 70.1 | % | | Gross profit | | | 72 | | | | 32.3 | % | | | 63 | | | | 29.9 | % | | Selling, general and administrative expenses | | | 35 | | | | 15.8 | % | | | 35 | | | | 16.4 | % | | Loss on sale of assets | | | - | | | | - | | | | 2 | | | | 0.8 | % | | Operating income | | $ | 36 | | | | 16.5 | % | | $ | 27 | | | | 12.6 | % |
BHVAC net sales increased $9 million, or 4 percent, in fiscal 20202023 compared with the prior year, primarily due to higher sales in the U.S., which increased $14 million,volume and favorable commercial pricing. These increases were partially offset by lower sales in the U.K., which decreased $5 million. The higher sales in the U.S. were primarily driven by the increased sales of ventilation and heating products. The lower sales in the U.K. were primarily due to lower sales of air conditioning and ventilation products and a $3$52 million unfavorable impact of foreign currency exchange rate changes, partially offset by higherrates. Compared with the prior year, sales of data center sales.cooling, heat transfer, and HVAC & refrigeration products increased $58 million, $33 million, and $11 million, respectively.
BHVACClimate Solutions cost of sales increased $1$44 million, or less than 16 percent, in fiscal 2020.2023, primarily due to higher sales volume, partially offset by a $44 million favorable impact of foreign currency exchange rates. As a percentage of sales, cost of sales decreased 240380 basis points to 67.777.9 percent, primarily due to the favorable impact of higher sales mixvolume, favorable commercial pricing, and favorable customer pricing.improved operating efficiencies, partially offset by higher labor and inflationary costs.
As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $9$58 million and gross margin improved 240380 basis points to 32.322.1 percent.
BHVACClimate Solutions SG&A expenses remained consistentincreased $7 million compared with the prior year, yet decreased 6030 basis points as a percentage of sales. The increase in SG&A expenses was primarily due to a $5 million increase in compensation-related expenses, including commission expenses, and increases in other general and administrative expenses that have been impacted by inflationary market conditions. These increases were partially offset by a $4 million favorable impact of foreign currency exchange rate changes.
DuringRestructuring expenses totaling $2 million during fiscal 2019, we sold our business in South Africa2023 were consistent with the prior year and as a result, recorded a lossprimarily consisted of $2 million.severance-related expenses.
Operating income in fiscal 2020 of $362023 increased $51 million increased $9to $124 million, primarily due to higher gross profit.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 as of March 31, 20202023 of $71$67 million, and an available borrowing capacity of $118$270 million under our revolving credit facility. Given our extensive international operations, approximately $31$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 may be subject to foreign withholding taxes if repatriated.
In response to lower customer demand resulting from the COVID-19 pandemic, we have taken actions to reduce operating expenses, conserve We believe our sources of liquidity will provide sufficient cash and maximize liquidity. These actions have included, but are not limited to, production staffing adjustments, furloughs, shortened work weeks, and temporary salary reductions at all levels of our organization. In addition, we are reducing operating and administrative expenses. Further, as described below, we are focused on reducing our capital expenditures and have executed amendments to our primary credit agreements to help ensure liquidity through financial covenant flexibility during the next two fiscal years. Together with anticipated cash flow from operations, we currently believe we have sufficient available cash and access to both committed and uncommitted credit facilities to adequately cover our funding needs on both a short-short-term and long-term basis. However, we are continuing to monitor the impacts of COVID-19 on our business and the credit and financial markets.
The full extentOur 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 impactsAmerican Rescue Plan Act of COVID-19, which will largely depend on the length and severity of the pandemic, could have a material adverse effect on2021, we do not expect to make cash contributions to our business, results of operations, and cash flows and could adversely affect our access to capital and/or financing.U.S. pension plans during fiscal 2024.
Net Cash Provided by Operating Activities
Net cash provided by operating activities in fiscal 20202023 was $58$108 million, an increase of $96 million from $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, as 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 and lower pension plan contributions in fiscal 2023, as compared with the prior year.
Net cash provided by operating activities in fiscal 2022 was $12 million, a decrease of $45$138 million from $103$150 million in the prior year. This decrease in operating cash flow was primarily due to lower operating earnings in the current year and payments for separation and project costs associated with our strategic review of alternatives for the VTS segment’s automotive business, partially offset by favorableunfavorable net changes in working capital. The favorable changes in working capital, including higher inventory and accounts receivable levels and higher payments for incentive compensation and employee benefits as compared with the prior year, included lower employee benefit and incentive compensation payments.
Net cash provided by operating activities in fiscal 2019 was $103 million, a decrease of $21year. Inventory increased $61 million from $124 million in fiscal 2018. This decrease in operating cash flow primarily resulted from unfavorable changes in working capital, partially offset by the favorable impact of stronger earnings. The unfavorable changes in working capital, as compared with the prior year, included higher incentive compensation and other employee benefit payments and higher inventory levels associated with higher sales levels.March 31, 2021 to March 31, 2022.
Capital Expenditures
Capital expenditures of $71$51 million during fiscal 2020 decreased $32023 increased $11 million compared with fiscal 2019, primarily due to lower capital investments in our VTS segment compared with the prior year, particularly in China and North America. Similar to prior years, our2022. Our capital spending in fiscal 2020 primarily occurred2023 in the VTS segment, whichPerformance Technologies and Climate Solutions segments totaled $53$25 million and included$24 million, respectively. Capital expenditures in the Performance Technologies segment include tooling and equipment purchases in conjunction with new and renewal programs with customers, as well as $7 million of capital investments associated with preparing our automotive business for a potential sale. In response to the economic impacts of the COVID-19 pandemic, we are taking steps to preserve our financial liquidity. As part of this initiative, we are focused on reducing our capital expenditures by delaying certain projects and the purchase of certain program-related equipment and tooling. At March 31, 2020, our capital expenditure commitments totaled $12 million and primarily consisted of commitments for tooling and equipment expenditures in support of new and renewal programscustomers. Capital spending in the VTS segment.Climate Solutions segment include investments supporting our strategic growth initiatives, including expanding our data center business.
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 $33decreased $25 million to $482$353 million at March 31, 20202023 compared with the prior year, primarily due to additional borrowingsrepayments during fiscal 2020. In response to the economic impacts of the COVID-19 pandemic, we executed amendments to our primary credit agreements in May 2020 to provide additional covenant flexibility. The amendments temporarily raise the leverage coverage ratio limit during the next two fiscal years.2023.
Our credit agreements require us to maintain compliance with various covenants. As specifiedcovenants, 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 agreement, the term loansagreements may require prepayments in the event of certain asset sales. In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.
The leverage ratio covenant within our primary credit agreements in the U.S., we are subject to a leverage ratio covenant, which requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, in relation to ourno more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”). The leverage ratio covenant limit was 3.25 to 1 through the fourth quarter of fiscal 2020. We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense. As of March 31, 2020,2023, we were in compliance with our debt covenants; our leverage ratio and interest coverage ratio were 2.4 and 8.1, respectively.
In May 2020, as noted above, we executed amendments to our primary credit agreements that provide additional financial covenant flexibility during the next two fiscal years in light of the risks and uncertainties associated with the COVID-19 pandemic. We believe this additional flexibility will enable us to be compliant with our debt covenants, even if the adverse effects of the COVID-19 pandemic on our business are more severe than we currently anticipate. However, failure to comply with the debt covenants could result in an event of default, which, if not cured or waived, could result in us being required to repay borrowings before their due date. Under the amended agreements, the leverage ratio covenant limit is temporarily raised. For fiscal 2021, the leverage ratio covenant limit is 4.00 to 1, 4.75 to 1, 5.25 to 1, and 5.75 to 1 for the first, second, third, and fourth quarters, respectively. In fiscal 2022, the leverage ratio covenant limit is 4.75 to 1, 3.75 to 1, and 3.50 to 1 for the first, second and third quarters, respectively, and subsequently returns to 3.25 to 1 for the fourth quarter of fiscal 2022.covenants. We expect to remain in compliance with our debt covenants during fiscal 20212024 and beyond.
See Note 17 of the Notes to Consolidated Financial Statements for additional information regarding our credit agreements.
Off-Balance Sheet ArrangementsShare Repurchase Program
None.
Contractual Obligations
| | | March 31, 2020 | | | (in millions) | | Total | | | Less than 1 year | | | 1 - 3 years | | | 4 - 5 years | | | More than 5 years | | | | | | | | | | | | | | | | | | | | Long-term debt | | $ | 468.9 | | | $ | 15.2 | | | $ | 42.6 | | | $ | 294.4 | | | $ | 116.7 | | | Interest associated with long-term debt | | | 89.3 | | | | 17.7 | | | | 33.4 | | | | 24.5 | | | | 13.7 | | | Operating lease obligations | | | 71.8 | | | | 12.8 | | | | 20.7 | | | | 12.1 | | | | 26.2 | | | Capital expenditure commitments | | | 12.0 | | | | 12.0 | | | | - | | | | - | | | | - | | | Other long-term obligations (a) | | | 9.9 | | | | 1.9 | | | | 3.1 | | | | 3.0 | | | | 1.9 | | | Total contractual obligations | | $ | 651.9 | | | $ | 59.6 | | | $ | 99.8 | | | $ | 334.0 | | | $ | 158.5 | |
| (a) | Includes finance lease obligations and other long-term obligations. |
Our liabilities for pensions, postretirement benefits, and uncertain tax positions totaled $145During fiscal 2023, we repurchased $7 million asof our common stock. As of March 31, 2020. 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 $20 million to our U.S. pension plans during fiscal 2021.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 statementstatements are disclosed in Note 1 of the Notes to Consolidated Financial Statements.
Revenue Recognition
In fiscal 2019, we adopted new revenue recognition accounting guidance. In accordance with this new accounting guidance, weWe recognize revenue based upon consideration specified in a contract and as we satisfy performance obligations by transferring control over our products to our customers, which may be at a point in time or over time. The majority of our revenue is recognized at a point in time, based upon shipment terms. A limited number of our customer contracts provide an enforceable right to payment for performance completed to date. For these contracts, we recognize revenue over time based upon our estimated progress towardstoward the satisfaction of the contract’s performance obligations. We record an allowance for doubtful accounts for estimated uncollectible receivablescredit losses and we accrue for estimated warranty costs at the time of sale. We base these estimates upon historical experience, current business trends and current economic conditions.conditions, and risks specific to the 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, 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, 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 underlying assets. Fair value is generally based upon 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 $448$315 million and $106$81 million, respectively, at March 31, 2020.2023. 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 CISClimate 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 2020,2022, we recorded asseta net impairment charges totaling $8reversal of $56 million, primarily related manufacturing facilitiesto assets that were held for sale in Austriathe Performance Technologies segment. In fiscal 2021, we recorded $167 million of impairment charges to write down the long-lived assets in the liquid- and Germany withinair-cooled automotive businesses when they were classified as held for sale. In fiscal 2022, we adjusted the VTS segment. Seelong-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 52 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. We consider factors such as operating losses, declining financial and market outlooks, and market capitalization when evaluating the necessity for an interim impairment analysis. We test goodwill for impairment at a reporting unit level. Reporting unitsGoodwill resulting from recent acquisitions generally representrepresents the highest risk of impairment, which typically decreases as the businesses are integrated into the Company and positioned for future operating and financial performance. We test goodwill for impairment by comparing the fair value of each reporting unit with 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 a reporting unit exceeds the carrying value of the reporting unit’s net assets, goodwill is not impaired. However, if the carrying value of the reporting unit’s net assets exceeds its fair value, we would conclude goodwill is impaired and would record an impairment charge equal to the amount that the reporting unit’s carrying value exceeds its fair 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 and risk-adjusted discount rates, 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 rates used in determining discounted cash flows are 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 the continued economic uncertainty andinflationary 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, 2020,2023, our goodwill totaled $166 million related to our CISClimate Solutions and BHVACPerformance Technologies segments. Each of these segments is comprised of two reporting units. We conducted annual goodwill impairment tests during the fourth quarteras of fiscal 2020March 31, 2023 by applying a fair value-based test and determined the fair value of the reporting units in each of our reporting unitsoperating segments exceeded thetheir respective book 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 adjust our warranty accruals, which totaled $8 million at March 31, 2020, 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, 2020,2023, our pension liabilities totaled $134$42 million. The most significant assumptions include the discount rate, long-term expected return on plan assets, and mortality 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 upon 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 pension plan assets and the large majority of our pension plan expense.
To determine the expected rate of return on pension plan assets, we consider such factors as (a) the actual return earned on plan assets, (b) historical rates of return on the various asset classes in the plan portfolio, (c) projections of returns on those asset classes, (d) the amount of active management of the assets, (e) capital market conditions and economic forecasts, and (f) administrative expenses paid with the plan assets. The long-term rate of return utilized in both fiscal 20202023 and 20192022 was 7.0 percent and 7.5 percent.percent, respectively. For fiscal 2021,2024, we have also assumed a rate of 7.56.5 percent. A change of 25 basis points in the expected rate of return on assets would impact our fiscal 20212024 pension expense by $0.4less 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 20202023 and 2019,2022, for purposes of determining pension expense, we used a discount rate of 4.0 percent.3.9 and 3.2 percent, respectively. We determined these rates based upon a yield curve that was created following an analysis of the projected cash flows fromfor our plans. See Note 18 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 20212024 pension expense and projected benefit obligation by less than $1 million.million and approximately $4 million, respectively.
Income Taxes
We operate in numerous taxing jurisdictions; therefore, we are 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 a particular jurisdiction will not be realized. This determination, which is made on a jurisdiction-by-jurisdictionlegal entity-by-legal entity basis, involves judgment and the use of significant estimates and assumptions, including expectations of future taxable income and tax planning strategies. We believe the assumptions that we used are appropriate and result in a reasonable determination regarding the future realizability of deferred tax assets. However, future events or circumstances, such as lower-than-expected taxable income or unfavorable changes in the financial outlook of our operations in certain jurisdictions, could cause us to record additional valuation allowances.
See Note 78 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 NoteNotes 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 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:
The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliers, customers, and employees;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;
Economic,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 in particular, foreign currency exchange rate fluctuations; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); inflation; changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade, public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the United StatesU.S. or abroad, as well as continuing uncertainty regarding the short- and long-term implications of “Brexit”;abroad;
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, whetherincluding through our quotation process or through contract provisions for prospective price adjustments, as well as the inherent lag in timing of such contract provisions; and
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 healthimpact of problems, including logistic and continually increasing price-down focus of our vehicular customers in light of economic and market-specific factors, and the potential impact on us from any deterioration in the stability or performance of any of our major customers;
Unanticipated problemstransportation challenges, associated with suppliers meeting our time, quantity, quality, price and pricetiming 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 maintain current customer programsrelationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;
UnanticipatedThe impact of product or manufacturing difficulties or operating inefficiencies, including unanticipatedany program launch and product transfer challenges and warranty claims and delays or inefficiencies resulting from restrictions imposed in response to the COVID-19 pandemic;claims;
UnanticipatedThe impact of delays or modifications initiated by major customers with respect to program launches, product applications or requirements;
Our ability to consistently structure our operations in order to develop and maintain a competitive cost base with appropriately skilled and stable labor, while also positioning ourselves geographically, so that we can continue to support our customers with the technical expertise and market-leading products they demand and expect from Modine;
Our ability to effectively and efficiently reducemanage our cost structure in response to sales volume declinesincreases or decreases and to complete restructuring activities and realize the anticipated benefits of those activities;
Costs and other effects of the investigation and remediation of environmental contamination; particularlyincluding 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 anya 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 unanticipated litigation, claims, or other obligations.
Strategic Risks:
Our ability to successfully exit the automotive business within our VTS segment in a manner that is in the best interest of our shareholders in order to optimize the segment’s future financial performance;
Our ability to successfully realize anticipated benefits from strategic initiatives and our increased “industrial”continued application of 80/20 principles to our business, through which we are focused on reducing complexity and growing businesses with strong market presence, with our CIS and BHVAC businesses, while maintaining appropriate focus on the market opportunities presented by our VTS business;drivers;
Our ability to identify and execute on organic growth opportunities and diversification opportunities in orderacquisitions, and to position us for long-term success;efficiently and successfully integrate acquired businesses;
37Our ability to successfully execute strategies to reduce costs and improve operating margins; and
The potential impacts from unanticipated actions by activist shareholders, including disruption of our business and related costs.
Financial Risks:
| • | Our ability to fund our global liquidity requirements efficiently for Modine’sour current operations and meet our long-term commitments particularly in light of the significant volatility and negative pressure in the financial markets as a result of the COVID-19 pandemic and in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy; |
The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations, and of the continued uncertainty around the utilization of LIBOR or alternative reference rates;obligations;
The impact of changes in federal, state or local taxes that could have the effect of increasing our income tax expense;
Our ability to comply with the financial covenants as amended in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);
The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and
Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.
Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.
ITEM 7A.7A.
| QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.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 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, and throughout Europe. We also have joint ventures in China 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. Whenever 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 entity engaging in the transaction. In 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 2020,2023, 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 impacted 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. In fiscal 2020, 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 2020,2023, changes in foreign currency exchange rates unfavorably impacted our sales by $46$111 million; however, the impact on our operating income was less than $3only $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 2020,2023, there would not have been a material impact on our fiscal 20202023 earnings.
We maintain foreign currency-denominated debt obligations and intercompany loans that are subject to foreign currency exchange risk. We seek to mitigate this risk through maintaining offsetting positions between external and intercompany loans; however, from time to time, we also enter into foreign currency derivative contracts to manage the currency exchange rate exposure. These derivative instruments are typically not accounted 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 typically offset the foreign currency changes on the outstanding loans.
Interest Rate Risk
We 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 variable-rate debt to manage exposure to changes in interest rates. Interest on both our term loans and borrowings under our primary multi-currency revolving credit facility, including swingline borrowings, is variable and is currently based upon a variable interest rate, primarily on either LIBORSOFR or EURIBOR, plus 137.5 to 250175 basis points, depending on our leverage ratio. For purposes of calculating the variable interest rate under our current credit agreement, LIBOR cannot be less than one percent. As 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, 2020,2023, our outstanding borrowings on variable-rate term loans and thetotaled $216 million. There were no outstanding borrowings on our revolving credit facility totaled $189 million and $127 million, respectively.as of March 31, 2023. Based upon our outstanding debt with variable interest rates at March 31, 2020,2023, a 100-basis point increase in interest rates would increase our annual interest expense in fiscal 20212024 by approximately $3$2 million.
Commodity Price and Supply RisksRisk
We are dependent uponTo produce the supply ofproducts we sell, we purchase raw materials and supplies in our production processes 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. Commodity price risk is most prevalent togas, helium, and nitrogen. In addition, we also purchase components and parts that are integrated into our vehicular businesses, which provide customized production and service parts to customers under multi-year programs. In orderend products.
We seek to mitigate commodity price risk specificprimarily by adjusting product pricing in response to these long-term sales programs, we maintain contract provisionsapplicable price increases. Our contracts with certain vehicular customers contain provisions that allow us to prospectively adjust pricesprovide for prospective price adjustments based upon changes in raw material price fluctuations.prices. These prospective price adjustments generally lag behind the actual raw material price fluctuations by three months or longer, and typically the contract provisions are limited to the underlying material cost based upon the London Metal Exchange and exclude additional cost elements, such as related premiums and fabrication. For our industrial businesses,In instances where the risk is not covered contractually, we predominantly seek to mitigate commodity price risk by adjustingadjust product pricing in response to any applicable price increases, including through our quotation process and through price list increases.
In an effortfiscal 2023, we continued to manageexperience a significant increase in raw material prices and reduceprice increases on other goods and services in connection with global supply chain challenges and inflationary market conditions. In response, we implemented selling price increases for our costs,products. Nevertheless, we are still subject to the risk 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 our suppliers to ensure availability of purchased commodities and components and we have been consolidatingadded key suppliers to our supply base. As a result,base during the last year. However, we are still dependent upon limited sources of supply for certain components used in the manufacture of our products, including aluminum, copper, steel and stainless steel (nickel). WeEven 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, (including the potential effects of trade laws and tariffs), 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, 2020, 342023, 37 percent of our trade accounts receivable balance was concentrated with our top ten customers. These customers operate primarily in the automotive, 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 COVID-19 pandemic.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, 2020;2023; |
| • | Trade accounts receivable – Prior to granting credit, we evaluate each customer, taking into consideration the customer'scustomer’s financial condition, payment experience and credit information. After credit is granted, we actively monitor the customer'scustomer’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, we are also exposed to risks associated with demandsprice reduction pressure applied by OEM customers. If contractual price downs are unavoidable, we contemplate them in our customers for decreases in the price of our products. We attemptoverall strategy and adjust pricing as necessary to offset this risk with firm agreements with our customers whenever possible, but these agreements sometimes contain provisions for future price reductions.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 products that provide thermal solutionssolution systems to customers operating in diverse markets, including the automotive, commercial vehicle, off-highway, and commercial, industrial, and building HVAC&R markets. The COVID-19 pandemic has negatively impacted these markets; the duration and severity of the impacts of COVID-19 on these markets are currently uncertain. We are monitoring economic conditions in the U.S.commercial vehicle, off-highway, and abroadautomotive and the impacts associated with the COVID-19 pandemic.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, coilsdata centers, indoor air quality, and coolers in certain markets, andaftermarket coatings. Our investmentinvestments in these areas isare subject to the risks associated with technological success, customer and market acceptance, and our ability to meet the demands of our customers as these markets grow.
Hedging and Foreign Currency Forward Contracts
We use derivative financial instruments as a tool to manage certain financial risks. We prohibit the use of leveraged derivatives.
Commodity derivatives: Derivatives From time to time, we enter into over-the-counter forward contracts related to forecasted purchases of aluminum and copper. Our strategy is to reduce our exposure to changing market prices of these commodities. In fiscal 2020 and 2019, we designatedWe periodically designate certain commodity forward contracts as cash flow hedges for accounting purposes. Accordingly, forFor 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 2020, 20192023, 2022, and 2018,2021, net gains and losses recognized in cost of sales related to commodity forward contracts were less thanapproximately $1 million or less in each year.
Foreign currency forward contracts: Currency Forward Contracts We use derivative financial instruments in a limited way to mitigate foreign currency exchange risk. We periodically enter into foreign currency forward contracts to hedge specific foreign currency-denominated assets and liabilities as well as forecasted transactions. We have designatedtransactions and designate certain hedges of forecasted transactions as cash flow hedges for accounting purposes. Accordingly, forFor 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 2020, 2019,2023, 2022, and 2018,2021, net gains and losses recognized in sales and cost of sales related to foreign currency forward contracts were less than $1 million or less in each year. We have not designated 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 maintain credit ratings acceptable to us. At March 31, 2020,2023, all counterparties had a sufficient long-term credit rating.
ITEM 8.8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.DATA. |
MODINE MANUFACTURING COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended March 31, 2020, 20192023, 2022 and 20182021 (In millions, except per share amounts)
| | 2020 | | | 2019 | | | 2018 | | | Net sales | | $ | 1,975.5 | | | $ | 2,212.7 | | | $ | 2,103.1 | | | Cost of sales | | | 1,668.0 | | | | 1,847.2 | | | | 1,746.6 | | | Gross profit | | | 307.5 | | | | 365.5 | | | | 356.5 | | | Selling, general and administrative expenses | | | 249.6 | | | | 244.1 | | | | 245.8 | | | Restructuring expenses | | | 12.2 | | | | 9.6 | | | | 16.0 | | | Impairment charges | | | 8.6 | | | | 0.4 | | | | 2.5 | | | (Gain) loss on sale of assets | | | (0.8 | ) | | | 1.7 | | | | - | | | Operating income | | | 37.9 | | | | 109.7 | | | | 92.2 | | | Interest expense | | | (22.7 | ) | | | (24.8 | ) | | | (25.6 | ) | | Other expense - net | | | (4.8 | ) | | | (4.1 | ) | | | (3.3 | ) | | Earnings before income taxes | | | 10.4 | | | | 80.8 | | | | 63.3 | | | (Provision) benefit for income taxes | | | (12.4 | ) | | | 5.1 | | | | (39.5 | ) | | Net (loss) earnings | | | (2.0 | ) | | | 85.9 | | | | 23.8 | | | Net earnings attributable to noncontrolling interest | | | (0.2 | ) | | | (1.1 | ) | | | (1.6 | ) | | Net (loss) earnings attributable to Modine | | $ | (2.2 | ) | | $ | 84.8 | | | $ | 22.2 | | | | | | | | | | | | | | | | | Net (loss) earnings per share attributable to Modine shareholders: | | | | | | | | | | | | | | Basic | | $ | (0.04 | ) | | $ | 1.67 | | | $ | 0.44 | | | Diluted | | $ | (0.04 | ) | | $ | 1.65 | | | $ | 0.43 | | | | | | | | | | | | | | | | | Weighted-average shares outstanding: | | | | | | | | | | | | | | Basic | | | 50.8 | | | | 50.5 | | | | 49.9 | | | Diluted | | | 50.8 | | | | 51.3 | | | | 50.9 | |
| | 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, 2020, 20192023, 2022 and 20182021 (In millions)
| | 2020 | | | 2019 | | | 2018 | | | Net (loss) earnings | | $ | (2.0 | ) | | $ | 85.9 | | | $ | 23.8 | | | Other comprehensive income (loss): | | | | | | | | | | | | | | Foreign currency translation | | | (19.2 | ) | | | (37.6 | ) | | | 41.8 | | | Defined benefit plans, net of income taxes of ($8.3), ($0.3) and ($0.2) million | | | (24.6 | ) | | | (1.4 | ) | | | 0.1 | | | Cash flow hedges, net of income taxes of ($0.5), $0.1 and $0.1 million | | | (1.5 | ) | | | 0.4 | | | | 0.1 | | | Total other comprehensive income (loss) | | | (45.3 | ) | | | (38.6 | ) | | | 42.0 | | | | | | | | | | | | | | | | | Comprehensive income (loss) | | | (47.3 | ) | | | 47.3 | | | | 65.8 | | | Comprehensive (income) loss attributable to noncontrolling interest | | | 0.2 | | | | (0.6 | ) | | | (2.1 | ) | | Comprehensive income (loss) attributable to Modine | | $ | (47.1 | ) | | $ | 46.7 | | | $ | 63.7 | |
| | 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, 20202023 and 20192022 (In millions, except per share amounts)
| | 2020 | | | 2019 | | | ASSETS | | | | | | | | Cash and cash equivalents | | $ | 70.9 | | | $ | 41.7 | | | Trade accounts receivable – net | | | 292.5 | | | | 338.6 | | | Inventories | | | 207.4 | | | | 200.7 | | | Other current assets | | | 62.5 | | | | 65.8 | | | Total current assets | | | 633.3 | | | | 646.8 | | | Property, plant and equipment – net | | | 448.0 | | | | 484.7 | | | Intangible assets – net | | | 106.3 | | | | 116.2 | | | Goodwill | | | 166.1 | | | | 168.5 | | | Deferred income taxes | | | 104.8 | | | | 97.1 | | | Other noncurrent assets | | | 77.6 | | | | 24.7 | | | Total assets | | $ | 1,536.1 | | | $ | 1,538.0 | | | | | | | | | | | | | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | | Short-term debt | | $ | 14.8 | | | $ | 18.9 | | | Long-term debt – current portion | | | 15.6 | | | | 48.6 | | | Accounts payable | | | 227.4 | | | | 280.9 | | | Accrued compensation and employee benefits | | | 65.0 | | | | 81.7 | | | Other current liabilities | | | 49.2 | | | | 39.9 | | | Total current liabilities | | | 372.0 | | | | 470.0 | | | Long-term debt | | | 452.0 | | | | 382.2 | | | Deferred income taxes | | | 8.1 | | | | 8.2 | | | Pensions | | | 130.9 | | | | 101.7 | | | Other noncurrent liabilities | | | 79.5 | | | | 34.8 | | | Total liabilities | | | 1,042.5 | | | | 996.9 | | | Commitments and contingencies (see Note 20) | | | | | | | | | | Shareholders’ equity: | | | | | | | | | | Preferred stock, $0.025 par value, authorized 16.0 million shares, issued - NaN | | | - | | | | - | | | Common stock, $0.625 par value, authorized 80.0 million shares, issued 53.4 million and 52.8 million shares | | | 33.3 | | | | 33.0 | | | Additional paid-in capital | | | 245.1 | | | | 238.6 | | | Retained earnings | | | 469.9 | | | | 472.1 | | | Accumulated other comprehensive loss | | | (223.3 | ) | | | (178.4 | ) | | Treasury stock, at cost, 2.5 million and 2.1 million shares | | | (37.1 | ) | | | (31.4 | ) | | Total Modine shareholders’ equity | | | 487.9 | | | | 533.9 | | | Noncontrolling interest | | | 5.7 | | | | 7.2 | | | Total equity | | | 493.6 | | | | 541.1 | | | Total liabilities and equity | | $ | 1,536.1 | | | $ | 1,538.0 | |
| | 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, 2020, 20192023, 2022 and 20182021 (In millions)
| | 2020 | | | 2019 | | | 2018 | | | Cash flows from operating activities: | | | | | | | | | | | Net (loss) earnings | | $ | (2.0 | ) | | $ | 85.9 | | | $ | 23.8 | | | Adjustments to reconcile net (loss) earnings to net cash provided by operating activities: | | | | | | | | | | | | | | Depreciation and amortization | | | 77.1 | | | | 76.9 | | | | 76.7 | | | Impairment charges | | | 8.6 | | | | 0.4 | | | | 2.5 | | | (Gain) loss on sale of assets | | | (0.8 | ) | | | 1.7 | | | | - | | | Stock-based compensation expense | | | 6.6 | | | | 7.9 | | | | 9.5 | | | Deferred income taxes | | | 1.0 | | | | (4.4 | ) | | | 12.1 | | | Other – net | | | 5.6 | | | | 5.3 | | | | 9.0 | | | Changes in operating assets and liabilities: | | | | | | | | | | | | | | Trade accounts receivable | | | 36.6 | | | | (15.3 | ) | | | (26.1 | ) | | Inventories | | | (12.0 | ) | | | (22.0 | ) | | | (12.5 | ) | | Accounts payable | | | (37.7 | ) | | | 16.6 | | | | 25.2 | | | Accrued compensation and employee benefits | | | (15.2 | ) | | | (10.1 | ) | | | 16.4 | | | Other assets | | | 14.7 | | | | (11.8 | ) | | | (5.0 | ) | | Other liabilities | | | (24.6 | ) | | | (27.8 | ) | | | (7.4 | ) | | Net cash provided by operating activities | | | 57.9 | | | | 103.3 | | | | 124.2 | | | | | | | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | | | | | | Expenditures for property, plant and equipment | | | (71.3 | ) | | | (73.9 | ) | | | (71.0 | ) | | Proceeds from dispositions of assets | | | 6.2 | | | | 0.3 | | | | 0.3 | | | Proceeds from sale of investment in affiliate | | | 3.8 | | | | - | | | | - | | | Proceeds from maturities of short-term investments | | | 4.1 | | | | 4.9 | | | | 4.8 | | | Purchases of short-term investments | | | (3.3 | ) | | | (3.8 | ) | | | (5.5 | ) | | Other – net | | | - | | | | (0.3 | ) | | | (0.2 | ) | | Net cash used for investing activities | | | (60.5 | ) | | | (72.8 | ) | | | (71.6 | ) | | | | | | | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | | | | | | Borrowings of debt | | | 692.4 | | | | 231.2 | | | | 171.0 | | | Repayments of debt | | | (649.5 | ) | | | (251.9 | ) | | | (222.9 | ) | | Dividend paid to noncontrolling interest | | | (1.3 | ) | | | (1.8 | ) | | | (0.9 | ) | | Purchase of treasury stock under share repurchase program | | | (2.4 | ) | | | (0.6 | ) | | | - | | | Financing fees paid | | | (2.8 | ) | | | - | | | | - | | | Other – net | | | (3.1 | ) | | | (2.8 | ) | | | 2.7 | | | Net cash provided by (used for) financing activities | | | 33.3 | | | | (25.9 | ) | | | (50.1 | ) | | | | | | | | | | | | | | | | Effect of exchange rate changes on cash | | | (1.6 | ) | | | (2.7 | ) | | | 3.0 | | | Net increase in cash, cash equivalents and restricted cash | | | 29.1 | | | | 1.9 | | | | 5.5 | | | Cash, cash equivalents and restricted cash - beginning of year | | | 42.2 | | | | 40.3 | | | | 34.8 | | | Cash, cash equivalents and restricted cash - end of year | | $ | 71.3 | | | $ | 42.2 | | | $ | 40.3 | |
| | 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’ EQUITY For the years ended March 31, 2020, 20192023, 2022 and 20182021 (In millions)
| | Common stock | | | Additional paid-in | | | Retained | | | Accumulated other | | | Treasury stock, | | | Non-controlling | | | | | | | | Shares | | | Amount | | | capital | | | earnings | | | comprehensive loss | | | at cost | | | interest | | | Total | | | Balance, March 31, 2017 | | | 51.8 | | | $ | 32.4 | | | $ | 216.4 | | | $ | 372.4 | | | $ | (181.8 | ) | | $ | (25.4 | ) | | $ | 7.2 | | | $ | 421.2 | | | Net earnings attributable to Modine | | | - | | | | - | | | | - | | | | 22.2 | | | | - | | | | - | | | | - | | | | 22.2 | | | Other comprehensive income | | | - | | | | - | | | | - | | | | - | | | | 41.5 | | | | - | | | | 0.5 | | | | 42.0 | | | Stock options and awards | | | 0.5 | | | | 0.3 | | | | 3.9 | | | | - | | | | - | | | | - | | | | - | | | | 4.2 | | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1.7 | ) | | | - | | | | (1.7 | ) | | Adoption of new accounting guidance (Note 1) | | | - | | | | - | | | | 0.1 | | | | 0.3 | | | | - | | | | - | | | | - | | | | 0.4 | | | Stock-based compensation expense | | | - | | | | - | | | | 9.5 | | | | - | | | | - | | | | - | | | | - | | | | 9.5 | | | Dividend paid to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.9 | ) | | | (0.9 | ) | | Net earnings attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1.6 | | | | 1.6 | | | Balance, March 31, 2018 | | | 52.3 | | | | 32.7 | | | | 229.9 | | | | 394.9 | | | | (140.3 | ) | | | (27.1 | ) | | | 8.4 | | | | 498.5 | | | Adoption of new accounting guidance (Note 1) | | | - | | | | - | | | | - | | | | (7.6 | ) | | | - | | | | - | | | | - | | | | (7.6 | ) | | Net earnings attributable to Modine | | | - | | | | - | | | | - | | | | 84.8 | | | | - | | | | - | | | | - | | | | 84.8 | | | Other comprehensive loss | | | - | | | | - | | | | - | | | | - | | | | (38.1 | ) | | | - | | | | (0.5 | ) | | | (38.6 | ) | | Stock options and awards | | | 0.5 | | | | 0.3 | | | | 0.8 | | | | - | | | | - | | | | - | | | | - | | | | 1.1 | | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (4.3 | ) | | | - | | | | (4.3 | ) | | Stock-based compensation expense | | | - | | | | - | | | | 7.9 | | | | - | | | | - | | | | - | | | | - | | | | 7.9 | | | Dividend paid to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1.8 | ) | | | (1.8 | ) | | Net earnings attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1.1 | | | | 1.1 | | | Balance, March 31, 2019 | | | 52.8 | | | | 33.0 | | | | 238.6 | | | | 472.1 | | | | (178.4 | ) | | | (31.4 | ) | | | 7.2 | | | | 541.1 | | | Net loss attributable to Modine | | | - | | | | - | | | | - | | | | (2.2 | ) | | | - | | | | - | | | | - | | | | (2.2 | ) | | Other comprehensive loss | | | - | | | | - | | | | - | | | | - | | | | (44.9 | ) | | | - | | | | (0.4 | ) | | | (45.3 | ) | | Stock options and awards | | | 0.6 | | | | 0.3 | | | | (0.1 | ) | | | - | | | | - | | | | - | | | | - | | | | 0.2 | | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (5.7 | ) | | | - | | | | (5.7 | ) | | Stock-based compensation expense | | | - | | | | - | | | | 6.6 | | | | - | | | | - | | | | - | | | | - | | | | 6.6 | | | Dividend paid to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1.3 | ) | | | (1.3 | ) | | Net earnings attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 0.2 | | | | 0.2 | | | Balance, March 31, 2020 | | | 53.4 | | | $ | 33.3 | | | $ | 245.1 | | | $ | 469.9 | | | $ | (223.3 | ) | | $ | (37.1 | ) | | $ | 5.7 | | | $ | 493.6 | |
| | 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.
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 products and solutions to diversified global markets and customers. Thecustomers in a wide array of commercial, industrial, and building heating, ventilating, air conditioning, and refrigeration (“HVAC&R”) markets. In addition, the Company is a leading provider of engineered heat transfer systems and high-quality heat transfer components for use in on- and off-highway original equipment manufacturer (“OEM”) vehicular applications. In addition, the Company is a global leader in thermal management technology and solutions for sale into a wide array of commercial, industrial, and building heating, ventilating, air conditioning, and refrigeration (“HVAC&R”) markets. The Company’s primary product groups include i) powertrain coolingheat transfer; ii) HVAC & refrigeration; iii) data center cooling; iv) air-cooled; v) liquid-cooled; and engine cooling; ii) coils, coolers, and coatings; and iii) heating, ventilation and air conditioning. vi) advanced solutions.
COVID-19: In March 2020, the World Health Organization declared the outbreak of the novel coronavirus, COVID-19, a pandemic. See Note 20 for additional information regarding the risks and uncertainties to our business resulting from this global pandemic.
SaleDisposition of facilityAustrian Air-cooled Automotive Business in Germany:Fiscal 2022
During fiscal 2020,On April 30, 2021, the Company completed the sale ofsold its Austrian a previously-closed manufacturing facility in Germany for a selling price of $6.0 million. As a result of this transaction, the Company recorded a gain of $0.8 million within the Vehicular Thermal Solutions segment. The Company reported this gain within the gain on sale of assets line on the consolidated statements of operations.
Sale of Nikkei Heat Exchanger Company, Ltd. (“NEX”): During fiscal 2020, the Company completed the sale of its 50 percent ownership interest in NEX for a selling price of $3.8 million. As a result of this sale, the Company recorded a gain of $0.1 million, which included the write-off of accumulated foreign currency translation gains of $0.6 million, within other income and expense on the consolidated statements of operations. Priorir-cooled automotive business to its sale, the Company accounted for its investment in NEX using the equity method. Utilizing the equity method, the Company reported its investment at cost, plus or minus a proportionate share of undistributed net earnings, and included Modine’s share of the affiliate’s net earnings in other income and expense. See Note 12 for additional information.
Sale of AIAC Air Conditioning South Africa (Pty) Ltd.: During fiscal 2019, the Company completed the sale of its AIAC Air Conditioning South Africa (Pty) Ltd. business, which was reported within the Building HVAC Systems segment, for a selling price of $0.5 million.Schmid Metall GmbH. As a result of this transaction, the Company recorded a loss of $1.7$6.6 million during fiscal 2022, which included the write-off of accumulated foreign currency translation$1.7 million of net actuarial losses of $0.8 million.related to its pension plan. The Company reported this loss within the loss on sale of assets line on the consolidated statementsstatement of operations. AnnualUpon 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 attributable toof this disposed 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 of $0.3 million within the Climate Solutions segment to write down the property to fair value less than $2.0 million.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 CEO. The Board of Directors subsequently conducted a search for his successor and, effective December 1, 2020, appointed Neil D. Brinker as President and CEO.
As a result of Mr. Burke’s departure and in connection with the search for and transition to his successor, the Company recorded costs totaling $6.7 million during fiscal 2021. These costs, which were recorded as selling, general and administrative (“SG&A”) expenses at Corporate, primarily consisted of severance and benefit-related expenses based upon the terms of Mr. Burke’s transition and separation agreement and costs directly associated with the CEO search, partially offset by the impact of Mr. Burke’s forfeited stock-based compensation awards. 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:Recognition The Company recognizes revenue based upon consideration specified in a contract and as it satisfies performance obligations by transferring control over its products to its customers, 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. A portion of the Company’s revenue is recognized over time, based upon estimated progress towardstoward satisfaction of the contractual performance obligations. See Note 23 for additional information.
Shipping and handling costs: 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: 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 recordsmaintains an allowance for doubtfulcredit losses, representing its estimate of expected losses associated with its trade accounts for estimated uncollectible receivables based upon historical experience or specific customer economic data.receivable. The Company recorded anbases 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 doubtful accounts of $1.9credit losses was $2.2 million and $1.6$1.7 million, at March 31, 2020respectively. The changes to the Company’s allowance for credit losses during fiscal 2023 and 2019, respectively, representing its estimated uncollectible receivables. 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 2020, 2019,2023, 2022, and 2018,2021, the Company sold $75.4$150.6 million, $85.1$126.4 million, and $65.8$88.7 million, respectively, of accounts receivable to accelerate cash receipts. During fiscal 2020, 2019,2023, 2022, and 2018,2021, the Company recorded a loss on the sale ofcosts totaling $1.2 million, $0.3 million, and $0.2 million, respectively, related to selling accounts receivable of $0.5 million, $0.6 million, and $0.4 million, respectively, in the consolidated statements of operations.
Warranty
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
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 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.years. At March 31, 20202023 and 2019,2022, Company-owned tooling totaled $23.3$17.1 million and $24.2$18.3 million, respectively.
In certain instances, tooling is customer-owned.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. TheIf the customer has agreed to reimburse the Company, accounts for unbilled customer-owned tooling costs are recorded as a receivable within other current assets when the customer has guaranteed reimbursement to the Company.assets. No significant arrangements exist where customer-owned tooling costs were not accompanied by guaranteed reimbursement. At March 31, 20202023 and 2019, cost reimbursement receivables related to2022, customer-owned tooling receivables totaled $7.8$10.9 million and $11.6$12.3 million, respectively.
Stock-based compensation: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 45 for additional information.
Research and development:Development The Company expenses research and development costs as incurred within SG&A expenses. During fiscal 2020, 2019,2023, 2022, and 2018,2021, research and development costs charged to operations totaled $59.5 $44.0 million, $69.8$50.3 million, and $65.8$46.3 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’ 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 forward 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 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 19 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 78 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 potential common shares if their inclusion would have an anti-dilutive effect. Certain outstanding restricted stock awards provide recipients with 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 89 for additional information.
Cash and cash equivalents: Cash Equivalents The Company considers all highly-liquid investments with original maturities of three months or less to be cash equivalents. Under the Company’s cash management system, cash balances at certain banks are funded when checks are presented for payment. To the extent checks issued, but not yet presented for payment, exceed the balance on hand at the specific bank against which they were written, the Company reports the amount of those checks within accounts payable in the consolidated balance sheets.
Short-term investments: Investments The Company invests in time deposits with original maturities of more than three months but not 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, 20202023 and 2019,2022, the Company’s short-term investments totaled $3.2$3.5 million and $4.3$3.7 million, respectively.
Inventories
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 lives of the 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 $8.7$13.6 million $17.9, $9.0 million, and $15.8$7.9 million were accrued within accounts payable at March 31, 2020, 2019,2023, 2022 and 2018,2021, respectively.
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, 20202023 and as a result, recorded a $0.5 million impairment charge withindetermined the VTS segment.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. During fiscal 2020, the Company recorded impairment charges totaling $8.1 million related to long-lived assets. See Note 5 for additional information.
Assets heldHeld for sale: Sale The Company considers assets to beclassifies 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,value; (ii) the asset is available for immediate sale in its present condition,condition; (iii) an active program to locate a buyer and other actions required to complete the sale have been initiated,initiated; (iv) the sale of the asset is expected to be completed within one yearyear; and (v) it is unlikely that significant changes will be made to the plan. Upon designationclassification as held for sale, the Company records the carrying value of the assetsasset at the lower of its carrying value or its estimated fair value, less costs to sell, within other noncurrent assets. Thesell. In addition, the Company ceases to record depreciation expense at the time of designation asfor assets held for sale. The carrying value of assets heldSee Note 2 for sale totaled $0.6 million and $1.1 million at March 31, 2020 and 2019, respectively.additional information.
Deferred compensation trusts: Compensation Trusts The Company maintains deferred compensation trusts to fund future obligations under its non-qualified deferred compensation plans. The trusts’ investments in third-party debt and equity securities are presented within other noncurrent assets in the consolidated balance sheets.
Self-insurance reserves:Reserves The Company retains a portion of the financial risk for certain 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.
Environmental liabilities:Liabilities The Company records liabilities for environmental assessments and remediation activities in the period in which its responsibility is probable and the costs can be reasonably estimated. The Company records environmental indemnification assets from third parties, including prior owners, when recovery is probable. To the extent that the required remediation procedures change, or additional contamination is identified, the Company’s estimated environmental liabilities may also change. See Note 20 for additional information.
Supplemental 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:information related to the Company’s leases.
| | Years ended March 31, | | | | | 2020 | | | 2019 | | | 2018 | | | Interest paid | | $ | 21.4 | | | $ | 22.3 | | | $ | 23.4 | | | Income taxes paid | | | 18.8 | | | | 22.2 | | | | 20.1 | |
New Accounting Guidance Adopted in Fiscal 2020:
LeasesSupplier Finance Programs
In February 2016,September 2022, the Financial Accounting Standards Board (“FASB”) issued new comprehensive lease accounting guidance that supersedes existing leasewill require companies that use supplier finance programs to disclose information about the 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 fiscal 2024 financial statements, with the exception of the roll forward disclosure requirement, which will become effective one year later. The Company is currently evaluating the new disclosures, but does not expect the guidance will have a material impact on its consolidated financial statements.
Income Tax Simplification In December 2019, the FASB issued new guidance designed to simplify the accounting for income taxes. The new guidance eliminated certain exceptions related to the approach for intraperiod tax allocations and requires balance sheet recognitionthe methodology for most leases.deferred tax liabilities. The Company adopted this guidance effectiveas of April 1, 2019 using a modified-retrospective transition method, under which it elected not to adjust comparative periods.2021. The Company elected the package of practical expedients permitted under the new guidance, and, as a result, the Company did not reassess the classification of existing leases or initial direct costs thereof, or whether existing contracts contain leases. In addition, the Company elected accounting policies to not record short-term leases on the balance sheet and to not separate lease and non-lease components. The Company did not elect the hindsight practical expedient.
The Company assessed its global lease portfolio and implemented a new lease accounting software solution and new processes and controls to account for leases in accordance with the new guidance. The Company’s most significant leases represent leases of real estate, such as manufacturing facilities, warehouses, and office buildings. The Company also leases certain manufacturing and IT equipment and vehicles. Upon adoption of this new guidance on April 1, 2019, the Company recognized right-of-use assets for operating leases totaling $61.3 million and corresponding current and noncurrent operating lease liabilities of $12.4 million and $48.9 million, respectively. In addition, the Company assessed 2 existing build-to-suit arrangements, for which it had recorded property, plant and equipment and long-term debt on its consolidated balance sheet as of March 31, 2019. The Company determined these arrangements represent operating leases under the new accounting guidance. As a result, the Company derecognized the previously-recorded balances and recorded $5.2 million of operating lease right-of-use assets and corresponding lease liabilities. As a result of adopting the new guidance, there was not a significant impact on the Company’s accounting for its previously-recorded capital leases, which are now classified as finance leases under the new guidance. In addition, there was no impact to retained earnings. Also, the adoption did not have a material impact on the Company’s consolidated statement of operations or consolidated statement of cash flows. See Note 16 for additional information regarding the Company’s leases.financial statements.
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive IncomeCredit Losses
In February 2018,June 2016, the FASB issued new guidance related to the accounting for credit losses for certain stranded income tax effects in accumulated other comprehensive income (loss) resulting from tax reform legislation that was enacted infinancial assets, including trade accounts receivable and contract assets. The new guidance modified the U.S. in December 2017. This guidance provided companies the optioncredit loss model to reclassify stranded income tax effects to retained earnings.measure and recognize credit losses based upon expected losses rather than incurred losses. The Company adopted this guidance as of April 1, 2019 and chose not to reclassify stranded income tax effects; therefore, the2020. The adoption of this guidance did not impact the Company’s consolidated financial statements.
New Accounting Guidance Adopted in Fiscal 2019:
Revenue Recognition
In May 2014, the FASB issued new guidance that outlines a comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The core principle of the new guidance is that companies are to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company adopted this new guidance for fiscal 2019 using the modified-retrospective transition method.
The Company assessed customer contracts and evaluated contractual provisions in light of the new guidance. Through its evaluation process, the Company identified a limited number of customer contracts that provide an enforceable right to payment for customized products, which require revenue recognition prior to the product being shipped to the customer. As a result of its adoption of the new guidance, the Company recorded an increase of $0.7 million to retained earnings as of April 1, 2018, along with related balance sheet reclassifications. The increase to retained earnings represented $3.0 million of net sales that, had the new guidance been in effect, the Company would have recognized as of March 31, 2018. See Note 2 for additional information regarding revenue recognition.
Income Taxes: Intra-Entity Transfers of Assets Other than Inventory
In October 2016, the FASB issued new guidance related to income tax accounting for intercompany asset transfers. This new guidance requires companies to recognize the income tax effects of intercompany asset transfers other than inventory at the transaction date. The income tax effects of these transfers were previously deferred. The Company adopted this new guidance for fiscal 2019 using the modified-retrospective transition method. Upon adoption, the Company recorded a decrease to retained earnings of $8.3 million as of April 1, 2018.
New Accounting Guidance Adopted in Fiscal 2018:
Stock-based Compensation
In March 2016, the FASB issued new guidance to simplify several aspects of accounting for stock-based payment transactions. The Company adopted this guidance beginning in its first quarter of fiscal 2018. The Company elected to account for forfeitures in the period in which they occur and recorded a cumulative-effect adjustment to equity. In addition, the Company prospectively adopted the guidance requiring all excess tax benefits or deficiencies to be recognized as income tax expense or benefit when share-based awards are settled. The provisions of this guidance did not have a material impact on the Company'sCompany’s consolidated financial statements.balance sheets, statements of operations or statements of cash flows.
Note 2: Assets Held for Sale
On November 2, 2020, the Company signed a definitive agreement to sell its liquid-cooled automotive business to Dana Incorporated (“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 sale 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, of adopting this new guidance, the Company recorded a $0.4remeasured the long-lived assets reverting back to held and used classification at the lower of their (i) carrying value, as if held for sale classification had not been met; or (ii) fair value at the date of the decision not to sell and reversed $57.2 million increase to both deferred taxof held for sale impairment charges during the third quarter of fiscal 2022. The long-lived assets primarily consisted of property, plant and equipment assets and equitywere fully impaired while classified as held for sale. For purposes of April 1, 2017. 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 cost valuation approaches and utilized third-party information from various industry-accepted sources, including applicable government-published statistics and data from appraisal and resale service providers. The market approach focused on prices for comparable assets in arm’s length transactions. For land and building assets, for example, sales of similar properties near the Company’s facilities were analyzed. For machinery and equipment assets, the Company referenced available third-party information regarding the selling prices of similar equipment. The cost approach focused on the amount for which an asset could be replaced or reproduced. The cost of an asset was then adjusted downward based on various factors including, but not limited to, age, location, and physical condition. After estimating the fair values of the assets reverting back to held and used classification, the Company compared the fair value for each asset to its carrying value. Carrying value represented each asset’s carrying value before the initial impairment charge, reduced for depreciation that would have been recorded if the asset had not been classified as held for sale. The Company then adjusted each asset to the lower of fair value or carrying value, resulting in the reversal of $57.2 million of previous impairment charges. In addition, the Company resumed depreciating the property, plant and equipment assets of the liquid-cooled automotive business based on the remeasured asset values during the third quarter of fiscal 2022.
The $57.2 million held for sale impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net held for sale impairment charges recorded 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 evaluations, the Company recorded a total of $8.6 million of impairment charges during the first and second quarters of fiscal 2022. These impairment charges reduced the net carrying value of property, plant and equipment additions during each quarter to zero. 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.
Note 2:3: Revenue Recognition
Effective April 1, 2018, the Company adopted new revenue recognition accounting guidance; see Note 1 for additional information .
The Company generates revenue from selling innovative thermal management products and solutions to diversified global markets and customers. The Company recognizes revenue based upon consideration specified in a contract and as it satisfies performance obligations by transferring control over its products to its customers, 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 doubtful accounts for estimated uncollectible receivablescredit 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:
Vehicular ThermalClimate Solutions (“VTS”) The VTSClimate Solutions segment principally generates revenue from providing engineeredselling heat transfer systemsproducts, heating, ventilating, air conditioning, and componentsrefrigeration (“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 use in on-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 off-highway original equipment. Thisdata 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 powertrainproducts and engine coolingsolutions 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 including, but not limited to,include radiators, charge air coolers, condensers, and engine cooling modules. Liquid-cooled products include engine oil coolers, EGRcharge air coolers, condensers, and fuel coolers, to original equipment manufacturers (“OEMs”) in the automotive, commercial vehicle, and off-highway markets in the Americas, Europe, and Asia regions.exhaust gas recirculation coolers. In addition, the VTSPerformance Technologies segment designs customer-owned tooling for OEMsprovides advanced solutions, which are designed to improve battery range and also serves Brazil’s automotivevehicle life, to zero-emission and hybrid commercial vehicle, aftermarkets.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 VTSPerformance 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 VTS 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 VTSPerformance 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 VTSthe 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 towardstoward satisfaction of the performance obligations. The VTSPerformance 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.
Commercial and Industrial Solutions (“CIS”)
The CIS segment principally generates revenue from providing thermal management products, including customized coils and coolers, to the heating, ventilating, air conditioning, and refrigeration (“HVAC&R”) markets in North America, Europe, and Asia. In addition, the segment applies corrosion protection solutions, which are referred to as coatings, to heat-transfer equipment.
For the sale of coils and coolers, individual customer purchase orders generally represent the Company’s contract with its customers. With the exception of a small number of customers, the applicable customer contracts do not provide the Company with an enforceable right to payment for performance completed to date. As a result, the CIS segment recognizes revenue for its sale of coils and coolers primarily at the time control is transferred to the customer based upon shipping terms, which is generally upon shipment.
For both sales to customers whose contract cancellation terms provide an enforceable right to payment and sales from the coatings businesses, in which the customers control the heat-transfer equipment being enhanced by the coating application, the CIS segment recognizes revenue over time based upon its estimated progress towards satisfaction of the performance obligations. The segment measures progress by evaluating the production status towards completion of ordered products or services not yet shipped to its customers.
Building HVAC Systems (“BHVAC”)
The BHVAC segment principally generates revenue from providing a variety of heating, ventilating, and air conditioning products, primarily for commercial buildings and related applications in North America and the U.K., as well as mainland Europe and the Middle East.
Heating products are manufactured in the U.S. and are generally 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 BHVAC segment recognizes revenue at the time control is transferred to the customer, generally the independent distributor, based upon shipping terms, which is generally upon shipment.
Ventilation and air conditioning products are highly-specified to a customer’s needs; however, the underlying sales contracts do not provide the Company with an enforceable right to payment for performance completed to date. As a result, the BHVAC segment recognizes revenue for these products at the time control is transferred to the customer based upon shipping terms, which is generally upon shipment.
Disaggregation of Revenue The tabletables below presentspresent revenue to external customers for each of the Company’s businessoperating segments, Climate Solutions and Performance Technologies. Each segment’s revenue is disaggregated by primary end market,product group, by geographic location and based upon the timing of revenue recognition:recognition.
| | Year ended March 31, 2020 | | | Year ended March 31, 2019 | | | | | VTS | | | CIS | | | BHVAC | | | Segment Total | | | VTS | | | CIS | | | BHVAC | | | Segment Total | | | Primary end market: | | | | | | | | | | | | | | | | | | | | | | | | | | Automotive | | $ | 508.8 | | | $ | - | | | $ | - | | | $ | 508.8 | | | $ | 542.8 | | | $ | - | | | $ | - | | | $ | 542.8 | | | Commercial vehicle | | | 323.7 | | | | - | | | | - | | | | 323.7 | | | | 387.6 | | | | - | | | | - | | | | 387.6 | | | Off-highway | | | 253.9 | | | | - | | | | - | | | | 253.9 | | | | 314.1 | | | | - | | | | - | | | | 314.1 | | | Commercial HVAC&R | | | - | | | | 463.1 | | | | 176.6 | | | | 639.7 | | | | - | | | | 506.3 | | | | 167.7 | | | | 674.0 | | | Data center cooling | | | - | | | | 107.5 | | | | 42.7 | | | | 150.2 | | | | - | | | | 145.7 | | | | 41.3 | | | | 187.0 | | | Industrial cooling | | | - | | | | 43.5 | | | | - | | | | 43.5 | | | | - | | | | 47.8 | | | | - | | | | 47.8 | | | Other | | | 90.8 | | | | 9.8 | | | | 1.8 | | | | 102.4 | | | | 107.2 | | | | 7.8 | | | | 3.4 | | | | 118.4 | | | Net sales | | $ | 1,177.2 | | | $ | 623.9 | | | $ | 221.1 | | | $ | 2,022.2 | | | $ | 1,351.7 | | | $ | 707.6 | | | $ | 212.4 | | | $ | 2,271.7 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Geographic location: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Americas | | $ | 554.4 | | | $ | 345.9 | | | $ | 139.1 | | | $ | 1,039.4 | | | $ | 613.7 | | | $ | 413.6 | | | $ | 124.9 | | | $ | 1,152.2 | | | Europe | | | 449.3 | | | | 232.6 | | | | 82.0 | | | | 763.9 | | | | 538.2 | | | | 244.8 | | | | 87.5 | | | | 870.5 | | | Asia | | | 173.5 | | | | 45.4 | | | | - | | | | 218.9 | | | | 199.8 | | | | 49.2 | | | | - | | | | 249.0 | | | Net sales | | $ | 1,177.2 | | | $ | 623.9 | | | $ | 221.1 | | | $ | 2,022.2 | | | $ | 1,351.7 | | | $ | 707.6 | | | $ | 212.4 | | | $ | 2,271.7 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Timing of revenue recognition: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Products transferred at a point in time | | $ | 1,146.4 | | | $ | 518.2 | | | $ | 221.1 | | | $ | 1,885.7 | | | $ | 1,308.5 | | | $ | 571.1 | | | $ | 212.4 | | | $ | 2,092.0 | | | Products transferred over time | | | 30.8 | | | | 105.7 | | | | - | | | | 136.5 | | | | 43.2 | | | | 136.5 | | | | - | | | | 179.7 | | | Net sales | | $ | 1,177.2 | | | $ | 623.9 | | | $ | 221.1 | | | $ | 2,022.2 | | | $ | 1,351.7 | | | $ | 707.6 | | | $ | 212.4 | | | $ | 2,271.7 | |
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 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, 2020 | | | March 31, 2019 | | | Contract assets | | $ | 21.7 | | | $ | 22.6 | | | Contract liabilities | | | 5.6 | | | | 4.0 | |
| | 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 $0.9$7.5 million decrease in contract assets during fiscal 20202023 primarily resulted from a decrease in capitalized costs related to customer-owned tooling contracts, partially offset by an increase in contract assets for revenue recognized over time.
Contract liabilities, included within other current liabilities in the consolidated balance sheets, consist of payments received in advance of satisfying performance obligations under customer contracts, including contracts for customer-owned tooling. The $1.6$9.7 million increase in contract liabilities during fiscal 2020 was2023 primarily related to customer contracts for which payment had beenresulted from payments received in advance of the Company’s satisfaction of performance obligations.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 3:4: Fair Value Measurements
Fair value is defined as the price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. Fair value measurements are classified under the following hierarchy:
Level 1 – Quoted prices for identical instruments in active markets. Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets. Level 3 – Model-derived valuations in which one or more significant inputs are not observable.
When available, the Company uses quoted market prices to determine fair value and classifies such measurements as Level 1. In some cases, where market prices are not available, the Company uses observable market-based inputs to calculate fair value, in which case the measurements are classified as Level 2. If quoted or observable market prices are not available, the Company determines fair value based upon valuation models that use, where possible, market-based data such as interest rates, yield curves or currency rates. These measurements are classified as Level 3.
The carrying values of cash, cash equivalents, restricted cash, short-term investments, trade accounts receivable, accounts payable, and short-term debt approximate fair value due to the short-term nature of these instruments. In addition, the Company assesses the fair value of a disposal group for each reporting period it is held for sale. See Note 2 for additional information regarding assets held for sale. The fair value of the Company’s long-term debt is disclosed in Note 17.
The Company holds investments in deferred compensation trusts to fund obligations under certain non-qualified deferred compensation plans. The Company records the fair value of these investments within other noncurrent assets on its consolidated balance sheets. The Company classifies money market investments held by the trusts within Level 2 of the valuation hierarchy. The Company classifies all other investments held by the trusts within Level 1 of the valuation hierarchy, as it uses quoted market prices to determine the investments’ fair value. The Company’s deferred compensation obligations, which are recorded as other noncurrent liabilities, are recorded at the fair values of the investments held by the trust. TheAt March 31, 2023 and 2022, the fair values of the investments and obligations for the Company’s deferred compensation plans each totaled $3.8$2.3 million and $6.0$2.9 million, asrespectively.
Plan assets related to the Company’s pension plans were classified as follows:
| | March 31, 2020 | | | | | Level 1 | | | Level 2 | | | Total | | | | | | | | | | | | | | Money market investments | | $ | - | | | $ | 2.4 | | | $ | 2.4 | | | Fixed income securities | | | - | | | | 8.7 | | | | 8.7 | | | Pooled equity funds | | | 17.9 | | | | - | | | | 17.9 | | | U.S. government and agency securities | | | - | | | | 13.1 | | | | 13.1 | | | Other | | | 0.1 | | | | 0.7 | | | | 0.8 | | | Fair value excluding investments measured at net asset value | | | 18.0 | | | | 24.9 | | | | 42.9 | | | Investments measured at net asset value | | | | | | | | | | | 88.2 | | | Total fair value | | | | | | | | | | $ | 131.1 | |
| | 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, 2019 | | | | | Level 1 | | | Level 2 | | | Total | | | | | | | | | | | | | | Money market investments | | $ | - | | | $ | 3.9 | | | $ | 3.9 | | | Fixed income securities | | | - | | | | 9.4 | | | | 9.4 | | | Pooled equity funds | | | 27.7 | | | | - | | | | 27.7 | | | U.S. government and agency securities | | | - | | | | 12.3 | | | | 12.3 | | | Other | | | 0.1 | | | | 0.9 | | | | 1.0 | | | Fair value excluding investment measured at net asset value | | | 27.8 | | | | 26.5 | | | | 54.3 | | | Investment measured at net asset value | | | | | | | | | | | 100.8 | | | Total fair value | | | | | | | | | | $ | 155.1 | |
| | 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 pooled equity funds based upon quoted prices from active markets and classified them within Level 1 of the valuation hierarchy. The Company determined the fair value of certain fixed 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, 20202023 and 2019,2022, the Company held 0no Level 3 assets within its pension plans.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
As a practical expedient, the Company valued certain investments, including pooled equity, fixed income and a real estate fund,funds, using their net asset value (NAV)(“NAV”) per unit, and therefore, has not classified these investments within the fair value hierarchy. The terms and conditions for redemptions vary for the investments valued at NAV. The real estate and fixed income investment fundsfund may be redeemed quarterly and monthly, respectively, with a 90-day and 60-day notice period, respectively.period. Other investments valued at NAV do not have significantly-restrictive redemption frequency or notice period requirements. The Company does not intend to sell or otherwise dispose of these investments at prices different than the NAV per unit.
Note 4:5: 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 stock awards, stock options, and performance-based stock awards granted for retention and performance, (2) a discretionary equity program for other management and key employees, and (3) stock awards for non-employee directors. The Company’s Board of Directors and the Officer NominationHuman Capital and Compensation Committee, as applicable, have discretionary authority to set the terms of the stock-based awards. Grants to employees during fiscal 20202023 were issued under the Company’s 2017Amended and Restated 2020 Incentive Compensation 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, 2020,2023, approximately 1.82.2 million shares authorized under the 2017Amended 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 $6.6$6.6 million $7.9, $5.7 million, and $9.5$6.3 million in fiscal 2020, 2019,2023, 2022, and 2018,2021, respectively.
Stock Options:Options The Company recorded $1.3$1.2 million $1.2, $1.1 million, and $1.2$0.9 million of compensation expense related to stock options in fiscal 2020, 2019,2023, 2022, and 2018,2021, respectively. During fiscal 2020, 2019, and 2018, theThe grant date fair value of stock options that vested during fiscal 2023, 2022, and 2021,was $1.2 million.$1.0 million, $0.9 million, and $1.3 million, respectively. As of March 31, 2020,2023, the total compensation expense not yet recognized related to non-vested stock options was $2.4$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:
| | Years ended March 31, | | | | | 2020 | | | 2019 | | | 2018 | | | Fair value of options | | $ | 5.56 | | | $ | 7.81 | | | $ | 7.30 | | | Expected life of awards in years | | | 6.3 | | | | 6.3 | | | | 6.4 | | | Risk-free interest rate | | | 2.2 | % | | | 2.8 | % | | | 1.9 | % | | Expected volatility of the Company's stock | | | 39.2 | % | | | 39.7 | % | | | 44.3 | % | | 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 | % |
Stock options expire no later than 10 years after the grant date and have an exercise price equal to the fair market value of Modine’s common stock on the date of grant. The risk-free interest rate was based upon 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 upon 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 upon 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.
A summary of stock option activity for fiscal 20202023 was as follows:
| | Shares | | | Weighted-average
exercise price | | | Weighted-average remaining contractual term (years) | | | Aggregate intrinsic value | | | Outstanding, beginning | | | 1.2 | | | $ | 12.24 | | | | | | | | | Granted | | | 0.3 | | | | 13.26 | | | | | | | | | Exercised | | | - | | | | 7.13 | | | | | | | | | Forfeited or expired | | | (0.1 | ) | | | 12.68 | | | | | | | | | Outstanding, ending | | | 1.4 | | | $ | 12.49 | | | | 5.6 | | | $ | - | | | | | | | | | | | | | | | | | | | | | Exercisable, March 31, 2020 | | | 0.9 | | | $ | 11.28 | | | | 3.9 | | | $ | - | |
| | 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 | |
AggregateThe aggregate intrinsic value represents the difference between the closing price of Modine’s common shares on the last trading day of fiscal 20202023 over the exercise price of the stock options, multiplied by the number of options outstanding or exercisable. As of March 31, 2020,The aggregate intrinsic value is not recorded for financial statement purposes, and this value will change based upon daily changes in the exercise price of outstanding options exceeded the closing price of ModineModine’s common shares and, as a result, the options had no intrinsic value.shares.
Additional information related to stock options exercised is as follows:
| | 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 | |
Additional information related to stock options exercised is as follows:
| | Years ended March 31, | | | | | 2020 | | | 2019 | | | 2018 | | | Intrinsic value of stock options exercised | | $ | 0.1 | | | $ | 0.7 | | | $ | 4.9 | | | Proceeds from stock options exercised | | | 0.1 | | | | 1.1 | | | | 4.3 | |
Restricted Stock:The Company recorded $4.5$5.4 million, $4.3$5.0 million, and $3.9$4.3 million of compensation expense related to restricted stock in fiscal 2020, 2019,2023, 2022, and 2018,2021, respectively. The grant date fair value of restricted stock awards that vested during fiscal 2020, 2019,2023, 2022, and 20182021 was $4.4$4.7 million, $4.3$4.4 million, and $3.9$4.5 million, respectively. At March 31, 2020,2023, the Company had $5.1$6.4 million of unrecognized compensation expense related to non-vested restricted stock, which it expects to recognize over a weighted-average period of 2.61.8 years. The Company values restricted stock awards using the closing market price 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 20202023 was as follows:
| | Shares | | | Weighted-average price | | | Non-vested balance, beginning | | | 0.5 | | | $ | 14.95 | | | Granted | | | 0.4 | | | | 13.54 | | | Vested | | | (0.3 | ) | | | 14.02 | | | Forfeited | | | (0.1 | ) | | | 14.99 | | | Non-vested balance, ending | | | 0.5 | | | $ | 14.48 | |
| | 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 $0.8 million, $2.4 million,granted performance-based cash awards in fiscal 2023, 2022, and $4.4 million2021 in lieu of compensation expense related toperformance-based stock awards. For performance-based stock awards, in fiscal 2020, 2019, and 2018, respectively. At March 31, 2020, the Company had $1.1 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 1.9 years. The Company values performance-based stockthe awards using the closing market price 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.
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. The performance componentsmetrics 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 programs initiatedthree-yearperformance period, commencing with the fiscal year of grant. The performance metrics for the performance-based cash awards granted in fiscal 20202022 and 2019fiscal 2023 are based upon both a target three-year average consolidated cash flow return on invested capital 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. The performance components of the program initiated in fiscal 2018 are based upon both a target three-year average consolidated return on capital employed and a target three-year average annual revenue growth at the end of a three-year performance period.
Note 5:6: Restructuring Activities
During fiscal 20202023, restructuring and 2019,repositioning expenses primarily consisted of severance-related expenses for targeted headcount reductions in each the Climate Solutions and Performance Technologies segments and supported the Company’s 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.
During fiscal 2022, the Company committed to restructuring actions intended to reduce SG&A and operational 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 Performance Technologies segment and primarily related to targeted headcount reductions in Europe. In addition, the Company implemented targeted headcount reductions in the Climate Solutions segment. Also in fiscal 2022, the Company incurred equipment transfer costs within the Performance Technologies segment.
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 VTSPerformance Technologies segment and supportsupported the Company’s objective to reduceof reducing operational and SG&A cost structures. Also,During fiscal 2021, the Company is in the process of transferring product lines totransferred production from its CIS manufacturing facility in Mexico in orderZhongshan, China to achieve operational improvements and organizational efficiencies.
During fiscal 2018, the Company ceased production at its Gailtal, Austriaanother Climate Solutions segment manufacturing facility primarily to reduce excess capacity and lower manufacturing costs in Europe.China. As a result of this facility closure,plant consolidation, the Company recorded $8.3 million of restructuring expenses within the CIS segment, primarily related to employee severance and related benefits. Fiscal 2018 restructuring activities also included plant consolidation activities, targeted headcount reductions, and certain product line transfers in Europe within the VTS segment. In addition, the Company recorded restructuring expenses associated with the discontinuance of its geothermal product line within the BHVAC segment.
During fiscal 2021, the Company approved headcount reductions in the VTS and CIS segments and, as a result, expects to record approximately $4.0$3.7 million of severance expenses during the first quarter of fiscal 2021. Other plant consolidation activities in fiscal 2021 included transferring product lines to the Company’s Climate Solutions manufacturing facility in Mexico.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Restructuring and repositioning expenses were as follows:
| | Years ended March 31, | | | | | 2020 | | | 2019 | | | 2018 | | | Employee severance and related benefits | | $ | 10.2 | | | $ | 8.7 | | | $ | 13.0 | | | Other restructuring and repositioning expenses | | | 2.0 | | | | 0.9 | | | | 3.0 | | | Total | | $ | 12.2 | | | $ | 9.6 | | | $ | 16.0 | |
| | 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, | | | | | 2020 | | | 2019 | | | Beginning balance | | $ | 10.0 | | | $ | 11.0 | | | Additions | | | 10.2 | | | | 8.7 | | | Payments | | | (15.1 | ) | | | (9.1 | ) | | Effect of exchange rate changes | | | (0.1 | ) | | | (0.6 | ) | | Ending balance | | $ | 5.0 | | | $ | 10.0 | |
| | 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 2020,2022 and 2021, the Company identified potential impairment indicators related to manufacturing facilities in Austria and Germany within the VTS segment. The Company anticipates the future cash flowsrecorded $56.0 million of these asset groups will be negatively impacted by planned wind downs of certain commercial vehicle and automotive programs. In response, the Company performed an impairment evaluation and recordeda net asset impairment reversal and $166.8 million of impairment charges, totaling $7.5 millionrespectively, within its VTS segment to write down property and equipment assets to fair value. The Company determined fair value using Level 3 inputs, primarily consisting of appraisals, which considered the market rental value, market conditions, physical condition of the assets, salability in the marketplace and estimated scrap values, based on the specialized nature of the machinery and equipment.Performance Technologies segment. See Note 2 for additional information.
Also during fiscal 2020,2022, the Company recorded a $0.6 millionan impairment charge of $0.3 million to reduce the carrying value of the previously-closed CIS Austriana previously closed Climate Solutions facility to its current estimated fair value, less costs to sell. During fiscal 2019 and 2018, the Company recorded asset impairment charges of $0.4 million and $1.3 million, respectively, related to this closed facility.
Note 6:7: Other Income and Expense
Other income and expense consisted of the following:
| | Years ended March 31, | | | | | 2020 | | | 2019 | | | 2018 | | | Equity in earnings of non-consolidated affiliate (a) | | $ | 0.2 | | | $ | 0.7 | | | $ | 0.2 | | | Interest income | | | 0.4 | | | | 0.4 | | | | 0.4 | | | Foreign currency transactions (b) | | | (2.4 | ) | | | (2.3 | ) | | | (0.6 | ) | | Net periodic benefit cost (c) | | | (3.0 | ) | | | (2.9 | ) | | | (3.3 | ) | | Total other expense - net | | $ | (4.8 | ) | | $ | (4.1 | ) | | $ | (3.3 | ) |
| | 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) | During fiscal 2020, the Company sold its ownership interest in Nikkei Heat Exchanger Company, Ltd. As a result of the sale, the Company recorded a gain of $0.1 million, which is included within the fiscal 2020 amount. See Note 12 for additional information.
|
| (b) | 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) | (c) | Net periodic benefit cost for the Company’s pension and postretirement plans is exclusive of service cost. cost. |
Note 7:8: Income Taxes
The U.S. and foreign components of earnings or loss before income taxes and the provisionbenefit or benefitprovision for income taxes consisted of the following:
| | Years ended March 31, | | | | | 2020 | | | 2019 | | | 2018 | | | Components of earnings (loss) before income taxes: | | | | | | | | | | | United States | | $ | (26.1 | ) | | $ | 22.4 | | | $ | 2.5 | | | Foreign | | | 36.5 | | | | 58.4 | | | | 60.8 | | | Total earnings before income taxes | | $ | 10.4 | | | $ | 80.8 | | | $ | 63.3 | |
| | 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 provision (benefit): | | | | | | | | | | | Federal: | | | | | | | | | | | Current | | $ | (3.4 | ) | | $ | (20.4 | ) | | $ | 11.6 | | | Deferred | | | (1.7 | ) | | | (4.2 | ) | | | 23.3 | | | State: | | | | | | | | | | | | | | Current | | | (0.1 | ) | | | 0.7 | | | | (0.3 | ) | | Deferred | | | (2.3 | ) | | | 1.9 | | | | 2.0 | | | Foreign: | | | | | | | | | | | | | | Current | | | 14.9 | | | | 19.0 | | | | 16.1 | | | Deferred | | | 5.0 | | | | (2.1 | ) | | | (13.2 | ) | | Total income tax provision (benefit) | | $ | 12.4 | | | $ | (5.1 | ) | | $ | 39.5 | |
| 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 | |
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Act. Shortly after the Tax Act was enacted, the SEC issued accounting guidance which provided a one-year measurement period during which a company could complete its accounting for the impacts of the Tax Act. To the extent a company’s accounting for certain income tax effects of the Tax Act was incomplete, the company could determine a reasonable estimate for those effects and record a provisional estimate in its financial statements. If a company could not determine a provisional estimate to be included in the financial statements, it was to continue applying the provisions of the tax laws that were in effect immediately prior to the Tax Act being enacted.
During fiscal 2018, the Company recorded provisional discrete tax charges totaling $38.0 million related to the Tax Act. The Company adjusted its U.S. deferred tax assets by $19.0 million due to the reduction in the U.S. federal corporate tax rate. This net reduction in deferred tax assets also included the estimated impact on the Company’s net state deferred tax assets. In addition, the Company recorded a $19.0 million charge for the transition tax required under the Tax Act.
During fiscal 2019, the Company completed its accounting for the Tax Act, which resulted in an income tax benefit totaling $7.7 million. The Company utilized its deferred tax attributes against the transition tax and finalized its fiscal 2018 U.S. federal income tax return. As a result, the Company decreased the provisional charge recorded for the reduction in the U.S. federal corporate tax rate by $9.3 million, since more deferred tax assets were utilized to offset taxable income at a higher fiscal 2018 U.S. federal corporate tax rate. The Company also decreased the transition tax liability to $18.9 million, a reduction of $0.1 million. In addition, the Company recorded a charge of $1.7 million for a reduction to state deferred tax assets.
The Tax Act included a new provision designed to tax global intangible low taxed income (“GILTI”) starting in fiscal 2019. The Company elected to record the tax effects of the GILTI provision as a period expense in the applicable tax year. To determine whether its net operating loss carryforward deferred tax assets are expected to be realized, the Company considers the applicable tax law ordering. Based upon this approach, net operating loss carryforwards are deemed to be realizable if they will reduce the expected tax liability when utilized, regardless of whether the 50% GILTI deduction or applicable tax credits may have been available.
The Company’s accounting policy is to allocate the income tax provision between net earnings and other comprehensive income. The Company applies its accounting for income taxes by tax jurisdiction, and in periods in which there is a loss before income taxes and pre-tax income in other comprehensive income, it first allocates the income tax provision to other comprehensive income, and then records a related tax benefit in the income tax provision.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The reconciliation between the U.S. federal statutory rate and the Company’s effective tax rate was as follows:
| | Years ended March 31, | | | | | 2020 | | | 2019 | | | 2018 | | | Statutory federal tax | | | 21.0 | % | | | 21.0 | % | | | 31.5 | % | | State taxes, net of federal benefit | | | (12.0 | ) | | | 3.6 | | | | 2.9 | | | Taxes on non-U.S. earnings and losses | | | 32.9 | | | | 3.9 | | | | (3.8 | ) | | Valuation allowances | | | 156.9 | | | | 4.0 | | | | (5.6 | ) | | Tax credits | | | (36.7 | ) | | | (26.1 | ) | | | (17.3 | ) | | Compensation | | | 4.0 | | | | (0.1 | ) | | | (0.8 | ) | | Tax rate or law changes | | | 3.6 | | | | (12.0 | ) | | | 60.1 | | | Uncertain tax positions, net of settlements | | | (37.9 | ) | | | 0.4 | | | | (0.8 | ) | | Notional interest deductions | | | (12.5 | ) | | | (2.5 | ) | | | (3.2 | ) | | Dividends and taxable foreign inclusions | | | (11.0 | ) | | | 1.6 | | | | 0.2 | | | Other | | | 10.9 | | | | (0.1 | ) | | | (0.8 | ) | | Effective tax rate | | | 119.2 | % | | | (6.3 | %) | | | 62.4 | % |
| | 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 DuringCompany’s fiscal 2020, the Company recorded net income2023 effective tax charges totaling $2.9 million as a result of legal entity restructuring completed in preparation of a potential sale of the automotive business and a $1.4 millionrate was favorably impacted by an income tax benefit resulting fromrelated to the recognition of a tax incentive in Italy. Also in fiscal 2020, the Company changed its determination of whether it was more likely than not certainvaluation allowance on deferred tax assets in the U.S. The effective tax rates in both fiscal 2022 and in a foreign jurisdiction would be realized and, as a result, adjusted the respective valuation allowances and recorded an income tax charge of $8.4 million and an income tax benefit of $1.3 million, respectively. In addition, the Company recorded a net increase of deferred tax asset valuation allowances totaling $9.2 million related to other tax jurisdictions and recorded a $4.5 million income tax benefit associated with the reduction in unrecognized tax benefits resulting from a lapse in statutes of limitations and settlements.
During fiscal 2019, the Company recorded income tax benefits totaling $7.7 million2021 were significantly impacted by impairment charges or reversals, largely related to the Tax Act, as discussed above; recordedliquid-cooled automotive business, and income tax charges or benefits totaling $14.5 million as a result of amending previous-year tax returnsrelated to recognize foreign tax credits that are expected to be realized based upon future sources of income;valuation allowances. See Note 2 for information regarding the impairment charges and recorded a $2.5 millionreversals. The income tax benefitcharges or benefits related to a manufacturing deduction in the United States. Also in fiscal 2019, the Company changed its determination of whether it was more likely than not certain deferred tax assets of two separate subsidiaries in a foreign jurisdiction would be realized and, as a result, adjusted the respective valuation allowances and recorded an income tax benefit totaling $1.0 million. In addition, the Company recorded a net increase of deferred tax asset valuation allowances totaling $4.3 million related to other tax jurisdictions and recorded a $2.2 million income tax benefit associated with the reduction in unrecognized tax benefits resulting from a lapse in statutes of limitations.are described below.
During fiscal 2018, the Company recorded provisional charges totaling $38.0 million related to the Tax Act, as discussed above, and recognized a $9.0 million Hungarian development tax credit. Also in fiscal 2018, the Company reversed a portion61
The Company has recordedrecords valuation allowances against its net deferred tax assets to the extent it has determineddetermines 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. As further discussed in Note 20, the COVID-19 pandemic has resulted in risks and uncertainties to our business. Future events or circumstances, such as lower taxable income or unfavorable changes in the financial outlook of the Company’s operations in certain jurisdictions, could necessitate the establishment of further valuation allowances, which could have a material adverse effect on the Company’s results of operations and financial condition.allowances.
The tax effects of temporary differences that gave rise to deferred tax assets and liabilities were as follows:
| | March 31, | | | | | 2020 | | | 2019 | | | Deferred tax assets: | | | | | | | | Accounts receivable | | $ | 0.3 | | | $ | 0.2 | | | Inventories | | | 4.5 | | | | 3.4 | | | Plant and equipment | | | 4.7 | | | | 1.8 | | | Lease liabilities | | | 15.7 | | | | - | | | Pension and employee benefits | | | 45.1 | | | | 32.7 | | | Net operating and capital losses | | | 70.2 | | | | 73.5 | | | Credit carryforwards | | | 56.8 | | | | 60.3 | | | Other, principally accrued liabilities | | | 8.1 | | | | 10.0 | | | Total gross deferred tax assets | | | 205.4 | | | | 181.9 | | | Less: valuation allowances | | | (46.9 | ) | | | (43.4 | ) | | Net deferred tax assets | | | 158.5 | | | | 138.5 | | | | | | | | | | | | | Deferred tax liabilities: | | | | | | | | | | Plant and equipment | | | 13.1 | | | | 15.1 | | | Lease assets | | | 15.6 | | | | - | | | Goodwill | | | 4.8 | | | | 4.8 | | | Intangible assets | | | 26.4 | | | | 28.8 | | | Other | | | 1.9 | | | | 0.9 | | | Total gross deferred tax liabilities | | | 61.8 | | | | 49.6 | | | Net deferred tax assets | | $ | 96.7 | | | $ | 88.9 | |
| | 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 | |
Unrecognized tax benefits were as follows:
| | Years ended March 31, | | | | | 2020 | | | 2019 | | | Beginning balance | | $ | 13.8 | | | $ | 13.6 | | | Gross increases - tax positions in prior period | | | 0.3 | | | | 1.6 | | | Gross decreases - tax positions in prior period | | | (1.0 | ) | | | (0.2 | ) | | Gross increases - tax positions in current period | | | 1.1 | | | | 1.1 | | | Settlements | | | (2.1 | ) | | | (0.1 | ) | | Lapse of statute of limitations | | | (2.4 | ) | | | (2.2 | ) | | Ending balance | | $ | 9.7 | | | $ | 13.8 | |
| | 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, 20202023 was $9.7 million and, if recognized, $7.9$7.8 million would have an effective tax rate impact. The Company estimates a $0.6$2.0 million net decrease in unrecognized tax benefits during fiscal 20212024 mainly due to lapses in statutes of limitations and settlements.limitations. If recognized, these reductions would not have a significantan 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 20202023, 2022 and 2019,2021, interest and penalties included within income tax expense in the consolidated statements of operations were not significant. At March 31, 20202023 and 2019,2022, accrued interest and penalties totaled $0.5$0.8 million and $1.1$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, 2020,2023, the Company was under income tax examination in a number of jurisdictions. The following tax years remain subject to examination for the Company’s major tax jurisdictions:
| Germany | Fiscal 20112017 - Fiscal 20192022 | | Italy | Calendar 2015Fiscal 2018 - Fiscal 20192022 | | United States | Fiscal 20172020 - Fiscal 20192022 |
At March 31, 2020, the Company had federal and state tax credits of $61.6 million that, if not utilized against U.S. taxes, will expire between fiscal 2021 and 2040. The Company also had state and local tax loss carryforwards totaling $149.8 million that, if not utilized against state apportioned taxable income, will expire between fiscal 2021 and 2040. In addition, the Company had tax loss and foreign attribute carryforwards totaling $314.7 million in various tax jurisdictions throughout the world. Certain of the carryforwards in the U.S. and in foreign jurisdictions are offset by valuation allowances. If not utilized against taxable income, $8.1 million of these carryforwards will expire between fiscal 2021 and 2034, and $306.6 million, mainly related to Germany and Italy, will not expire due to an unlimited carryforward period.
At March 31, 2023, the Company had federal and state tax credits of $60.4 million that, if not utilized against U.S. taxes, will expire between fiscal 2024 and 2043. The Company also had state and local tax loss carryforwards totaling $136.7 million. If not utilized against state apportioned taxable income, certain state and local carryforwards will expire between fiscal 2024 and 2042, while some will not expire due to an unlimited carryforward period. In addition, the Company had tax loss and foreign attribute carryforwards totaling $285.0 million in various tax jurisdictions throughout the world. Certain of the carryforwards in foreign jurisdictions are offset by valuation allowances. If not utilized against taxable income, $54.9 million of these carryforwards will expire between fiscal 2024 and 2034, and $230.1 million, mainly related to Germany and Italy, will not expire due to an unlimited carryforward period.
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 has not recorded foreign withholding taxes or deferred income taxes for these earnings. The Company has estimated the net amount of unrecognized foreign withholding tax and deferred tax liabilities would total approximately $7.0$12.0 million if the accumulated foreign earnings were distributed; however, the actual tax cost would be dependent on circumstances existing when remittance occurs.
Note 8:9: Earnings Per Share
The components of basic and diluted earnings per share were as follows:
| | Years ended March 31, | | | | | 2020 | | | 2019 | | | 2018 | | | Basic Earnings Per Share: | | | | | | | | | | | Net (loss) earnings attributable to Modine | | $ | (2.2 | ) | | $ | 84.8 | | | $ | 22.2 | | | Less: Undistributed earnings attributable to unvested shares | | | - | | | | (0.4 | ) | | | (0.2 | ) | | Net (loss) earnings available to Modine shareholders | | $ | (2.2 | ) | | $ | 84.4 | | | $ | 22.0 | | | | | | | | | | | | | | | | | Weighted-average shares outstanding - basic | | | 50.8 | | | | 50.5 | | | | 49.9 | | | | | | | | | | | | | | | | | Net (loss) earnings per share - basic | | $ | (0.04 | ) | | $ | 1.67 | | | $ | 0.44 | | | | | | | | | | | | | | | | | Diluted Earnings Per Share: | | | | | | | | | | | | | | Net (loss) earnings attributable to Modine | | $ | (2.2 | ) | | $ | 84.8 | | | $ | 22.2 | | | Less: Undistributed earnings attributable to unvested shares | | | - | | | | (0.2 | ) | | | (0.1 | ) | | Net (loss) earnings available to Modine shareholders | | $ | (2.2 | ) | | $ | 84.6 | | | $ | 22.1 | | | | | | | | | | | | | | | | | Weighted-average shares outstanding - basic | | | 50.8 | | | | 50.5 | | | | 49.9 | | | Effect of dilutive securities | | | - | | | | 0.8 | | | | 1.0 | | | Weighted-average shares outstanding - diluted | | | 50.8 | | | | 51.3 | | | | 50.9 | | | | | | | | | | | | | | | | | Net (loss) earnings per share - diluted | | $ | (0.04 | ) | | $ | 1.65 | | | $ | 0.43 | |
| | 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 fiscal 2020, 20192023, 2022 and 2018,2021, the calculation of diluted earnings per share excluded 1.10.5 million, 0.40.5 million, and 0.21.0 million, stock options, respectively, because they were anti-dilutive. For fiscal 20202023, 2022 and 2019,2021, the calculation of diluted earnings per share excluded 0.50.2 million, 0.2 million, and 0.30.4 million restricted stock awards, respectively, because they were anti-dilutive. For fiscal 2020,2021 the total number of potentially-dilutive securities was 0.30.2 million. However, these securities were not included in the computation of diluted net loss per share since to do so would have decreased the loss per share.
Note 9:10: Cash, Cash Equivalents and Restricted Cash
Cash, cash equivalents and restricted cash consisted of the following:
| | March 31, | | | | | 2020 | | | 2019 | | | Cash and cash equivalents | | $ | 70.9 | | | $ | 41.7 | | | Restricted cash | | | 0.4 | | | | 0.5 | | | Total cash, cash equivalents and restricted cash | | $ | 71.3 | | | $ | 42.2 | |
| | 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.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 10:11: Inventories
Inventories consisted of the following:
| | March 31, | | | | | 2020 | | | 2019 | | | Raw materials | | $ | 123.6 | | | $ | 122.8 | | | Work in process | | | 34.6 | | | | 32.2 | | | Finished goods | | | 49.2 | | | | 45.7 | | | Total inventories | | $ | 207.4 | | | $ | 200.7 | |
| | 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 | |
Note 11:12: Property, Plant and Equipment
Property, plant and equipment, including depreciable lives, consisted of the following:
| | March 31, | | | | | 2020 | | | 2019 | | | Land | | $ | 19.7 | | | $ | 20.7 | | | Buildings and improvements (10-40 years) | | | 276.7 | | | | 285.9 | | | Machinery and equipment (3-15 years) | | | 870.3 | | | | 848.7 | | | Office equipment (3-10 years) | | | 95.2 | | | | 92.0 | | | Construction in progress | | | 40.5 | | | | 57.4 | | | | | | 1,302.4 | | | | 1,304.7 | | | Less: accumulated depreciation | | | (854.4 | ) | | | (820.0 | ) | | Net property, plant and equipment | | $ | 448.0 | | | $ | 484.7 | |
| | 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 $68.2$46.5 million, $67.9$46.4 million, and $67.0$60.1 million for fiscal 2020, 2019,2023, 2022, and 2018,2021, respectively.
Gains and losses related to the disposal of property, plant and equipment are recorded within SG&A expenses. For fiscal 2020, 2019,2023 and 2018,2021, losses related to the disposal of property, plant and equipment totaled $0.6 million, $0.9$0.1 million and $0.7 million, respectively.
Note 12: Investment in Affiliate For fiscal 2022, gains related to the disposal of property, plant and equipment totaled $0.1 million.
During fiscal 2020, the Company completed the sale of its 50 percent ownership interest in Nikkei Heat Exchanger Company, Ltd. (“NEX”) for a selling price of $3.8 million. As a result of this sale, the Company recorded a gain of $0.1 million, which included the write-off of accumulated foreign currency translation gains of $0.6 million, within other income and expense on the consolidated statement of operations.
Prior to the sale, the Company accounted for its investment in this non-consolidated affiliate using the equity method. The Company included its investment in NEX of $3.8 million within other noncurrent assets on the March 31, 2019 consolidated balance sheet. The Company reported its equity in earnings from NEX within other income and expense in the consolidated statements of operations, using a one-month reporting delay. The Company’s share of NEX’s earnings for fiscal 2020, 2019, and 2018 was $0.1 million, $0.7 million, and $0.2 million, respectively.
Note 13: Intangible Assets
Intangible assets consisted of the following:
| | March 31, 2020 | | | March 31, 2019 | | | | | Gross Carrying Value | | | Accumulated Amortization | | | Net Intangible Assets | | | Gross Carrying Value | | | Accumulated Amortization | | | Net Intangible Assets | | | Customer relationships | | $ | 60.8 | | | $ | (12.6 | ) | | $ | 48.2 | | | $ | 61.5 | | | $ | (9.1 | ) | | $ | 52.4 | | | Trade names | | | 58.3 | | | | (16.2 | ) | | | 42.1 | | | | 58.9 | | | | (13.5 | ) | | | 45.4 | | | Acquired technology | | | 23.6 | | | | (7.6 | ) | | | 16.0 | | | | 23.9 | | | | (5.5 | ) | | | 18.4 | | | Total intangible assets | | $ | 142.7 | | | $ | (36.4 | ) | | $ | 106.3 | | | $ | 144.3 | | | $ | (28.1 | ) | | $ | 116.2 | |
The Company recorded $8.9 million, $9.0 million, and $9.7 million of amortization expense during fiscal 2020, 2019, and 2018, respectively. The Company estimates that it will record $8.4 million of amortization expense in fiscal 2021 and approximately $8.0 million of annual amortization expense in fiscal 2022 through 2025.
During fiscal 2018, the BHVAC segment discontinued its geothermal product line and, as a result, recorded a $1.2 million impairment charge for acquired technology intangible assets.
| | 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 $8.0 million, $8.4 million, and $8.5 million of amortization expense during fiscal 2023, 2022, and 2021, respectively. The Company estimates that it will record approximately $8.0 million of annual amortization expense in fiscal 2024 through 2028.
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.
| | VTS | | | CIS | | | BHVAC | | | Total | | | Balance, March 31, 2018 | | $ | 0.5 | | | $ | 158.3 | | | $ | 15.0 | | | $ | 173.8 | | | Effect of exchange rate changes | | | - | | | | (4.4 | ) | | | (0.9 | ) | | | (5.3 | ) | | Balance, March 31, 2019 | | | 0.5 | | | | 153.9 | | | | 14.1 | | | | 168.5 | | | Impairment charge | | | (0.5 | ) | | | - | | | | - | | | | (0.5 | ) | | Effect of exchange rate changes | | | - | | | | (1.3 | ) | | | (0.6 | ) | | | (1.9 | ) | | Balance, March 31, 2020 | | $ | - | | | $ | 152.6 | | | $ | 13.5 | | | $ | 166.1 | |
| | 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. Annually, the Company conducts itsTo test goodwill for impairment, assessment during the fourth quarter by applying a fair value-based test. For purposes of its assessment, the Company determines the fair value of each reporting unit based upon the present value of estimated future cash flows.flows and compares the fair value of each reporting unit with its carrying value. The Company’s determination of fair value involves judgment and the use of significant estimates and assumptions, including assumptions regarding the revenue growth rates and operating profit margins used to calculate estimated future cash flows and risk-adjusted discount rates, business trends and market conditions.rates.
As a result of its annual goodwill impairment testtests performed during the fourth quarteras of fiscal 2020,March 31, 2023, the Company determined that the fair value of each of the reporting units within its CISClimate Solutions and BHVACPerformance Technologies segments exceeded their respective book values. The Company determined, however, that the goodwill recorded within its VTS segment was fully impaired and recorded a $0.5 million impairment charge as a result. The impairment charge was primarily caused by a recent decline in the estimated fair value of the automotive business within the VTS segment.
At both March 31, 20202023 and 2019,2022, accumulated goodwill impairment losses totaled $40.8 million and $40.3 million, respectively, within the VTS segment. Performance Technologies segment.
Note 15: Product Warranties and Other Commitments
Product warrantiesWarranties : Many 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 and adjusts its warranty accruals if it becomes probable that expected claims will differ from previous estimates.
Changes in accrued warranty costs were as follows:
| | Years ended March 31, | | | | | 2020 | | | 2019 | | | Beginning balance | | $ | 9.2 | | | $ | 9.3 | | | Warranties recorded at time of sale | | | 5.3 | | | | 5.5 | | | Adjustments to pre-existing warranties | | | (1.6 | ) | | | 2.2 | | | Settlements | | | (4.8 | ) | | | (7.3 | ) | | Effect of exchange rate changes | | | (0.2 | ) | | | (0.5 | ) | | Ending balance | | $ | 7.9 | | | $ | 9.2 | |
| | 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 | |
Indemnification agreements: 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, 20202023 was not material.
Commitments Commitments: At March 31, 2020,2023, the Company had capital expenditure commitments of $12.0 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 VTSPerformance 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.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 16: Leases
Effective April 1, 2019, the Company adopted new lease accounting guidance and, as a result, recorded $61.3 million of right-of-use (“ROU”) assets and corresponding lease liabilities for operating leases on its consolidated balance sheet. The consolidated financial statements for fiscal 2020 reflect the adoption of this new guidance; however, fiscal 2019, fiscal 2018 and prior-years have not been adjusted. See Note 1 for additional information regarding the Company’s adoption of the new guidance.
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 based uponto calculate the information available atROU asset and lease commencement.liability. In determining the incremental borrowing rate, the Company considers its current collateralized borrowing rate, the term of the lease, and the economic environmentsenvironment 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 and recognizes payments for these leases as lease expense.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 office buildings.offices. In addition, the Company leases certain manufacturing and IT equipment and vehicles. The Company’s most significant leases have remaining lease terms of 1 to 1511 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 any material residual value guarantees or material restrictive covenants.
Lease Assets and Liabilities: Liabilities The following table provides a summary of leases recorded on the consolidated balance sheet. sheets.
| Balance Sheet Location | | March 31, 2020 | | Lease Assets | | | | | | Operating lease ROU assets | Other noncurrent assets | | $ | 61.4 | | Finance lease ROU assets (a) | Property, plant and equipment - net | | | 8.5 | | | | | | | | Lease Liabilities | | | | | | Operating lease liabilities | Other current liabilities | | $ | 10.9 | | Operating lease liabilities | Other noncurrent liabilities | | | 50.3 | | Finance lease liabilities | Long-term debt - current portion | | | 0.4 | | Finance lease liabilities | Long-term debt | | | 3.3 |
| | 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 | |
| (a) | Finance lease ROU assets were recorded net of accumulated amortization of $1.8$3.2 million and $2.8 million as of March 31, 2020.2023 and 2022, respectively. |
Components of Lease Expense: 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 | |
63| (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 | |
The components of lease expense were as follows:
| | Year ended March 31, 2020 | | | Operating lease expense (a) | | $ | 21.2 | | | Finance lease expense: | | | | | | Depreciation of ROU assets | | | 0.5 | | | Interest on lease liabilities | | | 0.2 | | | Total lease expense | | $ | 21.9 | |
| (a) | In fiscal 2020, operating lease expense included short-term lease expense of $4.1 million. Variable lease expense was not significant. |
Supplemental Cash Flow Information
| | Year ended March 31, 2020 | | | Cash paid for amounts included in the measurement of lease liabilities: | | | | | Operating cash flows for operating leases | | $ | 14.7 | | | Financing cash flows for finance leases | | | 0.5 | | | | | | | | | ROU assets obtained in exchange for lease liabilities | | | | | | Operating leases | | $ | 9.0 | | | Finance leases | | | 0.2 | |
Lease Term and Discount Rates
| | March 31, 2020 | | Weighted-average remaining lease term: | | | | Operating leases | | 9.3 years | | Finance leases | | 8.8 years | | | | | | Weighted-average discount rate: | | | | Operating leases | | | 3.5 | % | Finance leases | | | 4.7 | % |
| | 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 under New Lease Accounting Guidance: Future minimum rental payments for leases with initial non-cancellable lease terms in excess of one year were as follows at March 31, 2020:2023:
| Fiscal Year | | Operating Leases | | | Finance Leases | | | 2021 | | $ | 12.8 | | | $ | 0.5 | | | 2022 | | | 11.4 | | | | 0.5 | | | 2023 | | | 9.3 | | | | 0.5 | | | 2024 | | | 6.3 | | | | 0.5 | | | 2025 | | | 5.8 | | | | 0.5 | | | 2026 and beyond | | | 26.2 | | | | 2.0 | | | Total lease payments | | | 71.8 | | | | 4.5 | | | Less: Interest | | | (10.6 | ) | | | (0.8 | ) | | Present value of lease liabilities | | $ | 61.2 | | | $ | 3.7 | |
| 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 64
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.
Maturity of Lease Liabilities under Previous Lease Accounting Guidance: Future minimum rental payments for operating leases with initial non-cancellable lease terms in excess of one year were as follows at March 31, 2019:
| Fiscal Year | | | | | 2020 | | $ | 14.2 | | | 2021 | | | 12.4 | | | 2022 | | | 9.1 | | | 2023 | | | 7.1 | | | 2024 | | | 4.7 | | | 2025 and beyond | | | 22.9 | | | Total | | $ | 70.4 | |
The Company recorded $19.3 million and $18.5 million of rental expense related to operating leases in fiscal 2019 and 2018, respectively.
Note 17: IndebtednessLong-term debt consisted of the following:
| 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 finance lease obligations. |
In June 2019,Long-term debt, including the Company executedcurrent 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 Fourth Amended and Restated Credit Agreement with a syndicate of banks that provides for a multi-currency $250.0 million revolving credit, facility expiring in June 2024, which modified the Company’s then-existing revolver that would have expired in November 2021. In addition, this credit agreement provided for both U.S. dollar- and euro-denominated term loan facilities, with repayments continuing into fiscal 2025. These term loans replaced the previously-existing term loans with repayments scheduled through fiscal 2022. As a result of the credit agreement modification, the Company deferred debt issuance costs of $1.1 million, which are being amortized over the term of the debt. Borrowings under both the revolving creditswingline and term loan facilities bear interest at a variable rate, based upon the applicable reference rate and including a margin percentage dependent upon the Company’s leverage ratio, as described below. At March 31, 2020,2023, the weighted-average interest ratesrate for revolving credit facility borrowings and the term loans were 3.0 percent and 2.8 percent, respectively. At March 31, 2020, the Company’s revolving credit facility borrowings totaled $127.2 million and domestic letters of credit totaled $5.3 million, resulting in available borrowings under the revolving credit facility of $117.5 million.
In January 2020, the Company issued $100.0 million of 5.9 percent Senior Notes with repayments ending in fiscal 2029. The Company used the majority of the proceeds to satisfy the remaining principal balance of the 6.8 percent Senior Notes, which were scheduled to mature in August 2020. As a result of the credit agreement modification, the Company deferred debt issuance costs of $1.7 million, which are being amortized over the term of the debt.
was 6.0 percent. Based upon the terms of the credit agreement, the Company determined thatclassifies borrowings under its revolving credit facility should be classifiedand swingline facilities as long-term debt. Accordingly,and short-term debt, respectively, on its consolidated balance sheets.
At March 31, 2023, the Company has reclassifiedhad no outstanding borrowings related to the revolving credit and swingling facilities and domestic letters of $47.1credit 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 facility fromand swingline facilities totaled $64.9 million and $7.0 million, respectively.
The Company also maintains credit agreements for its foreign subsidiaries. The outstanding short-term borrowings related to long-term debt on thethese foreign credit agreements totaled $3.7 million and $0.7 million at March 31, 2019 balance sheet2023 and within the related disclosures.March 31, 2022, respectively.
Long-term debt consisted
Indebtedness under the Company’s credit agreement and Senior Note agreements is secured by liens on substantially all domestic assets. These agreements further require compliance with various covenants that may limit the Company’s ability to incur 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 the following:certain asset sales. | io | Fiscal year of maturity | | March 31, 2020 | | | March 31, 2019 | | | | | | | | | | | | Term loans | 2025 | | $ | 189.4 | | | $ | 238.4 | | | Revolving credit facility | 2025 | | | 127.2 | | | | 47.1 | | | 5.9% Senior Notes | 2029 | | | 100.0 | | | | - | | | 5.8% Senior Notes | 2027 | | | 50.0 | | | | 50.0 | | | 6.8% Senior Notes | 2021 | | | - | | | | 85.0 | | | Other (a) | | | | 6.0 | | | | 14.3 | | | | | | | 472.6 | | | | 434.8 | | | Less: current portion | | | | (15.6 | ) | | | (48.6 | ) | | Less: unamortized debt issuance costs | | | | (5.0 | ) | | | (4.0 | ) | | Total long-term debt | | | $ | 452.0 | | | $ | 382.2 | |
| (a) | Other long-term debt primarily includes borrowings by foreign subsidiaries and finance lease obligations. |
Long-term debt matures as follows:
| Fiscal Year | | | | | 2021 | | $ | 15.6 | | | 2022 | | | 21.7 | | | 2023 | | | 21.7 | | | 2024 | | | 21.7 | | | 2025 | | | 273.6 | | | 2026 & beyond | | | 118.3 | | | Total | | $ | 472.6 | |
The Company also maintainsFinancial covenants within its credit agreements for its foreign subsidiaries, with outstanding short-term borrowings at March 31, 2020 and 2019 of $14.8 million and $18.9 million, respectively.
Provisions in the Company’s credit agreement, Senior Note agreements, and various foreign credit agreements require the Company to maintain compliance with various covenants and include certain cross-default clauses. Under its primary credit agreements in the U.S., the Company has provided liens on substantially all domestic assets. Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales. In addition, at the time of each incremental borrowing under the revolving credit facility, the Company is required to represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on its business, property, or results of operations.
The Company is subject to a leverage ratio covenant, which requires the Company to limit its consolidated indebtedness, less a portion of its cash balance,balances, both as defined by the credit agreements, in relation to itsno more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”.). The leverage ratio covenant limit was 3.25 to 1 through the fourth quarter of fiscal 2020. The Company ismust also subject to an interest expense coveragemaintain a ratio covenant, 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, 2020.covenants.
In May 2020, the Company executed amendments to its primary credit agreements in the U.S. Under the amended agreements, the leverage ratio covenant limit is temporarily raised. The leverage ratio covenant limit in fiscal 2021 is 4.00 to 1, 4.75 to 1, 5.25 to 1, and 5.75 to 1 for the first, second, third, and fourth quarters, respectively. In fiscal 2022, the leverage ratio covenant limit is 4.75 to 1, 3.75 to 1, and 3.50 to 1 for the first, second and third quarters, respectively, and subsequently returns to 3.25 to 1 for the fourth quarter of fiscal 2022.
The Company estimates the fair value of long-term debt using discounted future cash flows at rates offered to the Company for similar debt instruments of comparable maturities. As of March 31, 20202023 and 2019,2022, the carrying value of the Company’s long-term debt approximated fair value, with the exception of the Senior Notes, which had an aggregate fair value of approximately $131.3$125.9 million and $137.2$138.9 million, respectively. The fair value of the Company’s long-term debt is categorized as Level 2 within the fair value hierarchy. Refer to Note 34 for the definition of a Level 2 fair value measurement.
Note 18: Pension and Employee Benefit Plans
Defined Contribution Employee Benefit Plans:
The Company maintains a domestic 401(k) plan that allows employees to contribute a portion of their salary to help them save for retirement. The Company currently matches employee contributions up to 4.5 percent of their compensationcompensation. During fiscal 2021, as part of its response to the negative impacts of the COVID-19 pandemic, the Company suspended matching employee contributions for participants.part of the year. The Company’s expense for defined contribution employee benefit plans during fiscal 2020, 2019,2023, 2022, and 20182021 was $6.6 $6.9 million, $6.4 million, and $5.2$3.0 million, respectively.
In addition, the Company maintains non-qualified deferred compensation plans 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:
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 substantially unfunded in accordance with local laws.
Pension Plans
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Defined Benefit Employee Benefit 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 domestic employees hired on or before December 31, 2003 and provide benefits based primarily upon years of service and average compensation for salaried and some hourly employees. Benefits for other hourly employees are based upon a monthly retirement benefit amount. 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 Austria, and Italy and are closed to new participants. The Company previously 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.
TheIn connection with funding relief provisions within the American Rescue Plan Act of 2021, the Company contributed $3.5 million, $8.0 million, and $13.4 milliondid not make cash contributions to its U.S. pension plans during fiscal 2020, 2019,2023. The Company contributed $3.5 million and 2018,$19.3 million to its U.S. pension plans during fiscal 2022 and 2021, respectively. In addition, the Company contributed $2.3$1.5 million, $5.9$1.5 million, and $2.6$2.2 million to its non-U.S. pension plans during fiscal 2020, 2019,2023, 2022, and 2018,2021, respectively. These contributions are reported in the change in other liabilities in the consolidated statements of cash flows.
Postretirement plans: 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 2020, 2019,2023, 2022, and 20182021 was $0.3 million, $0.3 million, and $0.2 million, respectively.million.
Measurement date: 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, were as follows:
| | Years ended March 31, | | | | | 2020 | | | 2019 | | | Change in benefit obligation: | | | | | | | | Benefit obligation at beginning of year | | $ | 258.8 | | | $ | 273.6 | | | Service cost | | | 0.4 | | | | 0.5 | | | Interest cost | | | 9.1 | | | | 9.6 | | | Actuarial loss | | | 15.5 | | | | 1.7 | | | Benefits paid | | | (18.2 | ) | | | (22.8 | ) | | Curtailment gain (a) | | | (0.3 | ) | | | - | | | Effect of exchange rate changes | | | (0.6 | ) | | | (3.8 | ) | | Benefit obligation at end of year | | $ | 264.7 | | | $ | 258.8 | | | | | | | | | | | | | Change in plan assets: | | | | | | | | | | Fair value of plan assets at beginning of year | | $ | 155.1 | | | $ | 157.7 | | | Actual return on plan assets | | | (11.6 | ) | | | 6.3 | | | Benefits paid | | | (18.2 | ) | | | (22.8 | ) | | Employer contributions | | | 5.8 | | | | 13.9 | | | Fair value of plan assets at end of year | | $ | 131.1 | | | $ | 155.1 | | | Funded status at end of year | | $ | (133.6 | ) | | $ | (103.7 | ) | | | | | | | | | | | | Amounts recognized in the consolidated balance sheets: | | | | | | | | | | Current liability | | $ | (2.7 | ) | | $ | (2.0 | ) | | Noncurrent liability | | | (130.9 | ) | | | (101.7 | ) | | | | $ | (133.6 | ) | | $ | (103.7 | ) |
| | 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) | The $0.3 million curtailment gain, which is associated with headcount reductions in Europe within the VTS segment, will be recognized as a component of net periodic benefit cost following the completion of the headcount reductions. See Note 5 for additional information on the Company’s restructuring activities. |
As of March 31, 2020, 2019,2023, 2022, and 2018,2021, the benefit obligation associated with the Company’s non-U.S. pension plans totaled $35.7$21.2 million, $36.5$26.5 million, and $43.4$36.4 million, respectively. In fiscal 2020, the $0.8The $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 resulteddue to net actuarial gains during the year from an increase in discount rates and employer contributions of $2.2 million for benefits paid to plan participants duringwhich decreased the year,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 $0.9$0.7 million. In fiscal 2019,2022, the $6.9$9.9 million decrease was primarily due to the sale of the air-cooled automotive business in Austria, which resulted from employer contributions of $5.9in a $5.5 million for benefits paid to plan participantsdecrease. In addition, net actuarial gains during the year, and 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 $1.1$0.6 million.
The accumulated benefit obligation for pension plans was $194.4 million and $228.1 million as of March 31, 2023 and 2022, respectively. The net actuarial loss related to the pension plans recognized in accumulated other comprehensive loss was $123.5 million and $131.5 million as of March 31, 2023 and 2022, respectively.
The accumulated benefit obligation for pension plans was $263.1 million and $256.9 million as of March 31, 2020 and 2019, respectively. The net actuarial loss related to the pension plans recognized in accumulated other comprehensive loss was $191.5 million and $159.1 million as of March 31, 2020 and 2019, respectively.
Costs for the Company’s global pension plans included the following components:
| | Years ended March 31, | | | | | 2020 | | | 2019 | | | 2018 | | | Components of net periodic benefit cost: | | | | | | | | | | | Service cost | | $ | 0.4 | | | $ | 0.5 | | | $ | 0.5 | | | Interest cost | | | 9.1 | | | | 9.6 | | | | 9.9 | | | Expected return on plan assets | | | (12.0 | ) | | | (12.3 | ) | | | (11.9 | ) | | Amortization of net actuarial loss | | | 6.0 | | | | 5.6 | | | | 5.6 | | | Settlements (a) | | | 0.2 | | | | 0.2 | | | | 0.3 | | | Curtailment gain (a) | | | - | | | | - | | | | (0.3 | ) | | Net periodic benefit cost | | $ | 3.7 | | | $ | 3.6 | | | $ | 4.1 | | | | | | | | | | | | | | | | | Other changes in benefit obligation recognized in other comprehensive income (loss): | | | | | | | | | | | | | | Net actuarial loss | | $ | (38.7 | ) | | $ | (7.7 | ) | | $ | (5.8 | ) | | Amortization of net actuarial loss | | | 6.2 | | | | 5.8 | | | | 5.9 | | | Total recognized in other comprehensive income (loss) | | $ | (32.5 | ) | | $ | (1.9 | ) | | $ | 0.1 | |
| | 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 and curtailment gain 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 amortized $6.2$5.7 million, $5.6$8.6 million, and $5.6 $7.1million of net actuarial loss in fiscal 2020, 2019,2023, 2022, and 2018,2021, respectively. In each Exclusive of these years,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$1.0 million of the amortization was attributable to the Company’s non-U.S. pension plans. The Company estimates $6.9 millionplans in each of net actuarial loss for its pension plans will be amortized from accumulated other comprehensive loss into net periodic benefit cost during fiscal 2021. The fiscal 2021 estimated amortization includes less than $1.0 million related to the Company’s non-U.S. pension plans.these years.
The Company used a discount rate of 3.4%5.2% and 4.0%3.9% as of March 31, 20202023 and 2019,2022, respectively, for determining its benefit obligations under its U.S. pension plans. The Company used a weighted-average discount rate of 1.0%3.8% and 1.4%1.8% as of March 31, 20202023 and 2019,2022, respectively, for determining its benefit obligations under its non-U.S. pension plans. The Company used a discount rate of 4.0%3.9%, 4.0%3.2%, and 4.1%3.4% to determine its costs under its U.S. pension plans for fiscal 2020, 2019,2023, 2022, and 2018,2021, respectively. The Company used a weighted-average discount rate of 1.7%2.9%, 1.9%1.6%, and 1.9%1.4% to determine its costs under its non-U.S. pension plans for fiscal 2020, 2019,2023, 2022, and 2018,2021, 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. pension 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, 20202023 and 20192022 were as follows:
| | Target allocation | | | Plan assets | | | | | | | | 2020 | | | 2019 | | | Equity securities | | | 65 | % | | | 60 | % | | | 66 | % | | Debt securities | | | 21 | % | | | 22 | % | | | 19 | % | | Real estate investments | | | 13 | % | | | 16 | % | | | 12 | % | | Cash and cash equivalents | | | 1 | % | | | 2 | % | | | 3 | % | | | | | 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, 20202023 and 2019,2022, the Company’s pension plans did not directly own shares of Modine common stock.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The Company employs a total return investment approach, whereby a mix of investments are used to maximize the long-term growth of 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 2020, 2019,2023, U.S. pension plan expense, the expected rate of return on plan assets was 7.0 percent. For fiscal 2022, and 20182021 U.S. pension plan expense, the expected rate of return on plan assets was 7.5 percent. For fiscal 20212024 U.S. pension plan expense, the Company has assumed a rate of return on plan assets of 7.56.5 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 contribute approximately $20 millionmake cash contributions to theseits U.S. plans during fiscal 2021.2024.
Estimated pension benefit payments for the next ten fiscal years are as follows:
| Fiscal Year | | Estimated Pension Benefit Payments | | | 2021 | | $ | 17.2 | | | 2022 | | | 16.8 | | | 2023 | | | 16.7 | | | 2024 | | | 16.7 | | | 2025 | | | 16.8 | | | 2026-2030 | | | 80.6 | |
| 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 | |
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 as a hedge, and, if so, on the nature of the hedging activity.
Commodity derivatives: Derivatives The Company periodically enters into over-the-counter forward contracts related to forecasted purchases of aluminum and copper. The Company’s strategy in entering into these contracts is to reduce its exposure to changing market prices of these commodities. The Company designates certain commodity forward contracts 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 accumulated other comprehensive income (loss) (“AOCI”) within shareholders’ equity and subsequently recognizes the gains and losses within cost of 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 forward contracts to hedge specific foreign currency-denominated assets and 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, the Company records unrealized gains and losses related to changes in fair value 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.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The fair value of the Company’s derivative financial instruments recorded in the consolidated balance sheets were as follows:
| _ | Balance Sheet Location | | March 31, 2020 | | | March 31, 2019 | | | Derivatives designated as hedges: | | | | | | | | | Commodity derivatives | Other current assets | | $ | - | | | $ | 0.6 | | | Commodity derivatives | Other current liabilities | | | 1.3 | | | | 0.3 | | | Foreign exchange contracts | Other current assets | | | 0.1 | | | | 0.2 | | | | | | | | | | | | | | Derivatives not designated as hedges: | | | | | | | | | | | Foreign exchange contracts | Other current liabilities | | $ | - | | | $ | 0.5 | |
| _ | 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 associated with derivative financial instruments that the Company designated for hedge accounting during the years ended March 31 were as follows:
| | Gain (loss) recognized in other comprehensive income | | Statement of Operations | | Gain (loss) reclassified from AOCI | | | | | 2020 | | | 2019 | | | 2018 | | Location | | 2020 | | | 2019 | | | 2018 | | | Commodity derivatives | | $ | (2.6 | ) | | $ | (0.3 | ) | | $ | 0.2 | | Cost of sales | | $ | (0.8 | ) | | $ | (0.4 | ) | | $ | - | | | Foreign exchange contracts | | | (0.1 | ) | | | (0.4 | ) | | | 0.1 | | Net sales | | | (0.1 | ) | | | (0.4 | ) | | | 0.1 | | | Foreign exchange contracts | | | 0.2 | | | | 1.0 | | | | - | | Cost of sales | | | 0.4 | | | | 0.6 | | | | - | | | Total gains (losses) | | $ | (2.5 | ) | | $ | 0.3 | | | $ | 0.3 | | | | $ | (0.5 | ) | | $ | (0.2 | ) | | $ | 0.1 | |
| | 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 | ) |
The amounts associated with derivative financial instruments that the Company did not designate for hedge accounting were as follows:
| Statement of Operations Location | | Years ended March 31, | | | _ | | | 2020 | | | 2019 | | | 2018 | | | Commodity derivatives | Cost of sales | | $ | - | | | $ | - | | | $ | 0.4 | | | Foreign exchange contracts | Net sales | | | (0.1 | ) | | | (0.7 | ) | | | (0.1 | ) | | Foreign exchange contracts | Other income (expense) - net | | | (0.1 | ) | | | (0.3 | ) | | | (0.5 | ) | | Total losses | | | $ | (0.2 | ) | | $ | (1.0 | ) | | $ | (0.2 | ) |
| 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
COVID-19
In March 2020,Supply Chain Disruptions and Inflationary Market Conditions
Market and economic dynamics, including the World Health Organization declared the outbreakimpacts of the novel coronavirus, COVID-19 a pandemic. The spreadpandemic, have contributed to global supply chain challenges and inflationary market conditions. Since the fourth quarter of COVID-19fiscal 2022, the military conflict between Russia and Ukraine and the resulting work and travel restrictions, including international border closings, have disrupted, and may continue to disrupt, global supply chains and have negatively impacted the global economy. As a result of this pandemic, the Company has experienced significant impacts on its operations and has suspended production at certain manufacturing facilities in China, India, Italy, Spain, Germany, the Netherlands, Austria, Hungary, the U.S., Mexico and Brazil due to local government requirements or customer shutdowns and is operating other facilitiesrelated sanctions imposed by governments in the U.S. and abroad at reduced capacity levels. Although the temporarily-closed facilities have since reopened, many are operating at a significantly reduced volume because of low customer demand. also impacted these market conditions. The Company is focused on protecting the health and wellbeing of its employees and the communities in which it operates, while also ensuring the continuity of its business operations and timely delivery of quality products and services to its customers. Beginning largely in April 2020 and in an effort to mitigatemitigating the negative impacts of COVID-19,labor 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 has taken actions, including, but not limited to, production staffing adjustments, furloughs, shortened work weeks,cannot reasonably estimate the full impact that the supply chain challenges and temporary salary reductions at all levels of our organization. In addition, the Company is focused on reducing operatingother related economic and administrative expenses.
The Company’s consolidated financial statements reflect estimates and assumptions made by management, including assumptions regarding the future impacts of the COVID-19 pandemic, that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenue and expenses during the reporting periods presented. For example, assets particularly sensitive to assumptions that could be adversely impacted by the COVID-19 pandemic include goodwill and deferred tax assets. While the Company believes it used appropriate estimates and assumptions to prepare the consolidated financial statements, actual amounts could differ materially and future events or circumstances couldmarket dynamics will have a potential negative effect on the assumptions used. If the Company, its suppliers, or its customers experience further shutdowns or other significant business disruptions associated with the COVID-19 pandemic, its ability to conduct business in the manner and on the timelines presently planned could be materially and negatively impacted, which could have a material adverse effect on the Company’s business, financial position, results of operations and cash flows.flows in the future.
Market Risk
The Company sells a broad range of products that provide thermal solutions to customers operating in diverse markets, including the automotive, commercial vehicle, off-highway, and commercial, industrial, and building HVAC&R markets. The COVID-19 pandemic has negatively impacted these markets; the duration and severity of the impacts of COVID-19 on these markets are currently uncertain.
Credit 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 2020, 1 customer within the VTS segment2023 and 2022, no customers accounted for more than ten percent of the Company’s total sales. In fiscal 2019 and 2018, 2 customers within the VTS segment each2021, 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 were 4539 percent, 5039 percent, and 4843 percent of total sales in fiscal 2020, 2019,2023, 2022, and 2018,2021, respectively. At March 31, 20202023 and 2019, 342022, 37 percent and 3829 percent, respectively, of the Company'sCompany’s trade accounts receivable were due from the Company'sCompany’s top 10ten customers. These customers operate primarily in the automotive, commercial vehicle, off-highway, automotive and light vehicle, data center cooling, and commercial air conditioning and refrigeration markets. CollateralThe 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 nor has experienced a significant increase in credit losses in connection with the COVID-19 pandemic.served.
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 financial ratings that are acceptable to the Company.
Counterparty Risk The Company manages counterparty risk 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 Company has recorded environmental investigation and remediation accruals related to soil and groundwater contamination at manufacturing facilities in the United States,U.S., one of which the Company currently owns and operates, and at its former manufacturing facility in the Netherlands, along with accruals for lesser environmental matters at certain other facilities in the United States and Brazil.Netherlands. These accruals generallyprimarily relate to soil and groundwater contamination at facilities where past operations followed practices and procedures that were considered acceptable under then-existing regulations, or where the Company is a successor to the obligations of prior owners, and current laws and regulations require investigative and/or remedial work to ensure sufficient environmental compliance. In instances where a range of loss can be reasonably estimated for a probable environmental liability, but no amount within the range is a better estimate than any other amount, the Company accrues the minimum of the range. The Company’s accruals for these environmental matters totaled $18.2$17.6 million and $18.9$18.2 million at March 31, 20202023 and 2019,2022, 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 liabilities related to these matters and revise the estimated accruals, if necessary. BasedWhile 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.
Other Litigation In the normal course of business, the Company and its subsidiaries are named as defendants in various lawsuits and enforcement proceedings by private parties, governmental agencies and/or others in which claims are asserted against Modine. The Company believes that any additional loss in excess of amounts already accrued would not have a material effect on the Company’s consolidated balance sheet, results of operations, and cash flows. In addition, management expects that the liabilities which may ultimately result from such lawsuits or proceedings, if any, would not have a material adverse effect on the Company’s financial position.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 21: Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss were as follows:
| | Foreign Currency Translation | | | Defined Benefit Plans | | | Cash Flow Hedges | | | Total | | | Balance, March 31, 2019 | | $ | (42.6 | ) | | $ | (136.3 | ) | | $ | 0.5 | | | $ | (178.4 | ) | | | | | | | | | | | | | | | | | | | | Other comprehensive loss before reclassifications | | | (18.2 | ) | | | (38.7 | ) | | | (2.5 | ) | | | (59.4 | ) | | Reclassifications: | | | | | | | | | | | | | | | | | | Amortization of unrecognized net loss (a) | | | - | | | | 5.8 | | | | - | | | | 5.8 | | | Realized losses - net (b) | | | - | | | | - | | | | 0.5 | | | | 0.5 | | | Foreign currency translation gains (c) | | | (0.6 | ) | | | - | | | | - | | | | (0.6 | ) | | Income taxes | | | - | | | | 8.3 | | | | 0.5 | | | | 8.8 | | | Total other comprehensive loss | | | (18.8 | ) | | | (24.6 | ) | | | (1.5 | ) | | | (44.9 | ) | | | | | | | | | | | | | | | | | | | | Balance, March 31, 2020 | | $ | (61.4 | ) | | $ | (160.9 | ) | | $ | (1.0 | ) | | $ | (223.3 | ) |
| | 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 | | | Cash Flow Hedges | | | Total | | | Balance, March 31, 2018 | | $ | (5.5 | ) | | $ | (134.9 | ) | | $ | 0.1 | | | $ | (140.3 | ) | | | | | | | | | | | | | | | | | | | | Other comprehensive income (loss) before reclassifications | | | (37.9 | ) | | | (7.1 | ) | | | 0.3 | | | | (44.7 | ) | | Reclassifications: | | | | | | | | | | | | | | | | | | Amortization of unrecognized net loss (a) | | | - | | | | 5.4 | | | | - | | | | 5.4 | | | Realized losses - net (b) | | | - | | | | - | | | | 0.2 | | | | 0.2 | | | Foreign currency translation losses (d) | | | 0.8 | | | | - | | | | - | | | | 0.8 | | | Income taxes | | | - | | | | 0.3 | | | | (0.1 | ) | | | 0.2 | | | Total other comprehensive income (loss) | | | (37.1 | ) | | | (1.4 | ) | | | 0.4 | | | | (38.1 | ) | | | | | | | | | | | | | | | | | | | | Balance, March 31, 2019 | | $ | (42.6 | ) | | $ | (136.3 | ) | | $ | 0.5 | | | $ | (178.4 | ) |
| | 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 18 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 investment in NEXpension plan as a component of the loss on sale recorded during fiscal 2020, the Company wrote off $0.6 million of accumulated foreign currency translation gains. |
| (d) | As a result of the sale of a business in South Africa during fiscal 2019, the Company wrote off $0.8 million of accumulated foreign currency translation losses.2022. See Note 1 for additional information. |
Note 22: Segment and Geographic Information
The Company’s product lines consist of heat-transfer componentssystems and systems.components. The Company serves vehicular and commercial, industrial, and building HVAC&R markets and vehicular markets.
The Company’s VTSClimate Solutions segment represents itsprovides heat transfer products, heating, ventilating, air conditioning and refrigeration products and data center cooling solutions to global customers. The Company’s Performance Technologies segment designs and manufactures air-and liquid-cooled technology for vehicular, businessstationary power, and primarily servesindustrial applications. In addition, the automotive,Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and off-highway markets. In addition, the VTS segment serves the automotive customers and commercial vehicle aftermarket in Brazil. The Company’s CIS segment provides coils, coolers,coatings products and coating solutions to customers throughout the world. The Company’s BHVAC segment provides heating, ventilating and air conditioning products to customers throughout the world.application services.
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, 2020,2022, the Company began managing its automotive business separate fromoperations under two operating segments, Climate Solutions and Performance Technologies. The Climate Solutions segment includes the other businesses withinpreviously-reported BHVAC and CIS segments, with the VTSexception 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 is managingbelieves 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 automotive business as a separate segment as the Company targets the sale or eventual exitCompany’s consolidated financial position, results of the businesses in this segment. Beginning for fiscal 2021, the Company will report theoperations, and cash flows. Segment financial resultsinformation for the automotive business asprior periods has been recast to conform to the Automotive segment. The remaining portion of the previous VTS segment will be named the Heavy-Duty Equipment segment and will include the heavy-duty commercial vehicle and off-highway businesses.current presentation.
The following is a summary of net sales, gross profit, and operating income by 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 | |
The following is a summary of net sales, gross profit, and operating income by segment:
| | 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, 2020 | | | | | External Sales | | | Inter-segment Sales | | | Total | | | Net sales: | | | | | | | | | | | VTS | | $ | 1,136.0 | | | $ | 41.2 | | | $ | 1,177.2 | | | CIS | | | 620.1 | | | | 3.8 | | | | 623.9 | | | BHVAC | | | 219.4 | | | | 1.7 | | | | 221.1 | | | Segment total | | | 1,975.5 | | | | 46.7 | | | | 2,022.2 | | | Corporate and eliminations | | | - | | | | (46.7 | ) | | | (46.7 | ) | | Net sales | | $ | 1,975.5 | | | $ | - | | | $ | 1,975.5 | |
| | Year ended March 31, 2019 | | | | | External Sales | | | Inter-segment Sales | | | Total | | | Net sales: | | | | | | | | | | | VTS | | $ | 1,298.9 | | | $ | 52.8 | | | $ | 1,351.7 | | | CIS | | | 704.7 | | | | 2.9 | | | | 707.6 | | | BHVAC | | | 209.1 | | | | 3.3 | | | | 212.4 | | | Segment total | | | 2,212.7 | | | | 59.0 | | | | 2,271.7 | | | Corporate and eliminations | | | - | | | | (59.0 | ) | | | (59.0 | ) | | Net sales | | $ | 2,212.7 | | | $ | - | | | $ | 2,212.7 | |
| | Year ended March 31, 2018 | | | | | External Sales | | | Inter-segment Sales | | | Total | | | Net sales: | | | | | | | | | | | VTS | | $ | 1,239.3 | | | $ | 56.4 | | | $ | 1,295.7 | | | CIS | | | 674.4 | | | | 1.3 | | | | 675.7 | | | BHVAC | | | 189.4 | | | | 1.8 | | | | 191.2 | | | Segment total | | | 2,103.1 | | | | 59.5 | | | | 2,162.6 | | | Corporate and eliminations | | | - | | | | (59.5 | ) | | | (59.5 | ) | | Net sales | | $ | 2,103.1 | | | $ | - | | | $ | 2,103.1 | |
| | 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, | | | | | 2020 | | | 2019 | | | 2018 | | | Gross profit: | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | VTS | | $ | 144.9 | | | | 12.3 | % | | $ | 186.9 | | | | 13.8 | % | | $ | 201.0 | | | | 15.5 | % | | CIS | | | 92.9 | | | | 14.9 | % | | | 114.9 | | | | 16.2 | % | | | 97.8 | | | | 14.5 | % | | BHVAC | | | 71.5 | | | | 32.3 | % | | | 63.4 | | | | 29.9 | % | | | 58.0 | | | | 30.3 | % | | Segment total | | | 309.3 | | | | 15.3 | % | | | 365.2 | | | | 16.1 | % | | | 356.8 | | | | 16.5 | % | | Corporate and eliminations | | | (1.8 | ) | | | - | | | | 0.3 | | | | - | | | | (0.3 | ) | | | - | | | Gross profit | | $ | 307.5 | | | | 15.6 | % | | $ | 365.5 | | | | 16.5 | % | | $ | 356.5 | | | | 17.0 | % |
| | 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: | | 2020 | | | 2019 | | | 2018 | | | VTS | | $ | 27.6 | | | $ | 64.8 | | | $ | 84.2 | | | CIS | | | 32.9 | | | | 53.4 | | | | 28.5 | | | BHVAC | | | 36.4 | | | | 26.9 | | | | 20.3 | | | Segment total | | | 96.9 | | | | 145.1 | | | | 133.0 | | | Corporate and eliminations (a) | | | (59.0 | ) | | | (35.4 | ) | | | (40.8 | ) | | Operating income | | $ | 37.9 | | | $ | 109.7 | | | $ | 92.2 | |
| | 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. During fiscal 2020 and 2019, the Company recorded $39.2 million and $7.1 million, respectively, of costs directly associated with its review of strategic alternatives for the VTS segment’s automotive business, including costs to separate and prepare the business for potential sale. |
The following is a summary of totalsegment assets, by segment:comprised entirely of trade accounts receivable and inventories, and other assets:
| | March 31, | | | | | 2020 | | | 2019 | | | VTS | | $ | 683.9 | | | $ | 749.9 | | | CIS | | | 617.7 | | | | 604.2 | | | BHVAC | | | 102.3 | | | | 89.4 | | | Corporate and eliminations | | | 132.2 | | | | 94.5 | | | Total assets | | $ | 1,536.1 | | | $ | 1,538.0 | |
| | 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 | |
| (a) | Represents cash and cash equivalents, other current assets, property plant and equipment, intangible assets, goodwill, deferred income taxes, and other noncurrent assets for the 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: | | 2020 | | | 2019 | | | 2018 | | | VTS | | $ | 53.2 | | | $ | 56.2 | | | $ | 61.4 | | | CIS | | | 15.0 | | | | 16.4 | | | | 9.0 | | | BHVAC | | | 3.1 | | | | 1.3 | | | | 0.6 | | | Total capital expenditures | | $ | 71.3 | | | $ | 73.9 | | | $ | 71.0 | |
| | 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: | | 2020 | | | 2019 | | | 2018 | | | VTS | | $ | 49.7 | | | $ | 49.5 | | | $ | 48.2 | | | CIS | | | 24.0 | | | | 23.9 | | | | 24.3 | | | BHVAC | | | 3.4 | | | | 3.5 | | | | 4.2 | | | Total depreciation and amortization expense | | $ | 77.1 | | | $ | 76.9 | | | $ | 76.7 | |
| | 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 | |
| (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. |
The following is a summary of net sales by geographicalgeographic area, based upon the location of the selling unit:
| | Years ended March 31, | | | | | 2020 | | | 2019 | | | 2018 | | | United States | | $ | 941.9 | | | $ | 1,032.3 | | | $ | 911.4 | | | Italy | | | 187.4 | | | | 217.3 | | | | 211.5 | | | China | | | 168.5 | | | | 172.1 | | | | 156.0 | | | Hungary | | | 142.4 | | | | 165.6 | | | | 153.9 | | | Germany | | | 97.5 | | | | 123.1 | | | | 132.6 | | | Austria | | | 93.0 | | | | 116.2 | | | | 151.7 | | | Other | | | 344.8 | | | | 386.1 | | | | 386.0 | | | Net sales | | $ | 1,975.5 | | | $ | 2,212.7 | | | $ | 2,103.1 | |
The following is a summary of property, plant and equipment by geographical area:
| | March 31, | | | | | 2020 | | | 2019 | | | United States | | $ | 114.6 | | | $ | 117.7 | | | China | | | 56.8 | | | | 57.6 | | | Hungary | | | 55.4 | | | | 55.3 | | | Mexico | | | 50.0 | | | | 56.3 | | | Italy | | | 49.8 | | | | 52.4 | | | Germany | | | 27.0 | | | | 32.8 | | | Austria | | | 26.0 | | | | 36.9 | | | Other | | | 68.4 | | | | 75.7 | | | Total property, plant and equipment | | $ | 448.0 | | | $ | 484.7 | |
The following is a summary of net sales by end market:
| | Years ended March 31, | | | | | 2020 | | | 2019 | | | 2018 | | | Commercial HVAC&R | | $ | 639.7 | | | $ | 674.0 | | | $ | 648.3 | | | Automotive | | | 508.8 | | | | 542.8 | | | | 526.0 | | | Commercial vehicle | | | 323.7 | | | | 387.6 | | | | 381.7 | | | Off-highway | | | 253.9 | | | | 314.1 | | | | 271.2 | | | Data center cooling | | | 150.2 | | | | 187.0 | | | | 137.6 | | | Industrial cooling | | | 43.5 | | | | 47.8 | | | | 67.6 | | | Other | | | 55.7 | | | | 59.4 | | | | 70.7 | | | Net sales | | $ | 1,975.5 | | | $ | 2,212.7 | | | $ | 2,103.1 | |
| | 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 | |
Note 23: Quarterly Financial Data (Unaudited)
The following is a summary of quarterly financial data:property, plant and equipment by geographic area:
| | Fiscal 2020 quarters ended | | | | | | | | June | | | Sept. | | | Dec. | | | March | | | Fiscal 2020 | | | | | | | | | | | | | | | | | | | | Net sales | | $ | 529.0 | | | $ | 500.2 | | | $ | 473.4 | | | $ | 472.9 | | | $ | 1,975.5 | | | Gross profit | | | 83.4 | | | | 75.7 | | | | 73.5 | | | | 74.9 | | | | 307.5 | | | Net earnings (loss) (a) | | | 8.2 | | | | (4.8 | ) | | | 1.0 | | | | (6.4 | ) | | | (2.0 | ) | | Net earnings (loss) attributable to Modine (a) | | | 8.0 | | | | (4.7 | ) | | | 1.2 | | | | (6.7 | ) | | | (2.2 | ) | | Net earnings (loss) per share attributable to Modine shareholders: | | | | | | | | | | | | | | | | | | | | | | Basic | | $ | 0.16 | | | $ | (0.09 | ) | | $ | 0.02 | | | $ | (0.13 | ) | | $ | (0.04 | ) | | Diluted | | | 0.16 | | | | (0.09 | ) | | | 0.02 | | | | (0.13 | ) | | | (0.04 | ) |
| | 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 | |
| | Fiscal 2019 quarters ended | | | | | | | | June | | | Sept. | | | Dec. | | | March | | | Fiscal 2019 | | | | | | | | | | | | | | | | | | | | Net sales | | $ | 566.1 | | | $ | 548.9 | | | $ | 541.0 | | | $ | 556.7 | | | $ | 2,212.7 | | | Gross profit | | | 94.3 | | | | 87.9 | | | | 91.7 | | | | 91.6 | | | | 365.5 | | | Net earnings (b) | | | 22.5 | | | | 38.7 | | | | 18.3 | | | | 6.4 | | | | 85.9 | | | Net earnings attributable to Modine (b) | | | 22.0 | | | | 38.5 | | | | 18.0 | | | | 6.3 | | | | 84.8 | | | Net earnings per share attributable to Modine shareholders: | | | | | | | | | | | | | | | | | | | | | | Basic | | $ | 0.43 | | | $ | 0.76 | | | $ | 0.36 | | | $ | 0.12 | | | $ | 1.67 | | | Diluted | | | 0.43 | | | | 0.75 | | | | 0.35 | | | | 0.12 | | | | 1.65 | |
| (a) | During fiscal 2020, restructuring expenses totaled $1.8 million, $2.3 million, $2.6 million, and $5.5 million for the quarters ended June 30, 2019, September 30, 2019, December 31, 2019, and March 31, 2020, respectively (see Note 5). During the third quarter of fiscal 2020, the Company sold a previously-closed manufacturing facility in Germany and, as a result, recorded a gain of $0.8 million (see Note 1). During the fourth quarter of fiscal 2020, the Company recorded asset impairment charges totaling $8.6 million related to long-lived assets and goodwill (see Note 5 and Note 14). During fiscal 2020, costs associated with the Company’s review of strategic alternatives for the VTS segment’s automotive business totaled $8.3 million, $11.9 million, $14.0 million, and $5.0 million for the quarters ended June 30, 2019, September 30, 2019, December 31, 2019, and March 31, 2020, respectively. During fiscal 2020, the Company adjusted its valuation allowances on deferred tax assets in the U.S and in Brazil. As a result, the Company recorded net income tax charges totaling $3.0 million and $4.1 million in the third and fourth quarters, respectively. Also during fiscal 2020, the Company recorded a net income tax charge totaling $2.9 million, $2.7 million of which was recorded in the third quarter, as a result of legal entity restructuring completed in preparation of a potential sale of the automotive business (see Note 7).
|
| (b) | During fiscal 2019, restructuring expenses totaled $0.2 million, $0.5 million, and $8.9 million for the quarters ended June 30, 2018, December 31, 2018, and March 31, 2019, respectively (see Note 5). During the second quarter of fiscal 2019, the Company sold its South African business within the BHVAC segment and, as a result, recorded a loss of $1.7 million (see Note 1). During the third quarter of fiscal 2019, the Company recorded a $0.4 million impairment charge related to a manufacturing facility in Austria (see Note 5). During the third and fourth quarter of fiscal 2019, the Company incurred $1.2 million and $5.9 million of costs associated with its review of strategic alternatives for the VTS segment’s automotive business. The Company’s income tax benefit for fiscal 2019 includes net benefits of $24.4 million and net charges of $2.2 million in the second and third quarters, respectively, related to the Tax Act and the recognition of foreign tax credits (see Note 7). During fiscal 2019, the Company adjusted its valuation allowances on deferred tax assets related to two separate subsidiaries in China and, as a result, recorded a $2.0 million income tax benefit and a $1.0 million income tax charge in the first and second quarters, respectively (see Note 7). |
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors and Shareholders of
Modine Manufacturing CompanyCompany:
Opinions on the Consolidated Financial Statements and Internal Control overOver Financial Reporting
We have audited the accompanying consolidated financial statements, including the related notes, as listed in the index appearing under Item 15(a)(1), and the financial statement schedule listed in the index appearing under Item 15(a)(2),balance sheet of Modine Manufacturing Company and its subsidiaries (the “Company”)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, referred to as the “consolidatedconsolidated financial statements”)statements). We also have audited the Company'sCompany’s internal control over financial reporting as of March 31, 2020,2023, based on criteria established in Internal Control -– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 31, 2020 and 2019,2023, and the results of its operations and its cash flows for each of the three years in the periodyear ended March 31, 20202023, in conformity with accounting principlesU.S. generally accepted in the United States of America.accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2020,2023 based on criteria established in Internal Control -– Integrated Framework (2013) issued by the COSO.
Changes in Accounting Principles
As discussed in Note 1 toCommittee of Sponsoring Organizations of the consolidated financial statements, the Company changed the manner in which it accounts for leases in fiscal 2020 and the manner in which it accounts for intra-entity transfers of assets other than inventory in fiscal 2019.Treadway Commission.
Basis for Opinions
The Company'sCompany’s management is responsible for these consolidated financial statements, 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 Over Financial Reporting appearing under Item 9A.Reporting. Our responsibility is to express opinionsan opinion on the Company’s consolidated financial statements and an opinion on the Company'sCompany’s internal control over financial reporting 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 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 regarding the amounts and disclosures in the consolidated financial statements. Our auditsaudit 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. 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.
Definition and Limitations of Internal Control overOver 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 MattersMatter
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 (i)that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (ii)(2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit mattersmatter 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.
Goodwill Impairment Assessment – CIS Reporting UnitsRealizability of certain domestic deferred tax assets
As describeddiscussed in Notes 1 and 148 to the consolidated financial statements, the Company’s consolidated goodwill balance was $166.1 millionCompany 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, 2020, and2023 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 goodwill associated with the CIS reporting units was $152.6 million. Management assesses goodwill for impairment annually as ofyear ended March 31, of each year, 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. Management determines the fair value of a reporting unit based upon the present value of estimated future cash flows. Determining the fair value of a reporting unit involves judgment and the use of significant estimates and assumptions by management, which include assumptions regarding the revenue growth rates and operating profit margins used to calculate estimated future cash flows, the risk-adjusted discount rates, business trends and market conditions.2023.
The principal considerations for our determination that performing procedures relating toWe identified the goodwill impairment assessmentevaluation of the CIS reporting units isrealizability of certain domestic deferred tax assets, specifically certain federal carryforward assets, as a critical audit mattermatter. 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 there was significant judgment by management when determining the fair valueprimary 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 reporting units. This in turn ledrealizability of the federal carryforward assets, including controls related to a high degreethe projections of auditor judgment, subjectivity, and effort in performing procedures and evaluating evidence relating to management’s estimated future cash flows and significant assumptions, including revenue growth rates, operating profit margins,taxable income and the risk-adjusted discount rates. In addition,application of tax laws to utilize the audit effort involvedfederal carryforward assets. We evaluated the usereasonableness of professionals with specialized skillmanagement’s projections of future taxable income, including positive and knowledge to assist in performing these procedures and evaluatingnegative evidence used, by comparing the audit evidence obtained.projections to:
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidatedrecent financial statements. These procedures included testing the effectiveness of controls relating to the goodwill impairment assessment, including controls over the estimated fair valueprofitability trends of the CIS reporting units. These procedures also included, among others, testing management’s process for developing the fair value estimates; evaluating the appropriateness of the discounted cash flow model; testing the completeness, accuracy, and relevance of underlying data used in the model; and evaluating the significant assumptions used by management including revenue growth rates, operating profit margins, and risk-adjusted discount rates. Evaluating management’s assumptions related to revenue growth rates and operating profit margins involved evaluating whether the assumptions used were reasonable considering (i) the current and past performance of the reporting units, (ii) the consistency with external market and Company industry data and (iii) whether these assumptions were consistent with economic trends, and evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used
We assessed the Company’s ability to assist in the evaluationproject future earnings based on comparisons of the Company’s discounted cash flow modelprevious annual projections to actual results. We performed a sensitivity analysis over the amount and certain significant assumptions, includingtiming of future taxable income to assess the risk-adjusted discount rates.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/ PricewaterhouseCoopersKPMG LLP Milwaukee, Wisconsin
May 29, 2020
We have served as the Company’s auditor since 1935.2022. Milwaukee, Wisconsin May 25, 2023
Report of Independent Registered Public Accounting Firm
77To 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 Company'sCompany’s disclosure controls and procedures were effective, at a reasonable assurance level, as of March 31, 2020.2023.
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, assessed the effectiveness of the Company’s internal control over financial reporting as of March 31, 2020.2023. In making its assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in “Internal Control—Integrated Framework (2013).” Based upon this assessment, management concluded that, as of March 31, 2020,2023, 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, 20202023 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 20202023 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 20202023 Annual Meeting of Shareholders to be held on July 23, 2020August 17, 2023 (the “2020“2023 Annual Meeting Proxy Statement”) under the caption “Election of Directors.”
Executive Officers. The information in response to this Item appears under the caption "Information“Information about our Executive Officers"Officers” in this Form 10-K.
Code of Conduct. The Company incorporates by reference the information appearing in the 20202023 Annual Meeting Proxy Statement under the caption “Corporate Governance – Code of Conduct.” The Company'sCompany’s Code of 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 20202023 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 20202023 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 20202023 Annual Meeting Proxy Statement under the caption “Shareholder Nominations and Recommendations of Director Candidates.”
Delinquent Section 16(a) Reports. Reports The Company incorporates by reference the information appearing in the 20202023 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 20202023 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 20202023 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 20202023 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 20202023 Annual Meeting Proxy Statement under the caption “Independent Auditor’sAuditors’ Fees for Fiscal 20202023 and 2019.2022.”
PART IV
| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. |
(a) | (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, 2020, 20192023, 2022 and 20182021 | 42 | Consolidated Statements of Comprehensive Income for the years ended March 31, 2020, 20192023, 2022 and 20182021 | 43 | Consolidated Balance Sheets at March 31, 20202023 and 20192022 | 44 | Consolidated Statements of Cash Flows for the years ended March 31, 2020, 20192023, 2022 and 20182021 | 45 | Consolidated Statements of Shareholders'Shareholders’ Equity for the years ended March 31, 2020, 20192023, 2022 and 20182021 | 46 | | Notes to Consolidated Financial Statements | 47-7547-81 | Report of Independent Registered Public Accounting Firm (KPMG PCAOB ID 185) | 76-7782
| 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, 2020, 20192023, 2022 and 20182021 | 8187 | | | | 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. | 82-8588-91 | | | | 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)
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS For the years ended March 31, 2020, 20192023, 2022 and 20182021 (In millions)
| | | | | Additions | | | | | | Description | | Balance at Beginning of Period | | | Charged (Benefit) to Costs and Expenses | | | Charged to Other Accounts | | | Balance at End of Period | | | | | | | | | | | | | | | | | 2020: Valuation Allowance for Deferred Tax Assets | | $ | 43.4 | | | $ | 4.5 | | | $ | (1.0 | )(a) | | $ | 46.9 | | | | | | | | | | | | | | | | | | | | | 2019: Valuation Allowance for Deferred Tax Assets | | $ | 48.9 | | | $ | (1.6 | ) | | $ | (3.9 | )(a) | | $ | 43.4 | | | | | | | | | | | | | | | | | | | | | 2018: Valuation Allowance for Deferred Tax Assets | | $ | 49.6 | | | $ | (6.7 | ) | | $ | 6.0 | (a) | | $ | 48.9 | |
| | | | | 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. The fiscal 2018 amounts also included increases associated with the Company’s acquisition of Luvata HTS. |
MODINE MANUFACTURING COMPANY (THE “REGISTRANT”) (COMMISSION FILE NO. 1-1373)
TO 20202023 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 October 24, 2019January 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.hereto | | | | | | | | | | | | | 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 (“August 12, 2010 8-K”) | | | | | | | | | | | | 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 8-K | | | | | | | | | | | | | 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 | | | | | | | | | | | | 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 | | | | | | | | | | | | 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 | | |
| | 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”) | | | | | | | | | | | | 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 | | | | | | | | | | | | 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”) | | | | | | | | | | | | | Credit FacilitySecond Amendment to Second Amended and Restated Note Purchase and Private Shelf Agreement among Modine Holding GmbH, Modine Europe GmbH and Deutsche Bank AG dated as of April 27, 2012.May 19, 2020. | | Exhibit 4.104.2 to Registrant’s Form 10-K for the fiscal year ended March 31, 2012May 19, 2020 8-K | | | | | | | | | |
| | ThirdAmendment No. 2 to Fourth Amended and Restated Credit Agreement dated as of November 15, 2016.May 18, 2021. | | Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated November 15, 2016May 18, 2021 (“November 15, 2016May 18, 2021 8-K”) | | | | | | | | | | | | | Third Amendment to Second Amended and Restated Note Purchase and Private Shelf Agreement dated as of November 15, 2016.May 18, 2021. | | Exhibit 4.2 to November 15, 2016 May 18, 2021 8-K | | | | | | | | | | | | | DescriptionFifth Amended and Restated Credit Agreement dated as of October 12, 2022. | | Exhibit 4.1 to Registrant’s securitiesCurrent Report on Form 8-K dated October 12, 2022 | | | | X | | | | | | | | | | | Fourth Amendment to Second Amended and Restated CreditNote Purchase and Private Shelf Agreement dated as of June 28, 2019.November 21, 2022. | | Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated June 28, 201910-Q for the third quarter ended December 31, 2022 | | | | | | | | | | | | | Second Amended and Restated Note Purchase and Private Shelf Agreement datedDirector Emeritus Retirement Plan effective April 1, 1992 (and frozen as of August 6, 2019July 1, 2000). | | Exhibit 4.110(a) to Registrant’s Form 10-Q10-K for the third quarterfiscal year ended DecemberMarch 31, 20192002 | | | | | | | | | | | | | First Amendment to Second AmendedForm of Change in Control and Restated Note PurchaseTermination Agreement (amended and Private Shelf Agreement dated as of January 31, 2020restated) between the Registrant and officers other than Neil Brinker. | | Exhibit 4.210(f) to Registrant’s Form 10-Q10-K for the third quarterfiscal year ended DecemberMarch 31, 20192004 | | | | | | | | | | | | | Amendment No. 1 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”) | | | | | | | | | | 4.19Executive Supplemental Retirement Plan (as amended). | | 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 | | | | | | | | | | | | Director Emeritus Retirement Plan effective April 1, 1992 (and frozen as of July 1, 2000). | | Exhibit 10(a)10(f) to Registrant’s Form 10-K for the fiscal year ended March 31, 2002 | | | | | | | | | | | | 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 | | |
| | 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 | | | | | | | | | | | | | Form of Change in Control and Termination Agreement (amended and restated) between the Registrant and officers other than Thomas A. Burke.Deferred Compensation Plan (as amended). | | Exhibit 10(f)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 10-K for the year ended March 31, 20048-K dated July 17, 2014 | | | | | | | | | | | | | Executive Supplemental Retirement Plan (as amended).Form of Fiscal 2023 Performance Cash Award Agreement. | | Exhibit 10(f)10.1 to Registrant'sthe Registrant’s Form 10-K10-Q for the fiscal yearfirst quarter ended March 31, 2000June 30, 2022 (“June 30, 2022 10-Q”) | | | | | | | | | | | | | Deferred Compensation Plan (as amended).Form of Fiscal 2023 Incentive Stock Option Award Agreement. | | Exhibit 10(y)10.2 to 2003 10-KJune 30, 2022 10-Q | | | | | | | | | | | | | 2008 Incentive Compensation Plan
(Amended and Restated effective May 7, 2014).Form of Fiscal 2023 Non-Qualified Stock Option Award Agreement..
| | Exhibit 10.110.3 to Registrant's Current Report on Form 8-K dated July 17, 2014June 30, 2022 10-Q | | | | | | | | | | | | | Form of Fiscal 2020 Performance2023 Restricted Stock Unit Award Agreement.Agreement.. | | Exhibit 10.110.4 to Registrant’s Form 10-Q for the quarter ended June 30, 20192022 10-Q | | | | | | | | | | | | | Form of Fiscal 2020 Incentive2023 Modine Non-Employee Director Restricted Stock OptionUnit Award Agreement.Agreement with Deferral. | | Exhibit 10.210.6 to Registrant’s Form 10-Q for the quarter ended June 30, 20192022 10-Q | | | | | | | | | | | | | Form of Fiscal 20202023 Modine Non-Employee Director Restricted Stock Unit Award Agreement.Agreement without Deferral. | | Exhibit 10.310.7 to Registrant’s Form 10-Q for the quarter ended June 30, 20192022 10-Q | | | | | | | | | | | | | FormChange in Control Agreement dated as of Fiscal 2020 Non-Qualified Stock Option Award Agreement.June 4, 2021, by and between Modine Manufacturing Company and Neil D. Brinker. | | Exhibit 10.410.1 to Registrant’s Current Report on Form 10-Q for the quarter ended8-K dated June 30, 20194, 2021 | | | | | | | | | | | | | 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.Neil Brinker. | | Exhibit 10.17 to Registrant'sRegistrant’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 | | | | | | | | | | | | | FormTransition and Separation Agreement between Thomas A. Burke and Modine Manufacturing Company effective as of Fiscal 2020 Non-Employee Director Restricted Stock Unit Award.August 4, 2020. | | Exhibit 10.110.6 to the Registrant’s Form 10-Q for the second quarter ended September 30, 20192020 | | | | | | | | | | | | | Separation[Corrected] Offer Letter for Dennis P. Appel dated as of September 26, 2019.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, 20192020 | | | | | | | | | | | | | Release Agreement executed as of October 17, 2019, between Modine Manufacturing Company2020 Incentive Compensation Plan (Amended and Dennis P. Appel.Restated effective July 21, 2022). | | Exhibit 10.210.1 to the Registrant’s Current Report on Form 10-Q for the quarter ended December 31, 2019 8-K dated July 21, 2022 | | | | | | | | | | | | | EmploymentForm of Retention Agreement forLetter, effective August 31, 2020, between the Company and each of Michael B. Lucareli, Scott Wollenberg, dated as of July 26, 2019.L. Bowser and Sylvia A. Stein. | | Exhibit 10.510.1 to the Registrant’s Current Report on Form 10-Q for the quarter ended June 30, 20198-K dated August 31, 2020 | | | | | | | | | | |
| | ListOffer Letter dated as of subsidiaries ofJuly 2, 2021, by and between the Registrant.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”) | | | | X | | | | | | | | | | | ConsentOffer Letter dated as of independent registered public accounting firm.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 Thomas A. Burke,Neil D. Brinker, President and Chief Executive Officer. | | | | X | | | | | | | | | | | Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Finance and Chief Financial Officer. | | | | X | | | | | | | | | | | Section 1350 Certification of Thomas A. Burke,Neil D. Brinker, President and Chief Executive Officer. | | | | X | | | | | | | | | | | Section 1350 Certification of Michael B. Lucareli, Executive Vice President, Finance and Chief Financial Officer. | | | | X | | | | | | | | | 101.INS | | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). | | | | X | | | | | | | | | 101.SCH | | Inline XBRL Taxonomy Extension Schema Document.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.LAB101.PRE | | Inline XBRL Taxonomy Extension LabelPresentation Linkbase Document. | | | | X | | | | | | | | | 101.PRE104 | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | | | | X | | | | | | | | 104 | | Cover Page Interactive Data Filepage interactive data file (formatted as inline XBRL and contained in ExhibitExhibits 101). | | | | 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. |
** | 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 29, 202025, 2023 | Modine Manufacturing Company | | | | | | By: | /s/ Thomas A. BurkeNeil D. Brinker | | | | Thomas A. Burke, Neil D. Brinker, President
| | | and Chief Executive Officer | | | | (Principal (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 | | Thomas A. BurkeNeil D. Brinker | May 29, 202025, 2023 | President, Chief Executive Officer and Director | | (Principal Executive Officer) | | | | | | /s/ Michael B. Lucareli | | Michael B. Lucareli | May 29, 202025, 2023 | Executive Vice President, Finance and Chief Financial Officer | | (Principal Financial and Accounting Officer) | | | | | | /s/ Marsha C. Williams | | Marsha C. Williams | May 29, 202025, 2023 | Director | | | | /s/ David J. Anderson | | David J. Anderson | May 29, 2020 | DirectorChairperson, Board of Directors | | | | | | /s/ Eric D. Ashleman | | Eric D. Ashleman | May 29, 202025, 2023 | Director | |
| | | /s/ Suresh V. Garimella |
| Suresh V. Garimella | May 25, 2023 | Director | | | | | /s/ David G. BillsKatherine C. Harper | | David G. BillsKatherine C. Harper | | Director | | | | /s/ Charles P. Cooley | | Charles P. Cooley | May 29, 2020 | Director | | | | /s/ Suresh V. Garimella | | Suresh V. Garimella | May 29, 2020 | Director | | | | | | /s/ Larry O. Moore |
| Larry O. Moore | May 29, 202025, 2023 | Director | | | | | | /s/ Christopher W. Patterson |
| Christopher W. Patterson | May 29, 202025, 2023 | Director | | | | | /s/ David J. Wilson | | David J. Wilson | May 25, 2023 | Director | | | | | /s/ William A. Wulfsohn |
| William A. Wulfsohn | May 25, 2023 | Director | | | | | | /s/ Christine Y. Yan |
| Christine Y. Yan | May 29, 202025, 2023 | Director | |
s | | | % of sales | | | $’s | | % of sales | | $’s | | % of sales | | $’s | | % of sales | | | Net sales | | $ | 1,976 | | | | 100.0 | % | | $ | 2,213 | | | | 100.0 | % | | $ | 2,298 | | 100.0 | % | | $ | 2,050 | | 100.0 | % | | $ | 1,808 | | 100.0 | % | | Cost of sales | | | 1,668 | | | | 84.4 | % | | | 1,847 | | | | 83.5 | % | | | 1,909 | | 83.1 | % | | | 1,741 | | 84.9 | % | | | 1,515 | | 83.8 | % | | Gross profit | | | 308 | | | | 15.6 | % | | | 366 | | | | 16.5 | % | | 389 | | 16.9 | % | | 309 | | 15.1 | % | | 293 | | 16.2 | % | | Selling, general and administrative expenses | | | 250 | | | | 12.6 | % | | | 244 | | | | 11.0 | % | | 234 | | 10.2 | % | | 215 | | 10.5 | % | | 211 | | 11.7 | % | | Restructuring expenses | | | 12 | | | | 0.6 | % | | | 10 | | | | 0.4 | % | | 5 | | 0.2 | % | | 24 | | 1.2 | % | | 13 | | 0.7 | % | | Impairment charges | | | 9 | | | | 0.4 | % | | | - | | | | - | | | | (Gain) loss on sale of assets | | | (1 | ) | | | - | | | | 2 | | | | 0.1 | % | | | Operating income | | | 38 | | | | 1.9 | % | | | 110 | | | | 5.0 | % | | | Impairment charges (reversals) - net | | | - | | - | | (56 | ) | | -2.7 | % | | 167 | | 9.2 | % | | Loss on sale of assets | | | | - | | | - | | | 7 | | | 0.3 | % | | | - | | | - | | | Operating income (loss) | | | 150 | | 6.5 | % | | 119 | | 5.8 | % | | (98 | ) | | -5.4 | % | | Interest expense | | | (23 | ) | | | -1.1 | % | | | (25 | ) | | | -1.1 | % | | (21 | ) | | -0.9 | % | | (16 | ) | | -0.8 | % | | (19 | ) | | -1.1 | % | | Other expense - net | | | (5 | ) | | | -0.2 | % | | | (4 | ) | | | -0.2 | % | | | Earnings before income taxes | | | 10 | | | | 0.5 | % | | | 81 | | | | 3.7 | % | | | (Provision) benefit for income taxes | | | (12 | ) | | | -0.6 | % | | | 5 | | | | 0.2 | % | | | Net (loss) earnings | | $ | (2 | ) | | | -0.1 | % | | $ | 86 | | | | 3.9 | % | | | Other expense – net | | | | (4 | ) | | -0.2 | % | | | (2 | ) | | -0.1 | % | | | (2 | ) | | -0.1 | % | | Earnings (loss) before income taxes | | | 125 | | 5.5 | % | | 101 | | 5.0 | % | | (119 | ) | | -6.6 | % | | Benefit (provision) for income taxes | | | | 28 | | 1.2 | % | | | (15 | ) | | -0.7 | % | | | (90 | ) | | -5.0 | % | | Net earnings (loss) | | | $ | 154 | | | 6.7 | % | | $ | 86 | | | 4.2 | % | | $ | (209 | ) | | | -11.6 | % |
Year Ended March 31, 2023 Compared with Year Ended March 31, 2022
Fiscal 20202023 net sales of $1,976$2,298 million were $237$248 million, or 1112 percent, lowerhigher than the prior year, primarily due to lowerhigher sales volume in both of our VTS and CIS segments and favorable commercial pricing, including adjustments in response to raw material price increases. These increases were partially offset by a $46$111 million unfavorable impact of foreign currency exchange rate changes, partially offset by higher salesrates. Sales in our BHVAC segment. Sales decreased $175the Performance Technologies and Climate Solutions segments increased $144 million and $84$101 million, in our VTS and CIS segments, respectively. Sales increased $9 million in our BHVAC segment.
Fiscal 20202023 cost of sales of $1,668$1,909 million decreased $179increased $168 million, or 10 percent, primarily due to lowerhigher sales volume and higher raw material prices, which increased $34 million. These increases were partially offset by a $39$95 million favorable impact of foreign currency exchange rate changes.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 an $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 90110 basis points to 84.4 percent and was negatively impacted by approximately 80 basis points due to higher labor and inflationary costs and, to a lesser extent, by sales mix. These negative impacts were partially offset by favorable material costs, which impacted costs of sales by approximately 30 basis points. The favorable material costs primarily resulted from lower commodity pricing, which more than offset the negative impacts of tariffs. In addition, we recorded $3 million of costs at Corporate for program and equipment transfers associated with the separation of the VTS segment’s automotive business in preparation for a potential sale.84.9 percent.
As a result of lowerhigher sales and higher cost of sales as a percentage of sales, fiscal 20202022 gross profit decreased $58increased $16 million and gross margin declined 90110 basis points to 15.615.1 percent.
Fiscal 20202022 SG&A expenses increased $6$4 million. The increase in SG&A expenses was primarily due to separation and projecthigher 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 recorded at Corporate associated withrelated to our review of strategic alternatives for the VTS segment’s automotive business, which increased approximately $29 million. This increase was partially offset bybusinesses and lower compensation-related expenses,strategic reorganization costs, which decreased approximately $13$4 million lower environmental charges related to previously-owned manufacturing facilities in the U.S., which decreased approximatelyand $3 million, and a $4 million favorable impactrespectively. The lower strategic reorganization costs primarily resulted from foreign currency exchange rate changes.lower severance expenses for executive management positions.
Restructuring expenses totaled $12of $24 million duringin fiscal 2020 and2022 increased $2$11 million compared with the prior year. The fiscal 2020 restructuringyear, primarily due to higher severance-related expenses primarily consisted of severance expenses related to targeted headcount reductions in the VTSPerformance Technologies segment, and equipment transfer and plant consolidation costspartially offset by lower severance-related expenses in the CISClimate Solutions segment. The fiscal 2020 headcount reductions were in response to lower market demand and in support of our objective to reduce operational and SG&A cost structures. During
In fiscal 2021, we approved headcount reductionsrecorded $167 million of impairment charges to write down the long-lived assets in the VTSliquid-cooled and CIS segmentsAustrian 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, we expect to record approximately $4 millionrecorded a net impairment reversal of severance expenses during the first quarter of fiscal 2021.$56 million.
During fiscal 2020,We sold our Austrian air-cooled automotive business on April 30, 2021. As a result of the sale, we recorded impairment charges totaling $9a $7 million primarily related to two manufacturing facilities in the VTS segment.loss on sale at Corporate during fiscal 2022.
Operating income of $38$119 million during fiscal 2020 decreased $722022 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. This decreaseyear, the fiscal 2022 operating income was primarily due to an increasefavorably impacted by higher gross profit. Operating income was negatively impacted by higher restructuring expenses, the loss on sale of $32 million of separation and project costs associated with our review of strategic alternatives for ourthe Austrian air-cooled automotive business, and lower earnings in our VTS and CIS segments, which decreased $37 million and $20 million, respectively, partially offset by higher earnings in our BHVAC segment, which increased $9 million.SG&A expenses.
The provision for income taxes was $12$15 million and $90 million in fiscal 2020, compared with a benefit for income taxes of $52022 and 2021, respectively. The $75 million in fiscal 2019. The $17 million changedecrease was primarily due to the absence of income tax benefits totaling $25 million recorded in the prior year and income tax charges totaling $10 million in the current year, partially offset by lower operating earnings in fiscal 2020. The $25 million of income tax benefits recorded in fiscal 2019 related to the recognition of tax assets for foreign tax credits and a manufacturing deduction in the U.S. and our accounting for the Tax Act. The $10$117 million of income tax charges recorded in fiscal 2020 were comprised of net charges totaling $7 million resulting from adjustments of2021 to increase the valuation allowances on certain 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 jurisdictionjurisdictions. 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 $3$9 million associated with legal entity restructuring in preparation for a potential sale of our automotive business. See Note 7resulting from the allocation of the Notes to Consolidated Financial Statements for additional information.income tax provision between net earnings and other comprehensive income.
Segment Results of Operations
A detailed comparison of our segment financial results for fiscal 2019 and 2018 can be found in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section in the Company’s 2019 Annual Report on Form 10-K filed with the SEC on May 23, 2019.
Effective April 1, 2020,2022, 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 automotive business separate fromconsolidated financial position, results of operations, and cash flows. We have recast the other businesses within the VTS segment. We are managing the automotive business as a separate segment as we target the sale or eventual exit of the automotive businesses. Beginningfinancial information for fiscal 2022 and 2021 we will reportto conform to the financial results for the automotive business as the Automotive segment. The remaining portion of the previous VTS segment will be named the Heavy-Duty Equipment segment and will include the heavy-duty commercial vehicle and off-highway businesses.fiscal 2023 presentation.
VTS
| | | Years ended March 31, | | | | | 2020 | | | 2019 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 1,177 | | | | 100.0 | % | | $ | 1,352 | | | | 100.0 | % | | Cost of sales | | | 1,032 | | | | 87.7 | % | | | 1,165 | | | | 86.2 | % | | Gross profit | | | 145 | | | | 12.3 | % | | | 187 | | | | 13.8 | % | | Selling, general and administrative expenses | | | 100 | | | | 8.5 | % | | | 113 | | | | 8.3 | % | | Restructuring expenses | | | 10 | | | | 0.8 | % | | | 9 | | | | 0.7 | % | | Impairment charges | | | 8 | | | | 0.7 | % | | | - | | | | - | | | Gain on sale of assets | | | (1 | ) | | | -0.1 | % | | | - | | | | - | | | Operating income | | $ | 28 | | | | 2.3 | % | | $ | 65 | | | | 4.8 | % |
Climate Solutions
VTS net sales decreased $175 million, or 13 percent, in fiscal 2020 compared with the prior year, primarily due to lower sales volume, a $31 million unfavorable impact of foreign currency exchange rate changes, and, to a lesser extent, unfavorable customer pricing largely resulting from contractually-scheduled price-downs. Sales to commercial vehicle, off-highway, and automotive customers decreased $64 million, $60 million, and $34 million, respectively. These sales declines largely result from weakness in global vehicular markets and the planned wind-down of certain commercial vehicle programs.| | | 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 | % |
VTS cost ofYear Ended March 31, 2023 Compared with Year Ended March 31, 2022
Climate Solutions net sales decreased $133increased $101 million, or 11 percent, primarily due to lower sales volume and a $26 million favorable impact of foreign currency exchange rate changes. As a percentage of sales, cost of sales increased 150 basis points to 87.7 percent. Beyond the unfavorable impact of the lower sales volume, higher labor and inflationary costs and unfavorable customer pricing negatively impacted cost of sales by approximately 90 basis points and 70 basis points, respectively. Higher depreciation costs, primarily resulting from recent manufacturing capacity expansion in China and Hungary, also negatively impacted cost of sales to a lesser extent. These negative impacts were partially offset by favorable material costs, which impacted cost of sales by approximately 30 basis points, improved operating efficiencies and cost savings from procurement initiatives. The favorable material costs primarily resulted from lower commodity pricing, which more than offset the negative impacts of tariffs.
As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $42 million and gross margin declined 150 basis points to 12.3 percent.
VTS SG&A expenses decreased $13 million compared with the prior year yet increased 20 basis points as a percentage of sales. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $9 million, lower environmental charges related to previously-owned manufacturing facilities in the U.S, which decreased approximately $3 million, and a $3 million favorable impact of foreign currency exchange rate changes.
Restructuring expenses during fiscal 2020 increased $1 million, primarily due to higher severance expenses resulting from targeted headcount reductions in Europe and in the Americas.
During fiscal 2020, we recorded asset impairment charges totaling $8 million, primarily related to manufacturing facilities in Austria and Germany to write down property and equipment assets to fair value. We anticipate future cash flows at these facilities will be negatively impacted by planned wind downs of certain commercial vehicle and automotive programs.
During fiscal 2020, we completed the sale of a previously-closed manufacturing facility in Germany and, as a result, recorded a gain of $1 million.
Operating income in fiscal 2020 decreased $37 million to $28 million, primarily due to lower gross profit and higher impairment charges, partially offset by lower SG&A expenses.
| CIS | | | | | | | Years ended March 31, | | | | | 2020 | | | 2019 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 624 | | | | 100.0 | % | | $ | 708 | | | | 100.0 | % | | Cost of sales | | | 531 | | | | 85.1 | % | | | 593 | | | | 83.8 | % | | Gross profit | | | 93 | | | | 14.9 | % | | | 115 | | | | 16.2 | % | | Selling, general and administrative expenses | | | 57 | | | | 9.2 | % | | | 61 | | | | 8.6 | % | | Restructuring expenses | | | 2 | | | | 0.3 | % | | | - | | | | - | | | Impairment charges | | | 1 | | | | 0.1 | % | | | - | | | | 0.1 | % | | Operating income | | $ | 33 | | | | 5.3 | % | | $ | 53 | | | | 7.5 | % |
CIS net sales decreased $84 million, or 12 percent, in fiscal 2020 compared with the prior year, primarily due to lower sales volume and a $12 million unfavorable impact of foreign currency exchange rate changes. Sales to commercial HVAC&R and data center cooling customers decreased $43 million and $38 million, respectively.
CIS cost of sales decreased $62 million, or 10 percent, primarily due to lower sales volume and an $11 million favorable foreign currency exchange rate impact. As a percentage of sales, cost of sales increased 130 basis points to 85.1 percent, primarily due to the unfavorable impact of lower sales volume and unfavorable sales mix.
As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $22 million and gross margin declined 130 basis points to 14.9 percent.
CIS SG&A expenses decreased $4 million compared with the prior year yet increased 60 basis points as a percentage of sales. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $2 million, and the favorable impact of cost-control initiatives.
Restructuring expenses during fiscal 2020 increased $2 million, primarily due to higher equipment transfer and plant consolidation costs. We are currently transferring product lines to our manufacturing facility in Mexico in order to achieve operational improvements and organizational efficiencies.
During fiscal 2020, we recorded a $1 million asset impairment charge related to a previously-closed manufacturing facility in Austria.
Operating income in fiscal 2020 decreased $20 million to $33 million, primarily due to lower gross profit, partially offset by lower SG&A expenses.
| BHVAC | | | | | | | Years ended March 31, | | | | | 2020 | | | 2019 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 221 | | | | 100.0 | % | | $ | 212 | | | | 100.0 | % | | Cost of sales | | | 150 | | | | 67.7 | % | | | 149 | | | | 70.1 | % | | Gross profit | | | 72 | | | | 32.3 | % | | | 63 | | | | 29.9 | % | | Selling, general and administrative expenses | | | 35 | | | | 15.8 | % | | | 35 | | | | 16.4 | % | | Loss on sale of assets | | | - | | | | - | | | | 2 | | | | 0.8 | % | | Operating income | | $ | 36 | | | | 16.5 | % | | $ | 27 | | | | 12.6 | % |
BHVAC net sales increased $9 million, or 4 percent, in fiscal 20202023 compared with the prior year, primarily due to higher sales in the U.S., which increased $14 million,volume and favorable commercial pricing. These increases were partially offset by lower sales in the U.K., which decreased $5 million. The higher sales in the U.S. were primarily driven by the increased sales of ventilation and heating products. The lower sales in the U.K. were primarily due to lower sales of air conditioning and ventilation products and a $3$52 million unfavorable impact of foreign currency exchange rate changes, partially offset by higherrates. Compared with the prior year, sales of data center sales.cooling, heat transfer, and HVAC & refrigeration products increased $58 million, $33 million, and $11 million, respectively.
BHVACClimate Solutions cost of sales increased $1$44 million, or less than 16 percent, in fiscal 2020.2023, primarily due to higher sales volume, partially offset by a $44 million favorable impact of foreign currency exchange rates. As a percentage of sales, cost of sales decreased 240380 basis points to 67.777.9 percent, primarily due to the favorable impact of higher sales mixvolume, favorable commercial pricing, and favorable customer pricing.improved operating efficiencies, partially offset by higher labor and inflationary costs.
As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $9$58 million and gross margin improved 240380 basis points to 32.322.1 percent.
BHVACClimate Solutions SG&A expenses remained consistentincreased $7 million compared with the prior year, yet decreased 6030 basis points as a percentage of sales. The increase in SG&A expenses was primarily due to a $5 million increase in compensation-related expenses, including commission expenses, and increases in other general and administrative expenses that have been impacted by inflationary market conditions. These increases were partially offset by a $4 million favorable impact of foreign currency exchange rate changes.
DuringRestructuring expenses totaling $2 million during fiscal 2019, we sold our business in South Africa2023 were consistent with the prior year and as a result, recorded a lossprimarily consisted of $2 million.severance-related expenses.
Operating income in fiscal 2020 of $362023 increased $51 million increased $9to $124 million, primarily due to higher gross profit.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 as of March 31, 20202023 of $71$67 million, and an available borrowing capacity of $118$270 million under our revolving credit facility. Given our extensive international operations, approximately $31$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 may be subject to foreign withholding taxes if repatriated.
In response to lower customer demand resulting from the COVID-19 pandemic, we have taken actions to reduce operating expenses, conserve We believe our sources of liquidity will provide sufficient cash and maximize liquidity. These actions have included, but are not limited to, production staffing adjustments, furloughs, shortened work weeks, and temporary salary reductions at all levels of our organization. In addition, we are reducing operating and administrative expenses. Further, as described below, we are focused on reducing our capital expenditures and have executed amendments to our primary credit agreements to help ensure liquidity through financial covenant flexibility during the next two fiscal years. Together with anticipated cash flow from operations, we currently believe we have sufficient available cash and access to both committed and uncommitted credit facilities to adequately cover our funding needs on both a short-short-term and long-term basis. However, we are continuing to monitor the impacts of COVID-19 on our business and the credit and financial markets.
The full extentOur 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 impactsAmerican Rescue Plan Act of COVID-19, which will largely depend on the length and severity of the pandemic, could have a material adverse effect on2021, we do not expect to make cash contributions to our business, results of operations, and cash flows and could adversely affect our access to capital and/or financing.U.S. pension plans during fiscal 2024.
Net Cash Provided by Operating Activities
Net cash provided by operating activities in fiscal 20202023 was $58$108 million, an increase of $96 million from $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, as 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 and lower pension plan contributions in fiscal 2023, as compared with the prior year.
Net cash provided by operating activities in fiscal 2022 was $12 million, a decrease of $45$138 million from $103$150 million in the prior year. This decrease in operating cash flow was primarily due to lower operating earnings in the current year and payments for separation and project costs associated with our strategic review of alternatives for the VTS segment’s automotive business, partially offset by favorableunfavorable net changes in working capital. The favorable changes in working capital, including higher inventory and accounts receivable levels and higher payments for incentive compensation and employee benefits as compared with the prior year, included lower employee benefit and incentive compensation payments.
Net cash provided by operating activities in fiscal 2019 was $103 million, a decrease of $21year. Inventory increased $61 million from $124 million in fiscal 2018. This decrease in operating cash flow primarily resulted from unfavorable changes in working capital, partially offset by the favorable impact of stronger earnings. The unfavorable changes in working capital, as compared with the prior year, included higher incentive compensation and other employee benefit payments and higher inventory levels associated with higher sales levels.March 31, 2021 to March 31, 2022.
Capital Expenditures
Capital expenditures of $71$51 million during fiscal 2020 decreased $32023 increased $11 million compared with fiscal 2019, primarily due to lower capital investments in our VTS segment compared with the prior year, particularly in China and North America. Similar to prior years, our2022. Our capital spending in fiscal 2020 primarily occurred2023 in the VTS segment, whichPerformance Technologies and Climate Solutions segments totaled $53$25 million and included$24 million, respectively. Capital expenditures in the Performance Technologies segment include tooling and equipment purchases in conjunction with new and renewal programs with customers, as well as $7 million of capital investments associated with preparing our automotive business for a potential sale. In response to the economic impacts of the COVID-19 pandemic, we are taking steps to preserve our financial liquidity. As part of this initiative, we are focused on reducing our capital expenditures by delaying certain projects and the purchase of certain program-related equipment and tooling. At March 31, 2020, our capital expenditure commitments totaled $12 million and primarily consisted of commitments for tooling and equipment expenditures in support of new and renewal programscustomers. Capital spending in the VTS segment.Climate Solutions segment include investments supporting our strategic growth initiatives, including expanding our data center business.
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 $33decreased $25 million to $482$353 million at March 31, 20202023 compared with the prior year, primarily due to additional borrowingsrepayments during fiscal 2020. In response to the economic impacts of the COVID-19 pandemic, we executed amendments to our primary credit agreements in May 2020 to provide additional covenant flexibility. The amendments temporarily raise the leverage coverage ratio limit during the next two fiscal years.2023.
Our credit agreements require us to maintain compliance with various covenants. As specifiedcovenants, 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 agreement, the term loansagreements may require prepayments in the event of certain asset sales. In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.
The leverage ratio covenant within our primary credit agreements in the U.S., we are subject to a leverage ratio covenant, which requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, in relation to ourno more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”). The leverage ratio covenant limit was 3.25 to 1 through the fourth quarter of fiscal 2020. We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense. As of March 31, 2020,2023, we were in compliance with our debt covenants; our leverage ratio and interest coverage ratio were 2.4 and 8.1, respectively.
In May 2020, as noted above, we executed amendments to our primary credit agreements that provide additional financial covenant flexibility during the next two fiscal years in light of the risks and uncertainties associated with the COVID-19 pandemic. We believe this additional flexibility will enable us to be compliant with our debt covenants, even if the adverse effects of the COVID-19 pandemic on our business are more severe than we currently anticipate. However, failure to comply with the debt covenants could result in an event of default, which, if not cured or waived, could result in us being required to repay borrowings before their due date. Under the amended agreements, the leverage ratio covenant limit is temporarily raised. For fiscal 2021, the leverage ratio covenant limit is 4.00 to 1, 4.75 to 1, 5.25 to 1, and 5.75 to 1 for the first, second, third, and fourth quarters, respectively. In fiscal 2022, the leverage ratio covenant limit is 4.75 to 1, 3.75 to 1, and 3.50 to 1 for the first, second and third quarters, respectively, and subsequently returns to 3.25 to 1 for the fourth quarter of fiscal 2022.covenants. We expect to remain in compliance with our debt covenants during fiscal 20212024 and beyond.
See Note 17 of the Notes to Consolidated Financial Statements for additional information regarding our credit agreements.
Off-Balance Sheet ArrangementsShare Repurchase Program
None.
Contractual Obligations
| | | March 31, 2020 | | | (in millions) | | Total | | | Less than 1 year | | | 1 - 3 years | | | 4 - 5 years | | | More than 5 years | | | | | | | | | | | | | | | | | | | | Long-term debt | | $ | 468.9 | | | $ | 15.2 | | | $ | 42.6 | | | $ | 294.4 | | | $ | 116.7 | | | Interest associated with long-term debt | | | 89.3 | | | | 17.7 | | | | 33.4 | | | | 24.5 | | | | 13.7 | | | Operating lease obligations | | | 71.8 | | | | 12.8 | | | | 20.7 | | | | 12.1 | | | | 26.2 | | | Capital expenditure commitments | | | 12.0 | | | | 12.0 | | | | - | | | | - | | | | - | | | Other long-term obligations (a) | | | 9.9 | | | | 1.9 | | | | 3.1 | | | | 3.0 | | | | 1.9 | | | Total contractual obligations | | $ | 651.9 | | | $ | 59.6 | | | $ | 99.8 | | | $ | 334.0 | | | $ | 158.5 | |
| (a) | Includes finance lease obligations and other long-term obligations. |
Our liabilities for pensions, postretirement benefits, and uncertain tax positions totaled $145During fiscal 2023, we repurchased $7 million asof our common stock. As of March 31, 2020. 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 $20 million to our U.S. pension plans during fiscal 2021.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 statementstatements are disclosed in Note 1 of the Notes to Consolidated Financial Statements.
Revenue Recognition
In fiscal 2019, we adopted new revenue recognition accounting guidance. In accordance with this new accounting guidance, weWe recognize revenue based upon consideration specified in a contract and as we satisfy performance obligations by transferring control over our products to our customers, which may be at a point in time or over time. The majority of our revenue is recognized at a point in time, based upon shipment terms. A limited number of our customer contracts provide an enforceable right to payment for performance completed to date. For these contracts, we recognize revenue over time based upon our estimated progress towardstoward the satisfaction of the contract’s performance obligations. We record an allowance for doubtful accounts for estimated uncollectible receivablescredit losses and we accrue for estimated warranty costs at the time of sale. We base these estimates upon historical experience, current business trends and current economic conditions.conditions, and risks specific to the 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, 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, 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 underlying assets. Fair value is generally based upon 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 $448$315 million and $106$81 million, respectively, at March 31, 2020.2023. 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 CISClimate 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 2020,2022, we recorded asseta net impairment charges totaling $8reversal of $56 million, primarily related manufacturing facilitiesto assets that were held for sale in Austriathe Performance Technologies segment. In fiscal 2021, we recorded $167 million of impairment charges to write down the long-lived assets in the liquid- and Germany withinair-cooled automotive businesses when they were classified as held for sale. In fiscal 2022, we adjusted the VTS segment. Seelong-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 52 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. We consider factors such as operating losses, declining financial and market outlooks, and market capitalization when evaluating the necessity for an interim impairment analysis. We test goodwill for impairment at a reporting unit level. Reporting unitsGoodwill resulting from recent acquisitions generally representrepresents the highest risk of impairment, which typically decreases as the businesses are integrated into the Company and positioned for future operating and financial performance. We test goodwill for impairment by comparing the fair value of each reporting unit with 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 a reporting unit exceeds the carrying value of the reporting unit’s net assets, goodwill is not impaired. However, if the carrying value of the reporting unit’s net assets exceeds its fair value, we would conclude goodwill is impaired and would record an impairment charge equal to the amount that the reporting unit’s carrying value exceeds its fair 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 and risk-adjusted discount rates, 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 rates used in determining discounted cash flows are 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 the continued economic uncertainty andinflationary 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, 2020,2023, our goodwill totaled $166 million related to our CISClimate Solutions and BHVACPerformance Technologies segments. Each of these segments is comprised of two reporting units. We conducted annual goodwill impairment tests during the fourth quarteras of fiscal 2020March 31, 2023 by applying a fair value-based test and determined the fair value of the reporting units in each of our reporting unitsoperating segments exceeded thetheir respective book 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 adjust our warranty accruals, which totaled $8 million at March 31, 2020, 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, 2020,2023, our pension liabilities totaled $134$42 million. The most significant assumptions include the discount rate, long-term expected return on plan assets, and mortality 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 upon 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 pension plan assets and the large majority of our pension plan expense.
To determine the expected rate of return on pension plan assets, we consider such factors as (a) the actual return earned on plan assets, (b) historical rates of return on the various asset classes in the plan portfolio, (c) projections of returns on those asset classes, (d) the amount of active management of the assets, (e) capital market conditions and economic forecasts, and (f) administrative expenses paid with the plan assets. The long-term rate of return utilized in both fiscal 20202023 and 20192022 was 7.0 percent and 7.5 percent.percent, respectively. For fiscal 2021,2024, we have also assumed a rate of 7.56.5 percent. A change of 25 basis points in the expected rate of return on assets would impact our fiscal 20212024 pension expense by $0.4less 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 20202023 and 2019,2022, for purposes of determining pension expense, we used a discount rate of 4.0 percent.3.9 and 3.2 percent, respectively. We determined these rates based upon a yield curve that was created following an analysis of the projected cash flows fromfor our plans. See Note 18 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 20212024 pension expense and projected benefit obligation by less than $1 million.million and approximately $4 million, respectively.
Income Taxes
We operate in numerous taxing jurisdictions; therefore, we are 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 a particular jurisdiction will not be realized. This determination, which is made on a jurisdiction-by-jurisdictionlegal entity-by-legal entity basis, involves judgment and the use of significant estimates and assumptions, including expectations of future taxable income and tax planning strategies. We believe the assumptions that we used are appropriate and result in a reasonable determination regarding the future realizability of deferred tax assets. However, future events or circumstances, such as lower-than-expected taxable income or unfavorable changes in the financial outlook of our operations in certain jurisdictions, could cause us to record additional valuation allowances.
See Note 78 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 NoteNotes 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 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:
The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliers, customers, and employees;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;
Economic,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 in particular, foreign currency exchange rate fluctuations; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); inflation; changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade, public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the United StatesU.S. or abroad, as well as continuing uncertainty regarding the short- and long-term implications of “Brexit”;abroad;
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, whetherincluding through our quotation process or through contract provisions for prospective price adjustments, as well as the inherent lag in timing of such contract provisions; and
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 healthimpact of problems, including logistic and continually increasing price-down focus of our vehicular customers in light of economic and market-specific factors, and the potential impact on us from any deterioration in the stability or performance of any of our major customers;
Unanticipated problemstransportation challenges, associated with suppliers meeting our time, quantity, quality, price and pricetiming 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 maintain current customer programsrelationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;
UnanticipatedThe impact of product or manufacturing difficulties or operating inefficiencies, including unanticipatedany program launch and product transfer challenges and warranty claims and delays or inefficiencies resulting from restrictions imposed in response to the COVID-19 pandemic;claims;
UnanticipatedThe impact of delays or modifications initiated by major customers with respect to program launches, product applications or requirements;
Our ability to consistently structure our operations in order to develop and maintain a competitive cost base with appropriately skilled and stable labor, while also positioning ourselves geographically, so that we can continue to support our customers with the technical expertise and market-leading products they demand and expect from Modine;
Our ability to effectively and efficiently reducemanage our cost structure in response to sales volume declinesincreases or decreases and to complete restructuring activities and realize the anticipated benefits of those activities;
Costs and other effects of the investigation and remediation of environmental contamination; particularlyincluding 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 anya 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 unanticipated litigation, claims, or other obligations.
Strategic Risks:
Our ability to successfully exit the automotive business within our VTS segment in a manner that is in the best interest of our shareholders in order to optimize the segment’s future financial performance;
Our ability to successfully realize anticipated benefits from strategic initiatives and our increased “industrial”continued application of 80/20 principles to our business, through which we are focused on reducing complexity and growing businesses with strong market presence, with our CIS and BHVAC businesses, while maintaining appropriate focus on the market opportunities presented by our VTS business;drivers;
Our ability to identify and execute on organic growth opportunities and diversification opportunities in orderacquisitions, and to position us for long-term success;efficiently and successfully integrate acquired businesses;
37Our ability to successfully execute strategies to reduce costs and improve operating margins; and
The potential impacts from unanticipated actions by activist shareholders, including disruption of our business and related costs.
Financial Risks:
| • | Our ability to fund our global liquidity requirements efficiently for Modine’sour current operations and meet our long-term commitments particularly in light of the significant volatility and negative pressure in the financial markets as a result of the COVID-19 pandemic and in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy; |
The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations, and of the continued uncertainty around the utilization of LIBOR or alternative reference rates;obligations;
The impact of changes in federal, state or local taxes that could have the effect of increasing our income tax expense;
Our ability to comply with the financial covenants as amended in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);
The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and
Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.
Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.
ITEM 7A.7A.
| QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.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 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, and throughout Europe. We also have joint ventures in China 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. Whenever 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 entity engaging in the transaction. In 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 2020,2023, 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 impacted 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. In fiscal 2020, 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 2020,2023, changes in foreign currency exchange rates unfavorably impacted our sales by $46$111 million; however, the impact on our operating income was less than $3only $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 2020,2023, there would not have been a material impact on our fiscal 20202023 earnings.
We maintain foreign currency-denominated debt obligations and intercompany loans that are subject to foreign currency exchange risk. We seek to mitigate this risk through maintaining offsetting positions between external and intercompany loans; however, from time to time, we also enter into foreign currency derivative contracts to manage the currency exchange rate exposure. These derivative instruments are typically not accounted 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 typically offset the foreign currency changes on the outstanding loans.
Interest Rate Risk
We 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 variable-rate debt to manage exposure to changes in interest rates. Interest on both our term loans and borrowings under our primary multi-currency revolving credit facility, including swingline borrowings, is variable and is currently based upon a variable interest rate, primarily on either LIBORSOFR or EURIBOR, plus 137.5 to 250175 basis points, depending on our leverage ratio. For purposes of calculating the variable interest rate under our current credit agreement, LIBOR cannot be less than one percent. As 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, 2020,2023, our outstanding borrowings on variable-rate term loans and thetotaled $216 million. There were no outstanding borrowings on our revolving credit facility totaled $189 million and $127 million, respectively.as of March 31, 2023. Based upon our outstanding debt with variable interest rates at March 31, 2020,2023, a 100-basis point increase in interest rates would increase our annual interest expense in fiscal 20212024 by approximately $3$2 million.
Commodity Price and Supply RisksRisk
We are dependent uponTo produce the supply ofproducts we sell, we purchase raw materials and supplies in our production processes 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. Commodity price risk is most prevalent togas, helium, and nitrogen. In addition, we also purchase components and parts that are integrated into our vehicular businesses, which provide customized production and service parts to customers under multi-year programs. In orderend products.
We seek to mitigate commodity price risk specificprimarily by adjusting product pricing in response to these long-term sales programs, we maintain contract provisionsapplicable price increases. Our contracts with certain vehicular customers contain provisions that allow us to prospectively adjust pricesprovide for prospective price adjustments based upon changes in raw material price fluctuations.prices. These prospective price adjustments generally lag behind the actual raw material price fluctuations by three months or longer, and typically the contract provisions are limited to the underlying material cost based upon the London Metal Exchange and exclude additional cost elements, such as related premiums and fabrication. For our industrial businesses,In instances where the risk is not covered contractually, we predominantly seek to mitigate commodity price risk by adjustingadjust product pricing in response to any applicable price increases, including through our quotation process and through price list increases.
In an effortfiscal 2023, we continued to manageexperience a significant increase in raw material prices and reduceprice increases on other goods and services in connection with global supply chain challenges and inflationary market conditions. In response, we implemented selling price increases for our costs,products. Nevertheless, we are still subject to the risk 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 our suppliers to ensure availability of purchased commodities and components and we have been consolidatingadded key suppliers to our supply base. As a result,base during the last year. However, we are still dependent upon limited sources of supply for certain components used in the manufacture of our products, including aluminum, copper, steel and stainless steel (nickel). WeEven 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, (including the potential effects of trade laws and tariffs), 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, 2020, 342023, 37 percent of our trade accounts receivable balance was concentrated with our top ten customers. These customers operate primarily in the automotive, 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 COVID-19 pandemic.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, 2020;2023; |
| • | Trade accounts receivable – Prior to granting credit, we evaluate each customer, taking into consideration the customer'scustomer’s financial condition, payment experience and credit information. After credit is granted, we actively monitor the customer'scustomer’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, we are also exposed to risks associated with demandsprice reduction pressure applied by OEM customers. If contractual price downs are unavoidable, we contemplate them in our customers for decreases in the price of our products. We attemptoverall strategy and adjust pricing as necessary to offset this risk with firm agreements with our customers whenever possible, but these agreements sometimes contain provisions for future price reductions.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 products that provide thermal solutionssolution systems to customers operating in diverse markets, including the automotive, commercial vehicle, off-highway, and commercial, industrial, and building HVAC&R markets. The COVID-19 pandemic has negatively impacted these markets; the duration and severity of the impacts of COVID-19 on these markets are currently uncertain. We are monitoring economic conditions in the U.S.commercial vehicle, off-highway, and abroadautomotive and the impacts associated with the COVID-19 pandemic.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, coilsdata centers, indoor air quality, and coolers in certain markets, andaftermarket coatings. Our investmentinvestments in these areas isare subject to the risks associated with technological success, customer and market acceptance, and our ability to meet the demands of our customers as these markets grow.
Hedging and Foreign Currency Forward Contracts
We use derivative financial instruments as a tool to manage certain financial risks. We prohibit the use of leveraged derivatives.
Commodity derivatives: Derivatives From time to time, we enter into over-the-counter forward contracts related to forecasted purchases of aluminum and copper. Our strategy is to reduce our exposure to changing market prices of these commodities. In fiscal 2020 and 2019, we designatedWe periodically designate certain commodity forward contracts as cash flow hedges for accounting purposes. Accordingly, forFor 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 2020, 20192023, 2022, and 2018,2021, net gains and losses recognized in cost of sales related to commodity forward contracts were less thanapproximately $1 million or less in each year.
Foreign currency forward contracts: Currency Forward Contracts We use derivative financial instruments in a limited way to mitigate foreign currency exchange risk. We periodically enter into foreign currency forward contracts to hedge specific foreign currency-denominated assets and liabilities as well as forecasted transactions. We have designatedtransactions and designate certain hedges of forecasted transactions as cash flow hedges for accounting purposes. Accordingly, forFor 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 2020, 2019,2023, 2022, and 2018,2021, net gains and losses recognized in sales and cost of sales related to foreign currency forward contracts were less than $1 million or less in each year. We have not designated 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 maintain credit ratings acceptable to us. At March 31, 2020,2023, all counterparties had a sufficient long-term credit rating.
ITEM 8.8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.DATA. |
MODINE MANUFACTURING COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended March 31, 2020, 20192023, 2022 and 20182021 (In millions, except per share amounts)
| | 2020 | | | 2019 | | | 2018 | | | Net sales | | $ | 1,975.5 | | | $ | 2,212.7 | | | $ | 2,103.1 | | | Cost of sales | | | 1,668.0 | | | | 1,847.2 | | | | 1,746.6 | | | Gross profit | | | 307.5 | | | | 365.5 | | | | 356.5 | | | Selling, general and administrative expenses | | | 249.6 | | | | 244.1 | | | | 245.8 | | | Restructuring expenses | | | 12.2 | | | | 9.6 | | | | 16.0 | | | Impairment charges | | | 8.6 | | | | 0.4 | | | | 2.5 | | | (Gain) loss on sale of assets | | | (0.8 | ) | | | 1.7 | | | | - | | | Operating income | | | 37.9 | | | | 109.7 | | | | 92.2 | | | Interest expense | | | (22.7 | ) | | | (24.8 | ) | | | (25.6 | ) | | Other expense - net | | | (4.8 | ) | | | (4.1 | ) | | | (3.3 | ) | | Earnings before income taxes | | | 10.4 | | | | 80.8 | | | | 63.3 | | | (Provision) benefit for income taxes | | | (12.4 | ) | | | 5.1 | | | | (39.5 | ) | | Net (loss) earnings | | | (2.0 | ) | | | 85.9 | | | | 23.8 | | | Net earnings attributable to noncontrolling interest | | | (0.2 | ) | | | (1.1 | ) | | | (1.6 | ) | | Net (loss) earnings attributable to Modine | | $ | (2.2 | ) | | $ | 84.8 | | | $ | 22.2 | | | | | | | | | | | | | | | | | Net (loss) earnings per share attributable to Modine shareholders: | | | | | | | | | | | | | | Basic | | $ | (0.04 | ) | | $ | 1.67 | | | $ | 0.44 | | | Diluted | | $ | (0.04 | ) | | $ | 1.65 | | | $ | 0.43 | | | | | | | | | | | | | | | | | Weighted-average shares outstanding: | | | | | | | | | | | | | | Basic | | | 50.8 | | | | 50.5 | | | | 49.9 | | | Diluted | | | 50.8 | | | | 51.3 | | | | 50.9 | |
| | 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, 2020, 20192023, 2022 and 20182021 (In millions)
| | 2020 | | | 2019 | | | 2018 | | | Net (loss) earnings | | $ | (2.0 | ) | | $ | 85.9 | | | $ | 23.8 | | | Other comprehensive income (loss): | | | | | | | | | | | | | | Foreign currency translation | | | (19.2 | ) | | | (37.6 | ) | | | 41.8 | | | Defined benefit plans, net of income taxes of ($8.3), ($0.3) and ($0.2) million | | | (24.6 | ) | | | (1.4 | ) | | | 0.1 | | | Cash flow hedges, net of income taxes of ($0.5), $0.1 and $0.1 million | | | (1.5 | ) | | | 0.4 | | | | 0.1 | | | Total other comprehensive income (loss) | | | (45.3 | ) | | | (38.6 | ) | | | 42.0 | | | | | | | | | | | | | | | | | Comprehensive income (loss) | | | (47.3 | ) | | | 47.3 | | | | 65.8 | | | Comprehensive (income) loss attributable to noncontrolling interest | | | 0.2 | | | | (0.6 | ) | | | (2.1 | ) | | Comprehensive income (loss) attributable to Modine | | $ | (47.1 | ) | | $ | 46.7 | | | $ | 63.7 | |
| | 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, 20202023 and 20192022 (In millions, except per share amounts)
| | 2020 | | | 2019 | | | ASSETS | | | | | | | | Cash and cash equivalents | | $ | 70.9 | | | $ | 41.7 | | | Trade accounts receivable – net | | | 292.5 | | | | 338.6 | | | Inventories | | | 207.4 | | | | 200.7 | | | Other current assets | | | 62.5 | | | | 65.8 | | | Total current assets | | | 633.3 | | | | 646.8 | | | Property, plant and equipment – net | | | 448.0 | | | | 484.7 | | | Intangible assets – net | | | 106.3 | | | | 116.2 | | | Goodwill | | | 166.1 | | | | 168.5 | | | Deferred income taxes | | | 104.8 | | | | 97.1 | | | Other noncurrent assets | | | 77.6 | | | | 24.7 | | | Total assets | | $ | 1,536.1 | | | $ | 1,538.0 | | | | | | | | | | | | | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | | Short-term debt | | $ | 14.8 | | | $ | 18.9 | | | Long-term debt – current portion | | | 15.6 | | | | 48.6 | | | Accounts payable | | | 227.4 | | | | 280.9 | | | Accrued compensation and employee benefits | | | 65.0 | | | | 81.7 | | | Other current liabilities | | | 49.2 | | | | 39.9 | | | Total current liabilities | | | 372.0 | | | | 470.0 | | | Long-term debt | | | 452.0 | | | | 382.2 | | | Deferred income taxes | | | 8.1 | | | | 8.2 | | | Pensions | | | 130.9 | | | | 101.7 | | | Other noncurrent liabilities | | | 79.5 | | | | 34.8 | | | Total liabilities | | | 1,042.5 | | | | 996.9 | | | Commitments and contingencies (see Note 20) | | | | | | | | | | Shareholders’ equity: | | | | | | | | | | Preferred stock, $0.025 par value, authorized 16.0 million shares, issued - NaN | | | - | | | | - | | | Common stock, $0.625 par value, authorized 80.0 million shares, issued 53.4 million and 52.8 million shares | | | 33.3 | | | | 33.0 | | | Additional paid-in capital | | | 245.1 | | | | 238.6 | | | Retained earnings | | | 469.9 | | | | 472.1 | | | Accumulated other comprehensive loss | | | (223.3 | ) | | | (178.4 | ) | | Treasury stock, at cost, 2.5 million and 2.1 million shares | | | (37.1 | ) | | | (31.4 | ) | | Total Modine shareholders’ equity | | | 487.9 | | | | 533.9 | | | Noncontrolling interest | | | 5.7 | | | | 7.2 | | | Total equity | | | 493.6 | | | | 541.1 | | | Total liabilities and equity | | $ | 1,536.1 | | | $ | 1,538.0 | |
| | 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, 2020, 20192023, 2022 and 20182021 (In millions)
| | 2020 | | | 2019 | | | 2018 | | | Cash flows from operating activities: | | | | | | | | | | | Net (loss) earnings | | $ | (2.0 | ) | | $ | 85.9 | | | $ | 23.8 | | | Adjustments to reconcile net (loss) earnings to net cash provided by operating activities: | | | | | | | | | | | | | | Depreciation and amortization | | | 77.1 | | | | 76.9 | | | | 76.7 | | | Impairment charges | | | 8.6 | | | | 0.4 | | | | 2.5 | | | (Gain) loss on sale of assets | | | (0.8 | ) | | | 1.7 | | | | - | | | Stock-based compensation expense | | | 6.6 | | | | 7.9 | | | | 9.5 | | | Deferred income taxes | | | 1.0 | | | | (4.4 | ) | | | 12.1 | | | Other – net | | | 5.6 | | | | 5.3 | | | | 9.0 | | | Changes in operating assets and liabilities: | | | | | | | | | | | | | | Trade accounts receivable | | | 36.6 | | | | (15.3 | ) | | | (26.1 | ) | | Inventories | | | (12.0 | ) | | | (22.0 | ) | | | (12.5 | ) | | Accounts payable | | | (37.7 | ) | | | 16.6 | | | | 25.2 | | | Accrued compensation and employee benefits | | | (15.2 | ) | | | (10.1 | ) | | | 16.4 | | | Other assets | | | 14.7 | | | | (11.8 | ) | | | (5.0 | ) | | Other liabilities | | | (24.6 | ) | | | (27.8 | ) | | | (7.4 | ) | | Net cash provided by operating activities | | | 57.9 | | | | 103.3 | | | | 124.2 | | | | | | | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | | | | | | Expenditures for property, plant and equipment | | | (71.3 | ) | | | (73.9 | ) | | | (71.0 | ) | | Proceeds from dispositions of assets | | | 6.2 | | | | 0.3 | | | | 0.3 | | | Proceeds from sale of investment in affiliate | | | 3.8 | | | | - | | | | - | | | Proceeds from maturities of short-term investments | | | 4.1 | | | | 4.9 | | | | 4.8 | | | Purchases of short-term investments | | | (3.3 | ) | | | (3.8 | ) | | | (5.5 | ) | | Other – net | | | - | | | | (0.3 | ) | | | (0.2 | ) | | Net cash used for investing activities | | | (60.5 | ) | | | (72.8 | ) | | | (71.6 | ) | | | | | | | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | | | | | | Borrowings of debt | | | 692.4 | | | | 231.2 | | | | 171.0 | | | Repayments of debt | | | (649.5 | ) | | | (251.9 | ) | | | (222.9 | ) | | Dividend paid to noncontrolling interest | | | (1.3 | ) | | | (1.8 | ) | | | (0.9 | ) | | Purchase of treasury stock under share repurchase program | | | (2.4 | ) | | | (0.6 | ) | | | - | | | Financing fees paid | | | (2.8 | ) | | | - | | | | - | | | Other – net | | | (3.1 | ) | | | (2.8 | ) | | | 2.7 | | | Net cash provided by (used for) financing activities | | | 33.3 | | | | (25.9 | ) | | | (50.1 | ) | | | | | | | | | | | | | | | | Effect of exchange rate changes on cash | | | (1.6 | ) | | | (2.7 | ) | | | 3.0 | | | Net increase in cash, cash equivalents and restricted cash | | | 29.1 | | | | 1.9 | | | | 5.5 | | | Cash, cash equivalents and restricted cash - beginning of year | | | 42.2 | | | | 40.3 | | | | 34.8 | | | Cash, cash equivalents and restricted cash - end of year | | $ | 71.3 | | | $ | 42.2 | | | $ | 40.3 | |
| | 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’ EQUITY For the years ended March 31, 2020, 20192023, 2022 and 20182021 (In millions)
| | Common stock | | | Additional paid-in | | | Retained | | | Accumulated other | | | Treasury stock, | | | Non-controlling | | | | | | | | Shares | | | Amount | | | capital | | | earnings | | | comprehensive loss | | | at cost | | | interest | | | Total | | | Balance, March 31, 2017 | | | 51.8 | | | $ | 32.4 | | | $ | 216.4 | | | $ | 372.4 | | | $ | (181.8 | ) | | $ | (25.4 | ) | | $ | 7.2 | | | $ | 421.2 | | | Net earnings attributable to Modine | | | - | | | | - | | | | - | | | | 22.2 | | | | - | | | | - | | | | - | | | | 22.2 | | | Other comprehensive income | | | - | | | | - | | | | - | | | | - | | | | 41.5 | | | | - | | | | 0.5 | | | | 42.0 | | | Stock options and awards | | | 0.5 | | | | 0.3 | | | | 3.9 | | | | - | | | | - | | | | - | | | | - | | | | 4.2 | | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1.7 | ) | | | - | | | | (1.7 | ) | | Adoption of new accounting guidance (Note 1) | | | - | | | | - | | | | 0.1 | | | | 0.3 | | | | - | | | | - | | | | - | | | | 0.4 | | | Stock-based compensation expense | | | - | | | | - | | | | 9.5 | | | | - | | | | - | | | | - | | | | - | | | | 9.5 | | | Dividend paid to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.9 | ) | | | (0.9 | ) | | Net earnings attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1.6 | | | | 1.6 | | | Balance, March 31, 2018 | | | 52.3 | | | | 32.7 | | | | 229.9 | | | | 394.9 | | | | (140.3 | ) | | | (27.1 | ) | | | 8.4 | | | | 498.5 | | | Adoption of new accounting guidance (Note 1) | | | - | | | | - | | | | - | | | | (7.6 | ) | | | - | | | | - | | | | - | | | | (7.6 | ) | | Net earnings attributable to Modine | | | - | | | | - | | | | - | | | | 84.8 | | | | - | | | | - | | | | - | | | | 84.8 | | | Other comprehensive loss | | | - | | | | - | | | | - | | | | - | | | | (38.1 | ) | | | - | | | | (0.5 | ) | | | (38.6 | ) | | Stock options and awards | | | 0.5 | | | | 0.3 | | | | 0.8 | | | | - | | | | - | | | | - | | | | - | | | | 1.1 | | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (4.3 | ) | | | - | | | | (4.3 | ) | | Stock-based compensation expense | | | - | | | | - | | | | 7.9 | | | | - | | | | - | | | | - | | | | - | | | | 7.9 | | | Dividend paid to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1.8 | ) | | | (1.8 | ) | | Net earnings attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1.1 | | | | 1.1 | | | Balance, March 31, 2019 | | | 52.8 | | | | 33.0 | | | | 238.6 | | | | 472.1 | | | | (178.4 | ) | | | (31.4 | ) | | | 7.2 | | | | 541.1 | | | Net loss attributable to Modine | | | - | | | | - | | | | - | | | | (2.2 | ) | | | - | | | | - | | | | - | | | | (2.2 | ) | | Other comprehensive loss | | | - | | | | - | | | | - | | | | - | | | | (44.9 | ) | | | - | | | | (0.4 | ) | | | (45.3 | ) | | Stock options and awards | | | 0.6 | | | | 0.3 | | | | (0.1 | ) | | | - | | | | - | | | | - | | | | - | | | | 0.2 | | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (5.7 | ) | | | - | | | | (5.7 | ) | | Stock-based compensation expense | | | - | | | | - | | | | 6.6 | | | | - | | | | - | | | | - | | | | - | | | | 6.6 | | | Dividend paid to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1.3 | ) | | | (1.3 | ) | | Net earnings attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 0.2 | | | | 0.2 | | | Balance, March 31, 2020 | | | 53.4 | | | $ | 33.3 | | | $ | 245.1 | | | $ | 469.9 | | | $ | (223.3 | ) | | $ | (37.1 | ) | | $ | 5.7 | | | $ | 493.6 | |
| | 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.
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 products and solutions to diversified global markets and customers. Thecustomers in a wide array of commercial, industrial, and building heating, ventilating, air conditioning, and refrigeration (“HVAC&R”) markets. In addition, the Company is a leading provider of engineered heat transfer systems and high-quality heat transfer components for use in on- and off-highway original equipment manufacturer (“OEM”) vehicular applications. In addition, the Company is a global leader in thermal management technology and solutions for sale into a wide array of commercial, industrial, and building heating, ventilating, air conditioning, and refrigeration (“HVAC&R”) markets. The Company’s primary product groups include i) powertrain coolingheat transfer; ii) HVAC & refrigeration; iii) data center cooling; iv) air-cooled; v) liquid-cooled; and engine cooling; ii) coils, coolers, and coatings; and iii) heating, ventilation and air conditioning. vi) advanced solutions.
COVID-19: In March 2020, the World Health Organization declared the outbreak of the novel coronavirus, COVID-19, a pandemic. See Note 20 for additional information regarding the risks and uncertainties to our business resulting from this global pandemic.
SaleDisposition of facilityAustrian Air-cooled Automotive Business in Germany:Fiscal 2022
During fiscal 2020,On April 30, 2021, the Company completed the sale ofsold its Austrian a previously-closed manufacturing facility in Germany for a selling price of $6.0 million. As a result of this transaction, the Company recorded a gain of $0.8 million within the Vehicular Thermal Solutions segment. The Company reported this gain within the gain on sale of assets line on the consolidated statements of operations.
Sale of Nikkei Heat Exchanger Company, Ltd. (“NEX”): During fiscal 2020, the Company completed the sale of its 50 percent ownership interest in NEX for a selling price of $3.8 million. As a result of this sale, the Company recorded a gain of $0.1 million, which included the write-off of accumulated foreign currency translation gains of $0.6 million, within other income and expense on the consolidated statements of operations. Priorir-cooled automotive business to its sale, the Company accounted for its investment in NEX using the equity method. Utilizing the equity method, the Company reported its investment at cost, plus or minus a proportionate share of undistributed net earnings, and included Modine’s share of the affiliate’s net earnings in other income and expense. See Note 12 for additional information.
Sale of AIAC Air Conditioning South Africa (Pty) Ltd.: During fiscal 2019, the Company completed the sale of its AIAC Air Conditioning South Africa (Pty) Ltd. business, which was reported within the Building HVAC Systems segment, for a selling price of $0.5 million.Schmid Metall GmbH. As a result of this transaction, the Company recorded a loss of $1.7$6.6 million during fiscal 2022, which included the write-off of accumulated foreign currency translation$1.7 million of net actuarial losses of $0.8 million.related to its pension plan. The Company reported this loss within the loss on sale of assets line on the consolidated statementsstatement of operations. AnnualUpon 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 attributable toof this disposed 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 of $0.3 million within the Climate Solutions segment to write down the property to fair value less than $2.0 million.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 CEO. The Board of Directors subsequently conducted a search for his successor and, effective December 1, 2020, appointed Neil D. Brinker as President and CEO.
As a result of Mr. Burke’s departure and in connection with the search for and transition to his successor, the Company recorded costs totaling $6.7 million during fiscal 2021. These costs, which were recorded as selling, general and administrative (“SG&A”) expenses at Corporate, primarily consisted of severance and benefit-related expenses based upon the terms of Mr. Burke’s transition and separation agreement and costs directly associated with the CEO search, partially offset by the impact of Mr. Burke’s forfeited stock-based compensation awards. 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:Recognition The Company recognizes revenue based upon consideration specified in a contract and as it satisfies performance obligations by transferring control over its products to its customers, 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. A portion of the Company’s revenue is recognized over time, based upon estimated progress towardstoward satisfaction of the contractual performance obligations. See Note 23 for additional information.
Shipping and handling costs: 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: 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 recordsmaintains an allowance for doubtfulcredit losses, representing its estimate of expected losses associated with its trade accounts for estimated uncollectible receivables based upon historical experience or specific customer economic data.receivable. The Company recorded anbases 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 doubtful accounts of $1.9credit losses was $2.2 million and $1.6$1.7 million, at March 31, 2020respectively. The changes to the Company’s allowance for credit losses during fiscal 2023 and 2019, respectively, representing its estimated uncollectible receivables. 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 2020, 2019,2023, 2022, and 2018,2021, the Company sold $75.4$150.6 million, $85.1$126.4 million, and $65.8$88.7 million, respectively, of accounts receivable to accelerate cash receipts. During fiscal 2020, 2019,2023, 2022, and 2018,2021, the Company recorded a loss on the sale ofcosts totaling $1.2 million, $0.3 million, and $0.2 million, respectively, related to selling accounts receivable of $0.5 million, $0.6 million, and $0.4 million, respectively, in the consolidated statements of operations.
Warranty
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
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 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.years. At March 31, 20202023 and 2019,2022, Company-owned tooling totaled $23.3$17.1 million and $24.2$18.3 million, respectively.
In certain instances, tooling is customer-owned.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. TheIf the customer has agreed to reimburse the Company, accounts for unbilled customer-owned tooling costs are recorded as a receivable within other current assets when the customer has guaranteed reimbursement to the Company.assets. No significant arrangements exist where customer-owned tooling costs were not accompanied by guaranteed reimbursement. At March 31, 20202023 and 2019, cost reimbursement receivables related to2022, customer-owned tooling receivables totaled $7.8$10.9 million and $11.6$12.3 million, respectively.
Stock-based compensation: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 45 for additional information.
Research and development:Development The Company expenses research and development costs as incurred within SG&A expenses. During fiscal 2020, 2019,2023, 2022, and 2018,2021, research and development costs charged to operations totaled $59.5 $44.0 million, $69.8$50.3 million, and $65.8$46.3 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’ 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 forward 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 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 19 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 78 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 potential common shares if their inclusion would have an anti-dilutive effect. Certain outstanding restricted stock awards provide recipients with 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 89 for additional information.
Cash and cash equivalents: Cash Equivalents The Company considers all highly-liquid investments with original maturities of three months or less to be cash equivalents. Under the Company’s cash management system, cash balances at certain banks are funded when checks are presented for payment. To the extent checks issued, but not yet presented for payment, exceed the balance on hand at the specific bank against which they were written, the Company reports the amount of those checks within accounts payable in the consolidated balance sheets.
Short-term investments: Investments The Company invests in time deposits with original maturities of more than three months but not 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, 20202023 and 2019,2022, the Company’s short-term investments totaled $3.2$3.5 million and $4.3$3.7 million, respectively.
Inventories
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 lives of the 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 $8.7$13.6 million $17.9, $9.0 million, and $15.8$7.9 million were accrued within accounts payable at March 31, 2020, 2019,2023, 2022 and 2018,2021, respectively.
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, 20202023 and as a result, recorded a $0.5 million impairment charge withindetermined the VTS segment.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. During fiscal 2020, the Company recorded impairment charges totaling $8.1 million related to long-lived assets. See Note 5 for additional information.
Assets heldHeld for sale: Sale The Company considers assets to beclassifies 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,value; (ii) the asset is available for immediate sale in its present condition,condition; (iii) an active program to locate a buyer and other actions required to complete the sale have been initiated,initiated; (iv) the sale of the asset is expected to be completed within one yearyear; and (v) it is unlikely that significant changes will be made to the plan. Upon designationclassification as held for sale, the Company records the carrying value of the assetsasset at the lower of its carrying value or its estimated fair value, less costs to sell, within other noncurrent assets. Thesell. In addition, the Company ceases to record depreciation expense at the time of designation asfor assets held for sale. The carrying value of assets heldSee Note 2 for sale totaled $0.6 million and $1.1 million at March 31, 2020 and 2019, respectively.additional information.
Deferred compensation trusts: Compensation Trusts The Company maintains deferred compensation trusts to fund future obligations under its non-qualified deferred compensation plans. The trusts’ investments in third-party debt and equity securities are presented within other noncurrent assets in the consolidated balance sheets.
Self-insurance reserves:Reserves The Company retains a portion of the financial risk for certain 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.
Environmental liabilities:Liabilities The Company records liabilities for environmental assessments and remediation activities in the period in which its responsibility is probable and the costs can be reasonably estimated. The Company records environmental indemnification assets from third parties, including prior owners, when recovery is probable. To the extent that the required remediation procedures change, or additional contamination is identified, the Company’s estimated environmental liabilities may also change. See Note 20 for additional information.
Supplemental 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:information related to the Company’s leases.
| | Years ended March 31, | | | | | 2020 | | | 2019 | | | 2018 | | | Interest paid | | $ | 21.4 | | | $ | 22.3 | | | $ | 23.4 | | | Income taxes paid | | | 18.8 | | | | 22.2 | | | | 20.1 | |
New Accounting Guidance Adopted in Fiscal 2020:
LeasesSupplier Finance Programs
In February 2016,September 2022, the Financial Accounting Standards Board (“FASB”) issued new comprehensive lease accounting guidance that supersedes existing leasewill require companies that use supplier finance programs to disclose information about the 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 fiscal 2024 financial statements, with the exception of the roll forward disclosure requirement, which will become effective one year later. The Company is currently evaluating the new disclosures, but does not expect the guidance will have a material impact on its consolidated financial statements.
Income Tax Simplification In December 2019, the FASB issued new guidance designed to simplify the accounting for income taxes. The new guidance eliminated certain exceptions related to the approach for intraperiod tax allocations and requires balance sheet recognitionthe methodology for most leases.deferred tax liabilities. The Company adopted this guidance effectiveas of April 1, 2019 using a modified-retrospective transition method, under which it elected not to adjust comparative periods.2021. The Company elected the package of practical expedients permitted under the new guidance, and, as a result, the Company did not reassess the classification of existing leases or initial direct costs thereof, or whether existing contracts contain leases. In addition, the Company elected accounting policies to not record short-term leases on the balance sheet and to not separate lease and non-lease components. The Company did not elect the hindsight practical expedient.
The Company assessed its global lease portfolio and implemented a new lease accounting software solution and new processes and controls to account for leases in accordance with the new guidance. The Company’s most significant leases represent leases of real estate, such as manufacturing facilities, warehouses, and office buildings. The Company also leases certain manufacturing and IT equipment and vehicles. Upon adoption of this new guidance on April 1, 2019, the Company recognized right-of-use assets for operating leases totaling $61.3 million and corresponding current and noncurrent operating lease liabilities of $12.4 million and $48.9 million, respectively. In addition, the Company assessed 2 existing build-to-suit arrangements, for which it had recorded property, plant and equipment and long-term debt on its consolidated balance sheet as of March 31, 2019. The Company determined these arrangements represent operating leases under the new accounting guidance. As a result, the Company derecognized the previously-recorded balances and recorded $5.2 million of operating lease right-of-use assets and corresponding lease liabilities. As a result of adopting the new guidance, there was not a significant impact on the Company’s accounting for its previously-recorded capital leases, which are now classified as finance leases under the new guidance. In addition, there was no impact to retained earnings. Also, the adoption did not have a material impact on the Company’s consolidated statement of operations or consolidated statement of cash flows. See Note 16 for additional information regarding the Company’s leases.financial statements.
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive IncomeCredit Losses
In February 2018,June 2016, the FASB issued new guidance related to the accounting for credit losses for certain stranded income tax effects in accumulated other comprehensive income (loss) resulting from tax reform legislation that was enacted infinancial assets, including trade accounts receivable and contract assets. The new guidance modified the U.S. in December 2017. This guidance provided companies the optioncredit loss model to reclassify stranded income tax effects to retained earnings.measure and recognize credit losses based upon expected losses rather than incurred losses. The Company adopted this guidance as of April 1, 2019 and chose not to reclassify stranded income tax effects; therefore, the2020. The adoption of this guidance did not impact the Company’s consolidated financial statements.
New Accounting Guidance Adopted in Fiscal 2019:
Revenue Recognition
In May 2014, the FASB issued new guidance that outlines a comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The core principle of the new guidance is that companies are to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company adopted this new guidance for fiscal 2019 using the modified-retrospective transition method.
The Company assessed customer contracts and evaluated contractual provisions in light of the new guidance. Through its evaluation process, the Company identified a limited number of customer contracts that provide an enforceable right to payment for customized products, which require revenue recognition prior to the product being shipped to the customer. As a result of its adoption of the new guidance, the Company recorded an increase of $0.7 million to retained earnings as of April 1, 2018, along with related balance sheet reclassifications. The increase to retained earnings represented $3.0 million of net sales that, had the new guidance been in effect, the Company would have recognized as of March 31, 2018. See Note 2 for additional information regarding revenue recognition.
Income Taxes: Intra-Entity Transfers of Assets Other than Inventory
In October 2016, the FASB issued new guidance related to income tax accounting for intercompany asset transfers. This new guidance requires companies to recognize the income tax effects of intercompany asset transfers other than inventory at the transaction date. The income tax effects of these transfers were previously deferred. The Company adopted this new guidance for fiscal 2019 using the modified-retrospective transition method. Upon adoption, the Company recorded a decrease to retained earnings of $8.3 million as of April 1, 2018.
New Accounting Guidance Adopted in Fiscal 2018:
Stock-based Compensation
In March 2016, the FASB issued new guidance to simplify several aspects of accounting for stock-based payment transactions. The Company adopted this guidance beginning in its first quarter of fiscal 2018. The Company elected to account for forfeitures in the period in which they occur and recorded a cumulative-effect adjustment to equity. In addition, the Company prospectively adopted the guidance requiring all excess tax benefits or deficiencies to be recognized as income tax expense or benefit when share-based awards are settled. The provisions of this guidance did not have a material impact on the Company'sCompany’s consolidated financial statements.balance sheets, statements of operations or statements of cash flows.
Note 2: Assets Held for Sale
On November 2, 2020, the Company signed a definitive agreement to sell its liquid-cooled automotive business to Dana Incorporated (“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 sale 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, of adopting this new guidance, the Company recorded a $0.4remeasured the long-lived assets reverting back to held and used classification at the lower of their (i) carrying value, as if held for sale classification had not been met; or (ii) fair value at the date of the decision not to sell and reversed $57.2 million increase to both deferred taxof held for sale impairment charges during the third quarter of fiscal 2022. The long-lived assets primarily consisted of property, plant and equipment assets and equitywere fully impaired while classified as held for sale. For purposes of April 1, 2017. 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 cost valuation approaches and utilized third-party information from various industry-accepted sources, including applicable government-published statistics and data from appraisal and resale service providers. The market approach focused on prices for comparable assets in arm’s length transactions. For land and building assets, for example, sales of similar properties near the Company’s facilities were analyzed. For machinery and equipment assets, the Company referenced available third-party information regarding the selling prices of similar equipment. The cost approach focused on the amount for which an asset could be replaced or reproduced. The cost of an asset was then adjusted downward based on various factors including, but not limited to, age, location, and physical condition. After estimating the fair values of the assets reverting back to held and used classification, the Company compared the fair value for each asset to its carrying value. Carrying value represented each asset’s carrying value before the initial impairment charge, reduced for depreciation that would have been recorded if the asset had not been classified as held for sale. The Company then adjusted each asset to the lower of fair value or carrying value, resulting in the reversal of $57.2 million of previous impairment charges. In addition, the Company resumed depreciating the property, plant and equipment assets of the liquid-cooled automotive business based on the remeasured asset values during the third quarter of fiscal 2022.
The $57.2 million held for sale impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net held for sale impairment charges recorded 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 evaluations, the Company recorded a total of $8.6 million of impairment charges during the first and second quarters of fiscal 2022. These impairment charges reduced the net carrying value of property, plant and equipment additions during each quarter to zero. 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.
Note 2:3: Revenue Recognition
Effective April 1, 2018, the Company adopted new revenue recognition accounting guidance; see Note 1 for additional information .
The Company generates revenue from selling innovative thermal management products and solutions to diversified global markets and customers. The Company recognizes revenue based upon consideration specified in a contract and as it satisfies performance obligations by transferring control over its products to its customers, 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 doubtful accounts for estimated uncollectible receivablescredit 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:
Vehicular ThermalClimate Solutions (“VTS”) The VTSClimate Solutions segment principally generates revenue from providing engineeredselling heat transfer systemsproducts, heating, ventilating, air conditioning, and componentsrefrigeration (“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 use in on-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 off-highway original equipment. Thisdata 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 powertrainproducts and engine coolingsolutions 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 including, but not limited to,include radiators, charge air coolers, condensers, and engine cooling modules. Liquid-cooled products include engine oil coolers, EGRcharge air coolers, condensers, and fuel coolers, to original equipment manufacturers (“OEMs”) in the automotive, commercial vehicle, and off-highway markets in the Americas, Europe, and Asia regions.exhaust gas recirculation coolers. In addition, the VTSPerformance Technologies segment designs customer-owned tooling for OEMsprovides advanced solutions, which are designed to improve battery range and also serves Brazil’s automotivevehicle life, to zero-emission and hybrid commercial vehicle, aftermarkets.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 VTSPerformance 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 VTS 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 VTSPerformance 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 VTSthe 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 towardstoward satisfaction of the performance obligations. The VTSPerformance 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.
Commercial and Industrial Solutions (“CIS”)
The CIS segment principally generates revenue from providing thermal management products, including customized coils and coolers, to the heating, ventilating, air conditioning, and refrigeration (“HVAC&R”) markets in North America, Europe, and Asia. In addition, the segment applies corrosion protection solutions, which are referred to as coatings, to heat-transfer equipment.
For the sale of coils and coolers, individual customer purchase orders generally represent the Company’s contract with its customers. With the exception of a small number of customers, the applicable customer contracts do not provide the Company with an enforceable right to payment for performance completed to date. As a result, the CIS segment recognizes revenue for its sale of coils and coolers primarily at the time control is transferred to the customer based upon shipping terms, which is generally upon shipment.
For both sales to customers whose contract cancellation terms provide an enforceable right to payment and sales from the coatings businesses, in which the customers control the heat-transfer equipment being enhanced by the coating application, the CIS segment recognizes revenue over time based upon its estimated progress towards satisfaction of the performance obligations. The segment measures progress by evaluating the production status towards completion of ordered products or services not yet shipped to its customers.
Building HVAC Systems (“BHVAC”)
The BHVAC segment principally generates revenue from providing a variety of heating, ventilating, and air conditioning products, primarily for commercial buildings and related applications in North America and the U.K., as well as mainland Europe and the Middle East.
Heating products are manufactured in the U.S. and are generally 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 BHVAC segment recognizes revenue at the time control is transferred to the customer, generally the independent distributor, based upon shipping terms, which is generally upon shipment.
Ventilation and air conditioning products are highly-specified to a customer’s needs; however, the underlying sales contracts do not provide the Company with an enforceable right to payment for performance completed to date. As a result, the BHVAC segment recognizes revenue for these products at the time control is transferred to the customer based upon shipping terms, which is generally upon shipment.
Disaggregation of Revenue The tabletables below presentspresent revenue to external customers for each of the Company’s businessoperating segments, Climate Solutions and Performance Technologies. Each segment’s revenue is disaggregated by primary end market,product group, by geographic location and based upon the timing of revenue recognition:recognition.
| | Year ended March 31, 2020 | | | Year ended March 31, 2019 | | | | | VTS | | | CIS | | | BHVAC | | | Segment Total | | | VTS | | | CIS | | | BHVAC | | | Segment Total | | | Primary end market: | | | | | | | | | | | | | | | | | | | | | | | | | | Automotive | | $ | 508.8 | | | $ | - | | | $ | - | | | $ | 508.8 | | | $ | 542.8 | | | $ | - | | | $ | - | | | $ | 542.8 | | | Commercial vehicle | | | 323.7 | | | | - | | | | - | | | | 323.7 | | | | 387.6 | | | | - | | | | - | | | | 387.6 | | | Off-highway | | | 253.9 | | | | - | | | | - | | | | 253.9 | | | | 314.1 | | | | - | | | | - | | | | 314.1 | | | Commercial HVAC&R | | | - | | | | 463.1 | | | | 176.6 | | | | 639.7 | | | | - | | | | 506.3 | | | | 167.7 | | | | 674.0 | | | Data center cooling | | | - | | | | 107.5 | | | | 42.7 | | | | 150.2 | | | | - | | | | 145.7 | | | | 41.3 | | | | 187.0 | | | Industrial cooling | | | - | | | | 43.5 | | | | - | | | | 43.5 | | | | - | | | | 47.8 | | | | - | | | | 47.8 | | | Other | | | 90.8 | | | | 9.8 | | | | 1.8 | | | | 102.4 | | | | 107.2 | | | | 7.8 | | | | 3.4 | | | | 118.4 | | | Net sales | | $ | 1,177.2 | | | $ | 623.9 | | | $ | 221.1 | | | $ | 2,022.2 | | | $ | 1,351.7 | | | $ | 707.6 | | | $ | 212.4 | | | $ | 2,271.7 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Geographic location: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Americas | | $ | 554.4 | | | $ | 345.9 | | | $ | 139.1 | | | $ | 1,039.4 | | | $ | 613.7 | | | $ | 413.6 | | | $ | 124.9 | | | $ | 1,152.2 | | | Europe | | | 449.3 | | | | 232.6 | | | | 82.0 | | | | 763.9 | | | | 538.2 | | | | 244.8 | | | | 87.5 | | | | 870.5 | | | Asia | | | 173.5 | | | | 45.4 | | | | - | | | | 218.9 | | | | 199.8 | | | | 49.2 | | | | - | | | | 249.0 | | | Net sales | | $ | 1,177.2 | | | $ | 623.9 | | | $ | 221.1 | | | $ | 2,022.2 | | | $ | 1,351.7 | | | $ | 707.6 | | | $ | 212.4 | | | $ | 2,271.7 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Timing of revenue recognition: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Products transferred at a point in time | | $ | 1,146.4 | | | $ | 518.2 | | | $ | 221.1 | | | $ | 1,885.7 | | | $ | 1,308.5 | | | $ | 571.1 | | | $ | 212.4 | | | $ | 2,092.0 | | | Products transferred over time | | | 30.8 | | | | 105.7 | | | | - | | | | 136.5 | | | | 43.2 | | | | 136.5 | | | | - | | | | 179.7 | | | Net sales | | $ | 1,177.2 | | | $ | 623.9 | | | $ | 221.1 | | | $ | 2,022.2 | | | $ | 1,351.7 | | | $ | 707.6 | | | $ | 212.4 | | | $ | 2,271.7 | |
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 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, 2020 | | | March 31, 2019 | | | Contract assets | | $ | 21.7 | | | $ | 22.6 | | | Contract liabilities | | | 5.6 | | | | 4.0 | |
| | 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 $0.9$7.5 million decrease in contract assets during fiscal 20202023 primarily resulted from a decrease in capitalized costs related to customer-owned tooling contracts, partially offset by an increase in contract assets for revenue recognized over time.
Contract liabilities, included within other current liabilities in the consolidated balance sheets, consist of payments received in advance of satisfying performance obligations under customer contracts, including contracts for customer-owned tooling. The $1.6$9.7 million increase in contract liabilities during fiscal 2020 was2023 primarily related to customer contracts for which payment had beenresulted from payments received in advance of the Company’s satisfaction of performance obligations.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 3:4: Fair Value Measurements
Fair value is defined as the price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. Fair value measurements are classified under the following hierarchy:
Level 1 – Quoted prices for identical instruments in active markets. Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets. Level 3 – Model-derived valuations in which one or more significant inputs are not observable.
When available, the Company uses quoted market prices to determine fair value and classifies such measurements as Level 1. In some cases, where market prices are not available, the Company uses observable market-based inputs to calculate fair value, in which case the measurements are classified as Level 2. If quoted or observable market prices are not available, the Company determines fair value based upon valuation models that use, where possible, market-based data such as interest rates, yield curves or currency rates. These measurements are classified as Level 3.
The carrying values of cash, cash equivalents, restricted cash, short-term investments, trade accounts receivable, accounts payable, and short-term debt approximate fair value due to the short-term nature of these instruments. In addition, the Company assesses the fair value of a disposal group for each reporting period it is held for sale. See Note 2 for additional information regarding assets held for sale. The fair value of the Company’s long-term debt is disclosed in Note 17.
The Company holds investments in deferred compensation trusts to fund obligations under certain non-qualified deferred compensation plans. The Company records the fair value of these investments within other noncurrent assets on its consolidated balance sheets. The Company classifies money market investments held by the trusts within Level 2 of the valuation hierarchy. The Company classifies all other investments held by the trusts within Level 1 of the valuation hierarchy, as it uses quoted market prices to determine the investments’ fair value. The Company’s deferred compensation obligations, which are recorded as other noncurrent liabilities, are recorded at the fair values of the investments held by the trust. TheAt March 31, 2023 and 2022, the fair values of the investments and obligations for the Company’s deferred compensation plans each totaled $3.8$2.3 million and $6.0$2.9 million, asrespectively.
Plan assets related to the Company’s pension plans were classified as follows:
| | March 31, 2020 | | | | | Level 1 | | | Level 2 | | | Total | | | | | | | | | | | | | | Money market investments | | $ | - | | | $ | 2.4 | | | $ | 2.4 | | | Fixed income securities | | | - | | | | 8.7 | | | | 8.7 | | | Pooled equity funds | | | 17.9 | | | | - | | | | 17.9 | | | U.S. government and agency securities | | | - | | | | 13.1 | | | | 13.1 | | | Other | | | 0.1 | | | | 0.7 | | | | 0.8 | | | Fair value excluding investments measured at net asset value | | | 18.0 | | | | 24.9 | | | | 42.9 | | | Investments measured at net asset value | | | | | | | | | | | 88.2 | | | Total fair value | | | | | | | | | | $ | 131.1 | |
| | 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, 2019 | | | | | Level 1 | | | Level 2 | | | Total | | | | | | | | | | | | | | Money market investments | | $ | - | | | $ | 3.9 | | | $ | 3.9 | | | Fixed income securities | | | - | | | | 9.4 | | | | 9.4 | | | Pooled equity funds | | | 27.7 | | | | - | | | | 27.7 | | | U.S. government and agency securities | | | - | | | | 12.3 | | | | 12.3 | | | Other | | | 0.1 | | | | 0.9 | | | | 1.0 | | | Fair value excluding investment measured at net asset value | | | 27.8 | | | | 26.5 | | | | 54.3 | | | Investment measured at net asset value | | | | | | | | | | | 100.8 | | | Total fair value | | | | | | | | | | $ | 155.1 | |
| | 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 pooled equity funds based upon quoted prices from active markets and classified them within Level 1 of the valuation hierarchy. The Company determined the fair value of certain fixed 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, 20202023 and 2019,2022, the Company held 0no Level 3 assets within its pension plans.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
As a practical expedient, the Company valued certain investments, including pooled equity, fixed income and a real estate fund,funds, using their net asset value (NAV)(“NAV”) per unit, and therefore, has not classified these investments within the fair value hierarchy. The terms and conditions for redemptions vary for the investments valued at NAV. The real estate and fixed income investment fundsfund may be redeemed quarterly and monthly, respectively, with a 90-day and 60-day notice period, respectively.period. Other investments valued at NAV do not have significantly-restrictive redemption frequency or notice period requirements. The Company does not intend to sell or otherwise dispose of these investments at prices different than the NAV per unit.
Note 4:5: 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 stock awards, stock options, and performance-based stock awards granted for retention and performance, (2) a discretionary equity program for other management and key employees, and (3) stock awards for non-employee directors. The Company’s Board of Directors and the Officer NominationHuman Capital and Compensation Committee, as applicable, have discretionary authority to set the terms of the stock-based awards. Grants to employees during fiscal 20202023 were issued under the Company’s 2017Amended and Restated 2020 Incentive Compensation 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, 2020,2023, approximately 1.82.2 million shares authorized under the 2017Amended 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 $6.6$6.6 million $7.9, $5.7 million, and $9.5$6.3 million in fiscal 2020, 2019,2023, 2022, and 2018,2021, respectively.
Stock Options:Options The Company recorded $1.3$1.2 million $1.2, $1.1 million, and $1.2$0.9 million of compensation expense related to stock options in fiscal 2020, 2019,2023, 2022, and 2018,2021, respectively. During fiscal 2020, 2019, and 2018, theThe grant date fair value of stock options that vested during fiscal 2023, 2022, and 2021,was $1.2 million.$1.0 million, $0.9 million, and $1.3 million, respectively. As of March 31, 2020,2023, the total compensation expense not yet recognized related to non-vested stock options was $2.4$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:
| | Years ended March 31, | | | | | 2020 | | | 2019 | | | 2018 | | | Fair value of options | | $ | 5.56 | | | $ | 7.81 | | | $ | 7.30 | | | Expected life of awards in years | | | 6.3 | | | | 6.3 | | | | 6.4 | | | Risk-free interest rate | | | 2.2 | % | | | 2.8 | % | | | 1.9 | % | | Expected volatility of the Company's stock | | | 39.2 | % | | | 39.7 | % | | | 44.3 | % | | 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 | % |
Stock options expire no later than 10 years after the grant date and have an exercise price equal to the fair market value of Modine’s common stock on the date of grant. The risk-free interest rate was based upon 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 upon 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 upon 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.
A summary of stock option activity for fiscal 20202023 was as follows:
| | Shares | | | Weighted-average
exercise price | | | Weighted-average remaining contractual term (years) | | | Aggregate intrinsic value | | | Outstanding, beginning | | | 1.2 | | | $ | 12.24 | | | | | | | | | Granted | | | 0.3 | | | | 13.26 | | | | | | | | | Exercised | | | - | | | | 7.13 | | | | | | | | | Forfeited or expired | | | (0.1 | ) | | | 12.68 | | | | | | | | | Outstanding, ending | | | 1.4 | | | $ | 12.49 | | | | 5.6 | | | $ | - | | | | | | | | | | | | | | | | | | | | | Exercisable, March 31, 2020 | | | 0.9 | | | $ | 11.28 | | | | 3.9 | | | $ | - | |
| | 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 | |
AggregateThe aggregate intrinsic value represents the difference between the closing price of Modine’s common shares on the last trading day of fiscal 20202023 over the exercise price of the stock options, multiplied by the number of options outstanding or exercisable. As of March 31, 2020,The aggregate intrinsic value is not recorded for financial statement purposes, and this value will change based upon daily changes in the exercise price of outstanding options exceeded the closing price of ModineModine’s common shares and, as a result, the options had no intrinsic value.shares.
Additional information related to stock options exercised is as follows:
| | 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 | |
Additional information related to stock options exercised is as follows:
| | Years ended March 31, | | | | | 2020 | | | 2019 | | | 2018 | | | Intrinsic value of stock options exercised | | $ | 0.1 | | | $ | 0.7 | | | $ | 4.9 | | | Proceeds from stock options exercised | | | 0.1 | | | | 1.1 | | | | 4.3 | |
Restricted Stock:The Company recorded $4.5$5.4 million, $4.3$5.0 million, and $3.9$4.3 million of compensation expense related to restricted stock in fiscal 2020, 2019,2023, 2022, and 2018,2021, respectively. The grant date fair value of restricted stock awards that vested during fiscal 2020, 2019,2023, 2022, and 20182021 was $4.4$4.7 million, $4.3$4.4 million, and $3.9$4.5 million, respectively. At March 31, 2020,2023, the Company had $5.1$6.4 million of unrecognized compensation expense related to non-vested restricted stock, which it expects to recognize over a weighted-average period of 2.61.8 years. The Company values restricted stock awards using the closing market price 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 20202023 was as follows:
| | Shares | | | Weighted-average price | | | Non-vested balance, beginning | | | 0.5 | | | $ | 14.95 | | | Granted | | | 0.4 | | | | 13.54 | | | Vested | | | (0.3 | ) | | | 14.02 | | | Forfeited | | | (0.1 | ) | | | 14.99 | | | Non-vested balance, ending | | | 0.5 | | | $ | 14.48 | |
| | 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 $0.8 million, $2.4 million,granted performance-based cash awards in fiscal 2023, 2022, and $4.4 million2021 in lieu of compensation expense related toperformance-based stock awards. For performance-based stock awards, in fiscal 2020, 2019, and 2018, respectively. At March 31, 2020, the Company had $1.1 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 1.9 years. The Company values performance-based stockthe awards using the closing market price 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.
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. The performance componentsmetrics 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 programs initiatedthree-yearperformance period, commencing with the fiscal year of grant. The performance metrics for the performance-based cash awards granted in fiscal 20202022 and 2019fiscal 2023 are based upon both a target three-year average consolidated cash flow return on invested capital 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. The performance components of the program initiated in fiscal 2018 are based upon both a target three-year average consolidated return on capital employed and a target three-year average annual revenue growth at the end of a three-year performance period.
Note 5:6: Restructuring Activities
During fiscal 20202023, restructuring and 2019,repositioning expenses primarily consisted of severance-related expenses for targeted headcount reductions in each the Climate Solutions and Performance Technologies segments and supported the Company’s 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.
During fiscal 2022, the Company committed to restructuring actions intended to reduce SG&A and operational 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 Performance Technologies segment and primarily related to targeted headcount reductions in Europe. In addition, the Company implemented targeted headcount reductions in the Climate Solutions segment. Also in fiscal 2022, the Company incurred equipment transfer costs within the Performance Technologies segment.
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 VTSPerformance Technologies segment and supportsupported the Company’s objective to reduceof reducing operational and SG&A cost structures. Also,During fiscal 2021, the Company is in the process of transferring product lines totransferred production from its CIS manufacturing facility in Mexico in orderZhongshan, China to achieve operational improvements and organizational efficiencies.
During fiscal 2018, the Company ceased production at its Gailtal, Austriaanother Climate Solutions segment manufacturing facility primarily to reduce excess capacity and lower manufacturing costs in Europe.China. As a result of this facility closure,plant consolidation, the Company recorded $8.3 million of restructuring expenses within the CIS segment, primarily related to employee severance and related benefits. Fiscal 2018 restructuring activities also included plant consolidation activities, targeted headcount reductions, and certain product line transfers in Europe within the VTS segment. In addition, the Company recorded restructuring expenses associated with the discontinuance of its geothermal product line within the BHVAC segment.
During fiscal 2021, the Company approved headcount reductions in the VTS and CIS segments and, as a result, expects to record approximately $4.0$3.7 million of severance expenses during the first quarter of fiscal 2021. Other plant consolidation activities in fiscal 2021 included transferring product lines to the Company’s Climate Solutions manufacturing facility in Mexico.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Restructuring and repositioning expenses were as follows:
| | Years ended March 31, | | | | | 2020 | | | 2019 | | | 2018 | | | Employee severance and related benefits | | $ | 10.2 | | | $ | 8.7 | | | $ | 13.0 | | | Other restructuring and repositioning expenses | | | 2.0 | | | | 0.9 | | | | 3.0 | | | Total | | $ | 12.2 | | | $ | 9.6 | | | $ | 16.0 | |
| | 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, | | | | | 2020 | | | 2019 | | | Beginning balance | | $ | 10.0 | | | $ | 11.0 | | | Additions | | | 10.2 | | | | 8.7 | | | Payments | | | (15.1 | ) | | | (9.1 | ) | | Effect of exchange rate changes | | | (0.1 | ) | | | (0.6 | ) | | Ending balance | | $ | 5.0 | | | $ | 10.0 | |
| | 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 2020,2022 and 2021, the Company identified potential impairment indicators related to manufacturing facilities in Austria and Germany within the VTS segment. The Company anticipates the future cash flowsrecorded $56.0 million of these asset groups will be negatively impacted by planned wind downs of certain commercial vehicle and automotive programs. In response, the Company performed an impairment evaluation and recordeda net asset impairment reversal and $166.8 million of impairment charges, totaling $7.5 millionrespectively, within its VTS segment to write down property and equipment assets to fair value. The Company determined fair value using Level 3 inputs, primarily consisting of appraisals, which considered the market rental value, market conditions, physical condition of the assets, salability in the marketplace and estimated scrap values, based on the specialized nature of the machinery and equipment.Performance Technologies segment. See Note 2 for additional information.
Also during fiscal 2020,2022, the Company recorded a $0.6 millionan impairment charge of $0.3 million to reduce the carrying value of the previously-closed CIS Austriana previously closed Climate Solutions facility to its current estimated fair value, less costs to sell. During fiscal 2019 and 2018, the Company recorded asset impairment charges of $0.4 million and $1.3 million, respectively, related to this closed facility.
Note 6:7: Other Income and Expense
Other income and expense consisted of the following:
| | Years ended March 31, | | | | | 2020 | | | 2019 | | | 2018 | | | Equity in earnings of non-consolidated affiliate (a) | | $ | 0.2 | | | $ | 0.7 | | | $ | 0.2 | | | Interest income | | | 0.4 | | | | 0.4 | | | | 0.4 | | | Foreign currency transactions (b) | | | (2.4 | ) | | | (2.3 | ) | | | (0.6 | ) | | Net periodic benefit cost (c) | | | (3.0 | ) | | | (2.9 | ) | | | (3.3 | ) | | Total other expense - net | | $ | (4.8 | ) | | $ | (4.1 | ) | | $ | (3.3 | ) |
| | 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) | During fiscal 2020, the Company sold its ownership interest in Nikkei Heat Exchanger Company, Ltd. As a result of the sale, the Company recorded a gain of $0.1 million, which is included within the fiscal 2020 amount. See Note 12 for additional information.
|
| (b) | 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) | (c) | Net periodic benefit cost for the Company’s pension and postretirement plans is exclusive of service cost. cost. |
Note 7:8: Income Taxes
The U.S. and foreign components of earnings or loss before income taxes and the provisionbenefit or benefitprovision for income taxes consisted of the following:
| | Years ended March 31, | | | | | 2020 | | | 2019 | | | 2018 | | | Components of earnings (loss) before income taxes: | | | | | | | | | | | United States | | $ | (26.1 | ) | | $ | 22.4 | | | $ | 2.5 | | | Foreign | | | 36.5 | | | | 58.4 | | | | 60.8 | | | Total earnings before income taxes | | $ | 10.4 | | | $ | 80.8 | | | $ | 63.3 | |
| | 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 provision (benefit): | | | | | | | | | | | Federal: | | | | | | | | | | | Current | | $ | (3.4 | ) | | $ | (20.4 | ) | | $ | 11.6 | | | Deferred | | | (1.7 | ) | | | (4.2 | ) | | | 23.3 | | | State: | | | | | | | | | | | | | | Current | | | (0.1 | ) | | | 0.7 | | | | (0.3 | ) | | Deferred | | | (2.3 | ) | | | 1.9 | | | | 2.0 | | | Foreign: | | | | | | | | | | | | | | Current | | | 14.9 | | | | 19.0 | | | | 16.1 | | | Deferred | | | 5.0 | | | | (2.1 | ) | | | (13.2 | ) | | Total income tax provision (benefit) | | $ | 12.4 | | | $ | (5.1 | ) | | $ | 39.5 | |
| 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 | |
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Act. Shortly after the Tax Act was enacted, the SEC issued accounting guidance which provided a one-year measurement period during which a company could complete its accounting for the impacts of the Tax Act. To the extent a company’s accounting for certain income tax effects of the Tax Act was incomplete, the company could determine a reasonable estimate for those effects and record a provisional estimate in its financial statements. If a company could not determine a provisional estimate to be included in the financial statements, it was to continue applying the provisions of the tax laws that were in effect immediately prior to the Tax Act being enacted.
During fiscal 2018, the Company recorded provisional discrete tax charges totaling $38.0 million related to the Tax Act. The Company adjusted its U.S. deferred tax assets by $19.0 million due to the reduction in the U.S. federal corporate tax rate. This net reduction in deferred tax assets also included the estimated impact on the Company’s net state deferred tax assets. In addition, the Company recorded a $19.0 million charge for the transition tax required under the Tax Act.
During fiscal 2019, the Company completed its accounting for the Tax Act, which resulted in an income tax benefit totaling $7.7 million. The Company utilized its deferred tax attributes against the transition tax and finalized its fiscal 2018 U.S. federal income tax return. As a result, the Company decreased the provisional charge recorded for the reduction in the U.S. federal corporate tax rate by $9.3 million, since more deferred tax assets were utilized to offset taxable income at a higher fiscal 2018 U.S. federal corporate tax rate. The Company also decreased the transition tax liability to $18.9 million, a reduction of $0.1 million. In addition, the Company recorded a charge of $1.7 million for a reduction to state deferred tax assets.
The Tax Act included a new provision designed to tax global intangible low taxed income (“GILTI”) starting in fiscal 2019. The Company elected to record the tax effects of the GILTI provision as a period expense in the applicable tax year. To determine whether its net operating loss carryforward deferred tax assets are expected to be realized, the Company considers the applicable tax law ordering. Based upon this approach, net operating loss carryforwards are deemed to be realizable if they will reduce the expected tax liability when utilized, regardless of whether the 50% GILTI deduction or applicable tax credits may have been available.
The Company’s accounting policy is to allocate the income tax provision between net earnings and other comprehensive income. The Company applies its accounting for income taxes by tax jurisdiction, and in periods in which there is a loss before income taxes and pre-tax income in other comprehensive income, it first allocates the income tax provision to other comprehensive income, and then records a related tax benefit in the income tax provision.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The reconciliation between the U.S. federal statutory rate and the Company’s effective tax rate was as follows:
| | Years ended March 31, | | | | | 2020 | | | 2019 | | | 2018 | | | Statutory federal tax | | | 21.0 | % | | | 21.0 | % | | | 31.5 | % | | State taxes, net of federal benefit | | | (12.0 | ) | | | 3.6 | | | | 2.9 | | | Taxes on non-U.S. earnings and losses | | | 32.9 | | | | 3.9 | | | | (3.8 | ) | | Valuation allowances | | | 156.9 | | | | 4.0 | | | | (5.6 | ) | | Tax credits | | | (36.7 | ) | | | (26.1 | ) | | | (17.3 | ) | | Compensation | | | 4.0 | | | | (0.1 | ) | | | (0.8 | ) | | Tax rate or law changes | | | 3.6 | | | | (12.0 | ) | | | 60.1 | | | Uncertain tax positions, net of settlements | | | (37.9 | ) | | | 0.4 | | | | (0.8 | ) | | Notional interest deductions | | | (12.5 | ) | | | (2.5 | ) | | | (3.2 | ) | | Dividends and taxable foreign inclusions | | | (11.0 | ) | | | 1.6 | | | | 0.2 | | | Other | | | 10.9 | | | | (0.1 | ) | | | (0.8 | ) | | Effective tax rate | | | 119.2 | % | | | (6.3 | %) | | | 62.4 | % |
| | 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 DuringCompany’s fiscal 2020, the Company recorded net income2023 effective tax charges totaling $2.9 million as a result of legal entity restructuring completed in preparation of a potential sale of the automotive business and a $1.4 millionrate was favorably impacted by an income tax benefit resulting fromrelated to the recognition of a tax incentive in Italy. Also in fiscal 2020, the Company changed its determination of whether it was more likely than not certainvaluation allowance on deferred tax assets in the U.S. The effective tax rates in both fiscal 2022 and in a foreign jurisdiction would be realized and, as a result, adjusted the respective valuation allowances and recorded an income tax charge of $8.4 million and an income tax benefit of $1.3 million, respectively. In addition, the Company recorded a net increase of deferred tax asset valuation allowances totaling $9.2 million related to other tax jurisdictions and recorded a $4.5 million income tax benefit associated with the reduction in unrecognized tax benefits resulting from a lapse in statutes of limitations and settlements.
During fiscal 2019, the Company recorded income tax benefits totaling $7.7 million2021 were significantly impacted by impairment charges or reversals, largely related to the Tax Act, as discussed above; recordedliquid-cooled automotive business, and income tax charges or benefits totaling $14.5 million as a result of amending previous-year tax returnsrelated to recognize foreign tax credits that are expected to be realized based upon future sources of income;valuation allowances. See Note 2 for information regarding the impairment charges and recorded a $2.5 millionreversals. The income tax benefitcharges or benefits related to a manufacturing deduction in the United States. Also in fiscal 2019, the Company changed its determination of whether it was more likely than not certain deferred tax assets of two separate subsidiaries in a foreign jurisdiction would be realized and, as a result, adjusted the respective valuation allowances and recorded an income tax benefit totaling $1.0 million. In addition, the Company recorded a net increase of deferred tax asset valuation allowances totaling $4.3 million related to other tax jurisdictions and recorded a $2.2 million income tax benefit associated with the reduction in unrecognized tax benefits resulting from a lapse in statutes of limitations.are described below.
During fiscal 2018, the Company recorded provisional charges totaling $38.0 million related to the Tax Act, as discussed above, and recognized a $9.0 million Hungarian development tax credit. Also in fiscal 2018, the Company reversed a portion61
The Company has recordedrecords valuation allowances against its net deferred tax assets to the extent it has determineddetermines 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. As further discussed in Note 20, the COVID-19 pandemic has resulted in risks and uncertainties to our business. Future events or circumstances, such as lower taxable income or unfavorable changes in the financial outlook of the Company’s operations in certain jurisdictions, could necessitate the establishment of further valuation allowances, which could have a material adverse effect on the Company’s results of operations and financial condition.allowances.
The tax effects of temporary differences that gave rise to deferred tax assets and liabilities were as follows:
| | March 31, | | | | | 2020 | | | 2019 | | | Deferred tax assets: | | | | | | | | Accounts receivable | | $ | 0.3 | | | $ | 0.2 | | | Inventories | | | 4.5 | | | | 3.4 | | | Plant and equipment | | | 4.7 | | | | 1.8 | | | Lease liabilities | | | 15.7 | | | | - | | | Pension and employee benefits | | | 45.1 | | | | 32.7 | | | Net operating and capital losses | | | 70.2 | | | | 73.5 | | | Credit carryforwards | | | 56.8 | | | | 60.3 | | | Other, principally accrued liabilities | | | 8.1 | | | | 10.0 | | | Total gross deferred tax assets | | | 205.4 | | | | 181.9 | | | Less: valuation allowances | | | (46.9 | ) | | | (43.4 | ) | | Net deferred tax assets | | | 158.5 | | | | 138.5 | | | | | | | | | | | | | Deferred tax liabilities: | | | | | | | | | | Plant and equipment | | | 13.1 | | | | 15.1 | | | Lease assets | | | 15.6 | | | | - | | | Goodwill | | | 4.8 | | | | 4.8 | | | Intangible assets | | | 26.4 | | | | 28.8 | | | Other | | | 1.9 | | | | 0.9 | | | Total gross deferred tax liabilities | | | 61.8 | | | | 49.6 | | | Net deferred tax assets | | $ | 96.7 | | | $ | 88.9 | |
| | 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 | |
Unrecognized tax benefits were as follows:
| | Years ended March 31, | | | | | 2020 | | | 2019 | | | Beginning balance | | $ | 13.8 | | | $ | 13.6 | | | Gross increases - tax positions in prior period | | | 0.3 | | | | 1.6 | | | Gross decreases - tax positions in prior period | | | (1.0 | ) | | | (0.2 | ) | | Gross increases - tax positions in current period | | | 1.1 | | | | 1.1 | | | Settlements | | | (2.1 | ) | | | (0.1 | ) | | Lapse of statute of limitations | | | (2.4 | ) | | | (2.2 | ) | | Ending balance | | $ | 9.7 | | | $ | 13.8 | |
| | 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, 20202023 was $9.7 million and, if recognized, $7.9$7.8 million would have an effective tax rate impact. The Company estimates a $0.6$2.0 million net decrease in unrecognized tax benefits during fiscal 20212024 mainly due to lapses in statutes of limitations and settlements.limitations. If recognized, these reductions would not have a significantan 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 20202023, 2022 and 2019,2021, interest and penalties included within income tax expense in the consolidated statements of operations were not significant. At March 31, 20202023 and 2019,2022, accrued interest and penalties totaled $0.5$0.8 million and $1.1$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, 2020,2023, the Company was under income tax examination in a number of jurisdictions. The following tax years remain subject to examination for the Company’s major tax jurisdictions:
| Germany | Fiscal 20112017 - Fiscal 20192022 | | Italy | Calendar 2015Fiscal 2018 - Fiscal 20192022 | | United States | Fiscal 20172020 - Fiscal 20192022 |
At March 31, 2020, the Company had federal and state tax credits of $61.6 million that, if not utilized against U.S. taxes, will expire between fiscal 2021 and 2040. The Company also had state and local tax loss carryforwards totaling $149.8 million that, if not utilized against state apportioned taxable income, will expire between fiscal 2021 and 2040. In addition, the Company had tax loss and foreign attribute carryforwards totaling $314.7 million in various tax jurisdictions throughout the world. Certain of the carryforwards in the U.S. and in foreign jurisdictions are offset by valuation allowances. If not utilized against taxable income, $8.1 million of these carryforwards will expire between fiscal 2021 and 2034, and $306.6 million, mainly related to Germany and Italy, will not expire due to an unlimited carryforward period.
At March 31, 2023, the Company had federal and state tax credits of $60.4 million that, if not utilized against U.S. taxes, will expire between fiscal 2024 and 2043. The Company also had state and local tax loss carryforwards totaling $136.7 million. If not utilized against state apportioned taxable income, certain state and local carryforwards will expire between fiscal 2024 and 2042, while some will not expire due to an unlimited carryforward period. In addition, the Company had tax loss and foreign attribute carryforwards totaling $285.0 million in various tax jurisdictions throughout the world. Certain of the carryforwards in foreign jurisdictions are offset by valuation allowances. If not utilized against taxable income, $54.9 million of these carryforwards will expire between fiscal 2024 and 2034, and $230.1 million, mainly related to Germany and Italy, will not expire due to an unlimited carryforward period.
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 has not recorded foreign withholding taxes or deferred income taxes for these earnings. The Company has estimated the net amount of unrecognized foreign withholding tax and deferred tax liabilities would total approximately $7.0$12.0 million if the accumulated foreign earnings were distributed; however, the actual tax cost would be dependent on circumstances existing when remittance occurs.
Note 8:9: Earnings Per Share
The components of basic and diluted earnings per share were as follows:
| | Years ended March 31, | | | | | 2020 | | | 2019 | | | 2018 | | | Basic Earnings Per Share: | | | | | | | | | | | Net (loss) earnings attributable to Modine | | $ | (2.2 | ) | | $ | 84.8 | | | $ | 22.2 | | | Less: Undistributed earnings attributable to unvested shares | | | - | | | | (0.4 | ) | | | (0.2 | ) | | Net (loss) earnings available to Modine shareholders | | $ | (2.2 | ) | | $ | 84.4 | | | $ | 22.0 | | | | | | | | | | | | | | | | | Weighted-average shares outstanding - basic | | | 50.8 | | | | 50.5 | | | | 49.9 | | | | | | | | | | | | | | | | | Net (loss) earnings per share - basic | | $ | (0.04 | ) | | $ | 1.67 | | | $ | 0.44 | | | | | | | | | | | | | | | | | Diluted Earnings Per Share: | | | | | | | | | | | | | | Net (loss) earnings attributable to Modine | | $ | (2.2 | ) | | $ | 84.8 | | | $ | 22.2 | | | Less: Undistributed earnings attributable to unvested shares | | | - | | | | (0.2 | ) | | | (0.1 | ) | | Net (loss) earnings available to Modine shareholders | | $ | (2.2 | ) | | $ | 84.6 | | | $ | 22.1 | | | | | | | | | | | | | | | | | Weighted-average shares outstanding - basic | | | 50.8 | | | | 50.5 | | | | 49.9 | | | Effect of dilutive securities | | | - | | | | 0.8 | | | | 1.0 | | | Weighted-average shares outstanding - diluted | | | 50.8 | | | | 51.3 | | | | 50.9 | | | | | | | | | | | | | | | | | Net (loss) earnings per share - diluted | | $ | (0.04 | ) | | $ | 1.65 | | | $ | 0.43 | |
| | 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 fiscal 2020, 20192023, 2022 and 2018,2021, the calculation of diluted earnings per share excluded 1.10.5 million, 0.40.5 million, and 0.21.0 million, stock options, respectively, because they were anti-dilutive. For fiscal 20202023, 2022 and 2019,2021, the calculation of diluted earnings per share excluded 0.50.2 million, 0.2 million, and 0.30.4 million restricted stock awards, respectively, because they were anti-dilutive. For fiscal 2020,2021 the total number of potentially-dilutive securities was 0.30.2 million. However, these securities were not included in the computation of diluted net loss per share since to do so would have decreased the loss per share.
Note 9:10: Cash, Cash Equivalents and Restricted Cash
Cash, cash equivalents and restricted cash consisted of the following:
| | March 31, | | | | | 2020 | | | 2019 | | | Cash and cash equivalents | | $ | 70.9 | | | $ | 41.7 | | | Restricted cash | | | 0.4 | | | | 0.5 | | | Total cash, cash equivalents and restricted cash | | $ | 71.3 | | | $ | 42.2 | |
| | 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.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 10:11: Inventories
Inventories consisted of the following:
| | March 31, | | | | | 2020 | | | 2019 | | | Raw materials | | $ | 123.6 | | | $ | 122.8 | | | Work in process | | | 34.6 | | | | 32.2 | | | Finished goods | | | 49.2 | | | | 45.7 | | | Total inventories | | $ | 207.4 | | | $ | 200.7 | |
| | 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 | |
Note 11:12: Property, Plant and Equipment
Property, plant and equipment, including depreciable lives, consisted of the following:
| | March 31, | | | | | 2020 | | | 2019 | | | Land | | $ | 19.7 | | | $ | 20.7 | | | Buildings and improvements (10-40 years) | | | 276.7 | | | | 285.9 | | | Machinery and equipment (3-15 years) | | | 870.3 | | | | 848.7 | | | Office equipment (3-10 years) | | | 95.2 | | | | 92.0 | | | Construction in progress | | | 40.5 | | | | 57.4 | | | | | | 1,302.4 | | | | 1,304.7 | | | Less: accumulated depreciation | | | (854.4 | ) | | | (820.0 | ) | | Net property, plant and equipment | | $ | 448.0 | | | $ | 484.7 | |
| | 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 $68.2$46.5 million, $67.9$46.4 million, and $67.0$60.1 million for fiscal 2020, 2019,2023, 2022, and 2018,2021, respectively.
Gains and losses related to the disposal of property, plant and equipment are recorded within SG&A expenses. For fiscal 2020, 2019,2023 and 2018,2021, losses related to the disposal of property, plant and equipment totaled $0.6 million, $0.9$0.1 million and $0.7 million, respectively.
Note 12: Investment in Affiliate For fiscal 2022, gains related to the disposal of property, plant and equipment totaled $0.1 million.
During fiscal 2020, the Company completed the sale of its 50 percent ownership interest in Nikkei Heat Exchanger Company, Ltd. (“NEX”) for a selling price of $3.8 million. As a result of this sale, the Company recorded a gain of $0.1 million, which included the write-off of accumulated foreign currency translation gains of $0.6 million, within other income and expense on the consolidated statement of operations.
Prior to the sale, the Company accounted for its investment in this non-consolidated affiliate using the equity method. The Company included its investment in NEX of $3.8 million within other noncurrent assets on the March 31, 2019 consolidated balance sheet. The Company reported its equity in earnings from NEX within other income and expense in the consolidated statements of operations, using a one-month reporting delay. The Company’s share of NEX’s earnings for fiscal 2020, 2019, and 2018 was $0.1 million, $0.7 million, and $0.2 million, respectively.
Note 13: Intangible Assets
Intangible assets consisted of the following:
| | March 31, 2020 | | | March 31, 2019 | | | | | Gross Carrying Value | | | Accumulated Amortization | | | Net Intangible Assets | | | Gross Carrying Value | | | Accumulated Amortization | | | Net Intangible Assets | | | Customer relationships | | $ | 60.8 | | | $ | (12.6 | ) | | $ | 48.2 | | | $ | 61.5 | | | $ | (9.1 | ) | | $ | 52.4 | | | Trade names | | | 58.3 | | | | (16.2 | ) | | | 42.1 | | | | 58.9 | | | | (13.5 | ) | | | 45.4 | | | Acquired technology | | | 23.6 | | | | (7.6 | ) | | | 16.0 | | | | 23.9 | | | | (5.5 | ) | | | 18.4 | | | Total intangible assets | | $ | 142.7 | | | $ | (36.4 | ) | | $ | 106.3 | | | $ | 144.3 | | | $ | (28.1 | ) | | $ | 116.2 | |
The Company recorded $8.9 million, $9.0 million, and $9.7 million of amortization expense during fiscal 2020, 2019, and 2018, respectively. The Company estimates that it will record $8.4 million of amortization expense in fiscal 2021 and approximately $8.0 million of annual amortization expense in fiscal 2022 through 2025.
During fiscal 2018, the BHVAC segment discontinued its geothermal product line and, as a result, recorded a $1.2 million impairment charge for acquired technology intangible assets.
| | 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 $8.0 million, $8.4 million, and $8.5 million of amortization expense during fiscal 2023, 2022, and 2021, respectively. The Company estimates that it will record approximately $8.0 million of annual amortization expense in fiscal 2024 through 2028.
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.
| | VTS | | | CIS | | | BHVAC | | | Total | | | Balance, March 31, 2018 | | $ | 0.5 | | | $ | 158.3 | | | $ | 15.0 | | | $ | 173.8 | | | Effect of exchange rate changes | | | - | | | | (4.4 | ) | | | (0.9 | ) | | | (5.3 | ) | | Balance, March 31, 2019 | | | 0.5 | | | | 153.9 | | | | 14.1 | | | | 168.5 | | | Impairment charge | | | (0.5 | ) | | | - | | | | - | | | | (0.5 | ) | | Effect of exchange rate changes | | | - | | | | (1.3 | ) | | | (0.6 | ) | | | (1.9 | ) | | Balance, March 31, 2020 | | $ | - | | | $ | 152.6 | | | $ | 13.5 | | | $ | 166.1 | |
| | 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. Annually, the Company conducts itsTo test goodwill for impairment, assessment during the fourth quarter by applying a fair value-based test. For purposes of its assessment, the Company determines the fair value of each reporting unit based upon the present value of estimated future cash flows.flows and compares the fair value of each reporting unit with its carrying value. The Company’s determination of fair value involves judgment and the use of significant estimates and assumptions, including assumptions regarding the revenue growth rates and operating profit margins used to calculate estimated future cash flows and risk-adjusted discount rates, business trends and market conditions.rates.
As a result of its annual goodwill impairment testtests performed during the fourth quarteras of fiscal 2020,March 31, 2023, the Company determined that the fair value of each of the reporting units within its CISClimate Solutions and BHVACPerformance Technologies segments exceeded their respective book values. The Company determined, however, that the goodwill recorded within its VTS segment was fully impaired and recorded a $0.5 million impairment charge as a result. The impairment charge was primarily caused by a recent decline in the estimated fair value of the automotive business within the VTS segment.
At both March 31, 20202023 and 2019,2022, accumulated goodwill impairment losses totaled $40.8 million and $40.3 million, respectively, within the VTS segment. Performance Technologies segment.
Note 15: Product Warranties and Other Commitments
Product warrantiesWarranties : Many 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 and adjusts its warranty accruals if it becomes probable that expected claims will differ from previous estimates.
Changes in accrued warranty costs were as follows:
| | Years ended March 31, | | | | | 2020 | | | 2019 | | | Beginning balance | | $ | 9.2 | | | $ | 9.3 | | | Warranties recorded at time of sale | | | 5.3 | | | | 5.5 | | | Adjustments to pre-existing warranties | | | (1.6 | ) | | | 2.2 | | | Settlements | | | (4.8 | ) | | | (7.3 | ) | | Effect of exchange rate changes | | | (0.2 | ) | | | (0.5 | ) | | Ending balance | | $ | 7.9 | | | $ | 9.2 | |
| | 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 | |
Indemnification agreements: 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, 20202023 was not material.
Commitments Commitments: At March 31, 2020,2023, the Company had capital expenditure commitments of $12.0 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 VTSPerformance 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.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 16: Leases
Effective April 1, 2019, the Company adopted new lease accounting guidance and, as a result, recorded $61.3 million of right-of-use (“ROU”) assets and corresponding lease liabilities for operating leases on its consolidated balance sheet. The consolidated financial statements for fiscal 2020 reflect the adoption of this new guidance; however, fiscal 2019, fiscal 2018 and prior-years have not been adjusted. See Note 1 for additional information regarding the Company’s adoption of the new guidance.
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 based uponto calculate the information available atROU asset and lease commencement.liability. In determining the incremental borrowing rate, the Company considers its current collateralized borrowing rate, the term of the lease, and the economic environmentsenvironment 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 and recognizes payments for these leases as lease expense.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 office buildings.offices. In addition, the Company leases certain manufacturing and IT equipment and vehicles. The Company’s most significant leases have remaining lease terms of 1 to 1511 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 any material residual value guarantees or material restrictive covenants.
Lease Assets and Liabilities: Liabilities The following table provides a summary of leases recorded on the consolidated balance sheet. sheets.
| Balance Sheet Location | | March 31, 2020 | | Lease Assets | | | | | | Operating lease ROU assets | Other noncurrent assets | | $ | 61.4 | | Finance lease ROU assets (a) | Property, plant and equipment - net | | | 8.5 | | | | | | | | Lease Liabilities | | | | | | Operating lease liabilities | Other current liabilities | | $ | 10.9 | | Operating lease liabilities | Other noncurrent liabilities | | | 50.3 | | Finance lease liabilities | Long-term debt - current portion | | | 0.4 | | Finance lease liabilities | Long-term debt | | | 3.3 |
| | 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 | |
| (a) | Finance lease ROU assets were recorded net of accumulated amortization of $1.8$3.2 million and $2.8 million as of March 31, 2020.2023 and 2022, respectively. |
Components of Lease Expense: 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 | |
63| (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 | |
The components of lease expense were as follows:
| | Year ended March 31, 2020 | | | Operating lease expense (a) | | $ | 21.2 | | | Finance lease expense: | | | | | | Depreciation of ROU assets | | | 0.5 | | | Interest on lease liabilities | | | 0.2 | | | Total lease expense | | $ | 21.9 | |
| (a) | In fiscal 2020, operating lease expense included short-term lease expense of $4.1 million. Variable lease expense was not significant. |
Supplemental Cash Flow Information
| | Year ended March 31, 2020 | | | Cash paid for amounts included in the measurement of lease liabilities: | | | | | Operating cash flows for operating leases | | $ | 14.7 | | | Financing cash flows for finance leases | | | 0.5 | | | | | | | | | ROU assets obtained in exchange for lease liabilities | | | | | | Operating leases | | $ | 9.0 | | | Finance leases | | | 0.2 | |
Lease Term and Discount Rates
| | March 31, 2020 | | Weighted-average remaining lease term: | | | | Operating leases | | 9.3 years | | Finance leases | | 8.8 years | | | | | | Weighted-average discount rate: | | | | Operating leases | | | 3.5 | % | Finance leases | | | 4.7 | % |
| | 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 under New Lease Accounting Guidance: Future minimum rental payments for leases with initial non-cancellable lease terms in excess of one year were as follows at March 31, 2020:2023:
| Fiscal Year | | Operating Leases | | | Finance Leases | | | 2021 | | $ | 12.8 | | | $ | 0.5 | | | 2022 | | | 11.4 | | | | 0.5 | | | 2023 | | | 9.3 | | | | 0.5 | | | 2024 | | | 6.3 | | | | 0.5 | | | 2025 | | | 5.8 | | | | 0.5 | | | 2026 and beyond | | | 26.2 | | | | 2.0 | | | Total lease payments | | | 71.8 | | | | 4.5 | | | Less: Interest | | | (10.6 | ) | | | (0.8 | ) | | Present value of lease liabilities | | $ | 61.2 | | | $ | 3.7 | |
| 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 64
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.
Maturity of Lease Liabilities under Previous Lease Accounting Guidance: Future minimum rental payments for operating leases with initial non-cancellable lease terms in excess of one year were as follows at March 31, 2019:
| Fiscal Year | | | | | 2020 | | $ | 14.2 | | | 2021 | | | 12.4 | | | 2022 | | | 9.1 | | | 2023 | | | 7.1 | | | 2024 | | | 4.7 | | | 2025 and beyond | | | 22.9 | | | Total | | $ | 70.4 | |
The Company recorded $19.3 million and $18.5 million of rental expense related to operating leases in fiscal 2019 and 2018, respectively.
Note 17: IndebtednessLong-term debt consisted of the following:
| 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 finance lease obligations. |
In June 2019,Long-term debt, including the Company executedcurrent 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 Fourth Amended and Restated Credit Agreement with a syndicate of banks that provides for a multi-currency $250.0 million revolving credit, facility expiring in June 2024, which modified the Company’s then-existing revolver that would have expired in November 2021. In addition, this credit agreement provided for both U.S. dollar- and euro-denominated term loan facilities, with repayments continuing into fiscal 2025. These term loans replaced the previously-existing term loans with repayments scheduled through fiscal 2022. As a result of the credit agreement modification, the Company deferred debt issuance costs of $1.1 million, which are being amortized over the term of the debt. Borrowings under both the revolving creditswingline and term loan facilities bear interest at a variable rate, based upon the applicable reference rate and including a margin percentage dependent upon the Company’s leverage ratio, as described below. At March 31, 2020,2023, the weighted-average interest ratesrate for revolving credit facility borrowings and the term loans were 3.0 percent and 2.8 percent, respectively. At March 31, 2020, the Company’s revolving credit facility borrowings totaled $127.2 million and domestic letters of credit totaled $5.3 million, resulting in available borrowings under the revolving credit facility of $117.5 million.
In January 2020, the Company issued $100.0 million of 5.9 percent Senior Notes with repayments ending in fiscal 2029. The Company used the majority of the proceeds to satisfy the remaining principal balance of the 6.8 percent Senior Notes, which were scheduled to mature in August 2020. As a result of the credit agreement modification, the Company deferred debt issuance costs of $1.7 million, which are being amortized over the term of the debt.
was 6.0 percent. Based upon the terms of the credit agreement, the Company determined thatclassifies borrowings under its revolving credit facility should be classifiedand swingline facilities as long-term debt. Accordingly,and short-term debt, respectively, on its consolidated balance sheets.
At March 31, 2023, the Company has reclassifiedhad no outstanding borrowings related to the revolving credit and swingling facilities and domestic letters of $47.1credit 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 facility fromand swingline facilities totaled $64.9 million and $7.0 million, respectively.
The Company also maintains credit agreements for its foreign subsidiaries. The outstanding short-term borrowings related to long-term debt on thethese foreign credit agreements totaled $3.7 million and $0.7 million at March 31, 2019 balance sheet2023 and within the related disclosures.March 31, 2022, respectively.
Long-term debt consisted
Indebtedness under the Company’s credit agreement and Senior Note agreements is secured by liens on substantially all domestic assets. These agreements further require compliance with various covenants that may limit the Company’s ability to incur 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 the following:certain asset sales. | io | Fiscal year of maturity | | March 31, 2020 | | | March 31, 2019 | | | | | | | | | | | | Term loans | 2025 | | $ | 189.4 | | | $ | 238.4 | | | Revolving credit facility | 2025 | | | 127.2 | | | | 47.1 | | | 5.9% Senior Notes | 2029 | | | 100.0 | | | | - | | | 5.8% Senior Notes | 2027 | | | 50.0 | | | | 50.0 | | | 6.8% Senior Notes | 2021 | | | - | | | | 85.0 | | | Other (a) | | | | 6.0 | | | | 14.3 | | | | | | | 472.6 | | | | 434.8 | | | Less: current portion | | | | (15.6 | ) | | | (48.6 | ) | | Less: unamortized debt issuance costs | | | | (5.0 | ) | | | (4.0 | ) | | Total long-term debt | | | $ | 452.0 | | | $ | 382.2 | |
| (a) | Other long-term debt primarily includes borrowings by foreign subsidiaries and finance lease obligations. |
Long-term debt matures as follows:
| Fiscal Year | | | | | 2021 | | $ | 15.6 | | | 2022 | | | 21.7 | | | 2023 | | | 21.7 | | | 2024 | | | 21.7 | | | 2025 | | | 273.6 | | | 2026 & beyond | | | 118.3 | | | Total | | $ | 472.6 | |
The Company also maintainsFinancial covenants within its credit agreements for its foreign subsidiaries, with outstanding short-term borrowings at March 31, 2020 and 2019 of $14.8 million and $18.9 million, respectively.
Provisions in the Company’s credit agreement, Senior Note agreements, and various foreign credit agreements require the Company to maintain compliance with various covenants and include certain cross-default clauses. Under its primary credit agreements in the U.S., the Company has provided liens on substantially all domestic assets. Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales. In addition, at the time of each incremental borrowing under the revolving credit facility, the Company is required to represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on its business, property, or results of operations.
The Company is subject to a leverage ratio covenant, which requires the Company to limit its consolidated indebtedness, less a portion of its cash balance,balances, both as defined by the credit agreements, in relation to itsno more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”.). The leverage ratio covenant limit was 3.25 to 1 through the fourth quarter of fiscal 2020. The Company ismust also subject to an interest expense coveragemaintain a ratio covenant, 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, 2020.covenants.
In May 2020, the Company executed amendments to its primary credit agreements in the U.S. Under the amended agreements, the leverage ratio covenant limit is temporarily raised. The leverage ratio covenant limit in fiscal 2021 is 4.00 to 1, 4.75 to 1, 5.25 to 1, and 5.75 to 1 for the first, second, third, and fourth quarters, respectively. In fiscal 2022, the leverage ratio covenant limit is 4.75 to 1, 3.75 to 1, and 3.50 to 1 for the first, second and third quarters, respectively, and subsequently returns to 3.25 to 1 for the fourth quarter of fiscal 2022.
The Company estimates the fair value of long-term debt using discounted future cash flows at rates offered to the Company for similar debt instruments of comparable maturities. As of March 31, 20202023 and 2019,2022, the carrying value of the Company’s long-term debt approximated fair value, with the exception of the Senior Notes, which had an aggregate fair value of approximately $131.3$125.9 million and $137.2$138.9 million, respectively. The fair value of the Company’s long-term debt is categorized as Level 2 within the fair value hierarchy. Refer to Note 34 for the definition of a Level 2 fair value measurement.
Note 18: Pension and Employee Benefit Plans
Defined Contribution Employee Benefit Plans:
The Company maintains a domestic 401(k) plan that allows employees to contribute a portion of their salary to help them save for retirement. The Company currently matches employee contributions up to 4.5 percent of their compensationcompensation. During fiscal 2021, as part of its response to the negative impacts of the COVID-19 pandemic, the Company suspended matching employee contributions for participants.part of the year. The Company’s expense for defined contribution employee benefit plans during fiscal 2020, 2019,2023, 2022, and 20182021 was $6.6 $6.9 million, $6.4 million, and $5.2$3.0 million, respectively.
In addition, the Company maintains non-qualified deferred compensation plans 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:
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 substantially unfunded in accordance with local laws.
Pension Plans
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Defined Benefit Employee Benefit 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 domestic employees hired on or before December 31, 2003 and provide benefits based primarily upon years of service and average compensation for salaried and some hourly employees. Benefits for other hourly employees are based upon a monthly retirement benefit amount. 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 Austria, and Italy and are closed to new participants. The Company previously 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.
TheIn connection with funding relief provisions within the American Rescue Plan Act of 2021, the Company contributed $3.5 million, $8.0 million, and $13.4 milliondid not make cash contributions to its U.S. pension plans during fiscal 2020, 2019,2023. The Company contributed $3.5 million and 2018,$19.3 million to its U.S. pension plans during fiscal 2022 and 2021, respectively. In addition, the Company contributed $2.3$1.5 million, $5.9$1.5 million, and $2.6$2.2 million to its non-U.S. pension plans during fiscal 2020, 2019,2023, 2022, and 2018,2021, respectively. These contributions are reported in the change in other liabilities in the consolidated statements of cash flows.
Postretirement plans: 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 2020, 2019,2023, 2022, and 20182021 was $0.3 million, $0.3 million, and $0.2 million, respectively.million.
Measurement date: 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, were as follows:
| | Years ended March 31, | | | | | 2020 | | | 2019 | | | Change in benefit obligation: | | | | | | | | Benefit obligation at beginning of year | | $ | 258.8 | | | $ | 273.6 | | | Service cost | | | 0.4 | | | | 0.5 | | | Interest cost | | | 9.1 | | | | 9.6 | | | Actuarial loss | | | 15.5 | | | | 1.7 | | | Benefits paid | | | (18.2 | ) | | | (22.8 | ) | | Curtailment gain (a) | | | (0.3 | ) | | | - | | | Effect of exchange rate changes | | | (0.6 | ) | | | (3.8 | ) | | Benefit obligation at end of year | | $ | 264.7 | | | $ | 258.8 | | | | | | | | | | | | | Change in plan assets: | | | | | | | | | | Fair value of plan assets at beginning of year | | $ | 155.1 | | | $ | 157.7 | | | Actual return on plan assets | | | (11.6 | ) | | | 6.3 | | | Benefits paid | | | (18.2 | ) | | | (22.8 | ) | | Employer contributions | | | 5.8 | | | | 13.9 | | | Fair value of plan assets at end of year | | $ | 131.1 | | | $ | 155.1 | | | Funded status at end of year | | $ | (133.6 | ) | | $ | (103.7 | ) | | | | | | | | | | | | Amounts recognized in the consolidated balance sheets: | | | | | | | | | | Current liability | | $ | (2.7 | ) | | $ | (2.0 | ) | | Noncurrent liability | | | (130.9 | ) | | | (101.7 | ) | | | | $ | (133.6 | ) | | $ | (103.7 | ) |
| | 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) | The $0.3 million curtailment gain, which is associated with headcount reductions in Europe within the VTS segment, will be recognized as a component of net periodic benefit cost following the completion of the headcount reductions. See Note 5 for additional information on the Company’s restructuring activities. |
As of March 31, 2020, 2019,2023, 2022, and 2018,2021, the benefit obligation associated with the Company’s non-U.S. pension plans totaled $35.7$21.2 million, $36.5$26.5 million, and $43.4$36.4 million, respectively. In fiscal 2020, the $0.8The $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 resulteddue to net actuarial gains during the year from an increase in discount rates and employer contributions of $2.2 million for benefits paid to plan participants duringwhich decreased the year,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 $0.9$0.7 million. In fiscal 2019,2022, the $6.9$9.9 million decrease was primarily due to the sale of the air-cooled automotive business in Austria, which resulted from employer contributions of $5.9in a $5.5 million for benefits paid to plan participantsdecrease. In addition, net actuarial gains during the year, and 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 $1.1$0.6 million.
The accumulated benefit obligation for pension plans was $194.4 million and $228.1 million as of March 31, 2023 and 2022, respectively. The net actuarial loss related to the pension plans recognized in accumulated other comprehensive loss was $123.5 million and $131.5 million as of March 31, 2023 and 2022, respectively.
The accumulated benefit obligation for pension plans was $263.1 million and $256.9 million as of March 31, 2020 and 2019, respectively. The net actuarial loss related to the pension plans recognized in accumulated other comprehensive loss was $191.5 million and $159.1 million as of March 31, 2020 and 2019, respectively.
Costs for the Company’s global pension plans included the following components:
| | Years ended March 31, | | | | | 2020 | | | 2019 | | | 2018 | | | Components of net periodic benefit cost: | | | | | | | | | | | Service cost | | $ | 0.4 | | | $ | 0.5 | | | $ | 0.5 | | | Interest cost | | | 9.1 | | | | 9.6 | | | | 9.9 | | | Expected return on plan assets | | | (12.0 | ) | | | (12.3 | ) | | | (11.9 | ) | | Amortization of net actuarial loss | | | 6.0 | | | | 5.6 | | | | 5.6 | | | Settlements (a) | | | 0.2 | | | | 0.2 | | | | 0.3 | | | Curtailment gain (a) | | | - | | | | - | | | | (0.3 | ) | | Net periodic benefit cost | | $ | 3.7 | | | $ | 3.6 | | | $ | 4.1 | | | | | | | | | | | | | | | | | Other changes in benefit obligation recognized in other comprehensive income (loss): | | | | | | | | | | | | | | Net actuarial loss | | $ | (38.7 | ) | | $ | (7.7 | ) | | $ | (5.8 | ) | | Amortization of net actuarial loss | | | 6.2 | | | | 5.8 | | | | 5.9 | | | Total recognized in other comprehensive income (loss) | | $ | (32.5 | ) | | $ | (1.9 | ) | | $ | 0.1 | |
| | 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 and curtailment gain 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 amortized $6.2$5.7 million, $5.6$8.6 million, and $5.6 $7.1million of net actuarial loss in fiscal 2020, 2019,2023, 2022, and 2018,2021, respectively. In each Exclusive of these years,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$1.0 million of the amortization was attributable to the Company’s non-U.S. pension plans. The Company estimates $6.9 millionplans in each of net actuarial loss for its pension plans will be amortized from accumulated other comprehensive loss into net periodic benefit cost during fiscal 2021. The fiscal 2021 estimated amortization includes less than $1.0 million related to the Company’s non-U.S. pension plans.these years.
The Company used a discount rate of 3.4%5.2% and 4.0%3.9% as of March 31, 20202023 and 2019,2022, respectively, for determining its benefit obligations under its U.S. pension plans. The Company used a weighted-average discount rate of 1.0%3.8% and 1.4%1.8% as of March 31, 20202023 and 2019,2022, respectively, for determining its benefit obligations under its non-U.S. pension plans. The Company used a discount rate of 4.0%3.9%, 4.0%3.2%, and 4.1%3.4% to determine its costs under its U.S. pension plans for fiscal 2020, 2019,2023, 2022, and 2018,2021, respectively. The Company used a weighted-average discount rate of 1.7%2.9%, 1.9%1.6%, and 1.9%1.4% to determine its costs under its non-U.S. pension plans for fiscal 2020, 2019,2023, 2022, and 2018,2021, 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. pension 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, 20202023 and 20192022 were as follows:
| | Target allocation | | | Plan assets | | | | | | | | 2020 | | | 2019 | | | Equity securities | | | 65 | % | | | 60 | % | | | 66 | % | | Debt securities | | | 21 | % | | | 22 | % | | | 19 | % | | Real estate investments | | | 13 | % | | | 16 | % | | | 12 | % | | Cash and cash equivalents | | | 1 | % | | | 2 | % | | | 3 | % | | | | | 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, 20202023 and 2019,2022, the Company’s pension plans did not directly own shares of Modine common stock.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The Company employs a total return investment approach, whereby a mix of investments are used to maximize the long-term growth of 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 2020, 2019,2023, U.S. pension plan expense, the expected rate of return on plan assets was 7.0 percent. For fiscal 2022, and 20182021 U.S. pension plan expense, the expected rate of return on plan assets was 7.5 percent. For fiscal 20212024 U.S. pension plan expense, the Company has assumed a rate of return on plan assets of 7.56.5 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 contribute approximately $20 millionmake cash contributions to theseits U.S. plans during fiscal 2021.2024.
Estimated pension benefit payments for the next ten fiscal years are as follows:
| Fiscal Year | | Estimated Pension Benefit Payments | | | 2021 | | $ | 17.2 | | | 2022 | | | 16.8 | | | 2023 | | | 16.7 | | | 2024 | | | 16.7 | | | 2025 | | | 16.8 | | | 2026-2030 | | | 80.6 | |
| 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 | |
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 as a hedge, and, if so, on the nature of the hedging activity.
Commodity derivatives: Derivatives The Company periodically enters into over-the-counter forward contracts related to forecasted purchases of aluminum and copper. The Company’s strategy in entering into these contracts is to reduce its exposure to changing market prices of these commodities. The Company designates certain commodity forward contracts 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 accumulated other comprehensive income (loss) (“AOCI”) within shareholders’ equity and subsequently recognizes the gains and losses within cost of 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 forward contracts to hedge specific foreign currency-denominated assets and 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, the Company records unrealized gains and losses related to changes in fair value 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.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The fair value of the Company’s derivative financial instruments recorded in the consolidated balance sheets were as follows:
| _ | Balance Sheet Location | | March 31, 2020 | | | March 31, 2019 | | | Derivatives designated as hedges: | | | | | | | | | Commodity derivatives | Other current assets | | $ | - | | | $ | 0.6 | | | Commodity derivatives | Other current liabilities | | | 1.3 | | | | 0.3 | | | Foreign exchange contracts | Other current assets | | | 0.1 | | | | 0.2 | | | | | | | | | | | | | | Derivatives not designated as hedges: | | | | | | | | | | | Foreign exchange contracts | Other current liabilities | | $ | - | | | $ | 0.5 | |
| _ | 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 associated with derivative financial instruments that the Company designated for hedge accounting during the years ended March 31 were as follows:
| | Gain (loss) recognized in other comprehensive income | | Statement of Operations | | Gain (loss) reclassified from AOCI | | | | | 2020 | | | 2019 | | | 2018 | | Location | | 2020 | | | 2019 | | | 2018 | | | Commodity derivatives | | $ | (2.6 | ) | | $ | (0.3 | ) | | $ | 0.2 | | Cost of sales | | $ | (0.8 | ) | | $ | (0.4 | ) | | $ | - | | | Foreign exchange contracts | | | (0.1 | ) | | | (0.4 | ) | | | 0.1 | | Net sales | | | (0.1 | ) | | | (0.4 | ) | | | 0.1 | | | Foreign exchange contracts | | | 0.2 | | | | 1.0 | | | | - | | Cost of sales | | | 0.4 | | | | 0.6 | | | | - | | | Total gains (losses) | | $ | (2.5 | ) | | $ | 0.3 | | | $ | 0.3 | | | | $ | (0.5 | ) | | $ | (0.2 | ) | | $ | 0.1 | |
| | 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 | ) |
The amounts associated with derivative financial instruments that the Company did not designate for hedge accounting were as follows:
| Statement of Operations Location | | Years ended March 31, | | | _ | | | 2020 | | | 2019 | | | 2018 | | | Commodity derivatives | Cost of sales | | $ | - | | | $ | - | | | $ | 0.4 | | | Foreign exchange contracts | Net sales | | | (0.1 | ) | | | (0.7 | ) | | | (0.1 | ) | | Foreign exchange contracts | Other income (expense) - net | | | (0.1 | ) | | | (0.3 | ) | | | (0.5 | ) | | Total losses | | | $ | (0.2 | ) | | $ | (1.0 | ) | | $ | (0.2 | ) |
| 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
COVID-19
In March 2020,Supply Chain Disruptions and Inflationary Market Conditions
Market and economic dynamics, including the World Health Organization declared the outbreakimpacts of the novel coronavirus, COVID-19 a pandemic. The spreadpandemic, have contributed to global supply chain challenges and inflationary market conditions. Since the fourth quarter of COVID-19fiscal 2022, the military conflict between Russia and Ukraine and the resulting work and travel restrictions, including international border closings, have disrupted, and may continue to disrupt, global supply chains and have negatively impacted the global economy. As a result of this pandemic, the Company has experienced significant impacts on its operations and has suspended production at certain manufacturing facilities in China, India, Italy, Spain, Germany, the Netherlands, Austria, Hungary, the U.S., Mexico and Brazil due to local government requirements or customer shutdowns and is operating other facilitiesrelated sanctions imposed by governments in the U.S. and abroad at reduced capacity levels. Although the temporarily-closed facilities have since reopened, many are operating at a significantly reduced volume because of low customer demand. also impacted these market conditions. The Company is focused on protecting the health and wellbeing of its employees and the communities in which it operates, while also ensuring the continuity of its business operations and timely delivery of quality products and services to its customers. Beginning largely in April 2020 and in an effort to mitigatemitigating the negative impacts of COVID-19,labor 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 has taken actions, including, but not limited to, production staffing adjustments, furloughs, shortened work weeks,cannot reasonably estimate the full impact that the supply chain challenges and temporary salary reductions at all levels of our organization. In addition, the Company is focused on reducing operatingother related economic and administrative expenses.
The Company’s consolidated financial statements reflect estimates and assumptions made by management, including assumptions regarding the future impacts of the COVID-19 pandemic, that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenue and expenses during the reporting periods presented. For example, assets particularly sensitive to assumptions that could be adversely impacted by the COVID-19 pandemic include goodwill and deferred tax assets. While the Company believes it used appropriate estimates and assumptions to prepare the consolidated financial statements, actual amounts could differ materially and future events or circumstances couldmarket dynamics will have a potential negative effect on the assumptions used. If the Company, its suppliers, or its customers experience further shutdowns or other significant business disruptions associated with the COVID-19 pandemic, its ability to conduct business in the manner and on the timelines presently planned could be materially and negatively impacted, which could have a material adverse effect on the Company’s business, financial position, results of operations and cash flows.flows in the future.
Market Risk
The Company sells a broad range of products that provide thermal solutions to customers operating in diverse markets, including the automotive, commercial vehicle, off-highway, and commercial, industrial, and building HVAC&R markets. The COVID-19 pandemic has negatively impacted these markets; the duration and severity of the impacts of COVID-19 on these markets are currently uncertain.
Credit 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 2020, 1 customer within the VTS segment2023 and 2022, no customers accounted for more than ten percent of the Company’s total sales. In fiscal 2019 and 2018, 2 customers within the VTS segment each2021, 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 were 4539 percent, 5039 percent, and 4843 percent of total sales in fiscal 2020, 2019,2023, 2022, and 2018,2021, respectively. At March 31, 20202023 and 2019, 342022, 37 percent and 3829 percent, respectively, of the Company'sCompany’s trade accounts receivable were due from the Company'sCompany’s top 10ten customers. These customers operate primarily in the automotive, commercial vehicle, off-highway, automotive and light vehicle, data center cooling, and commercial air conditioning and refrigeration markets. CollateralThe 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 nor has experienced a significant increase in credit losses in connection with the COVID-19 pandemic.served.
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 financial ratings that are acceptable to the Company.
Counterparty Risk The Company manages counterparty risk 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 Company has recorded environmental investigation and remediation accruals related to soil and groundwater contamination at manufacturing facilities in the United States,U.S., one of which the Company currently owns and operates, and at its former manufacturing facility in the Netherlands, along with accruals for lesser environmental matters at certain other facilities in the United States and Brazil.Netherlands. These accruals generallyprimarily relate to soil and groundwater contamination at facilities where past operations followed practices and procedures that were considered acceptable under then-existing regulations, or where the Company is a successor to the obligations of prior owners, and current laws and regulations require investigative and/or remedial work to ensure sufficient environmental compliance. In instances where a range of loss can be reasonably estimated for a probable environmental liability, but no amount within the range is a better estimate than any other amount, the Company accrues the minimum of the range. The Company’s accruals for these environmental matters totaled $18.2$17.6 million and $18.9$18.2 million at March 31, 20202023 and 2019,2022, 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 liabilities related to these matters and revise the estimated accruals, if necessary. BasedWhile 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.
Other Litigation In the normal course of business, the Company and its subsidiaries are named as defendants in various lawsuits and enforcement proceedings by private parties, governmental agencies and/or others in which claims are asserted against Modine. The Company believes that any additional loss in excess of amounts already accrued would not have a material effect on the Company’s consolidated balance sheet, results of operations, and cash flows. In addition, management expects that the liabilities which may ultimately result from such lawsuits or proceedings, if any, would not have a material adverse effect on the Company’s financial position.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 21: Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss were as follows:
| | Foreign Currency Translation | | | Defined Benefit Plans | | | Cash Flow Hedges | | | Total | | | Balance, March 31, 2019 | | $ | (42.6 | ) | | $ | (136.3 | ) | | $ | 0.5 | | | $ | (178.4 | ) | | | | | | | | | | | | | | | | | | | | Other comprehensive loss before reclassifications | | | (18.2 | ) | | | (38.7 | ) | | | (2.5 | ) | | | (59.4 | ) | | Reclassifications: | | | | | | | | | | | | | | | | | | Amortization of unrecognized net loss (a) | | | - | | | | 5.8 | | | | - | | | | 5.8 | | | Realized losses - net (b) | | | - | | | | - | | | | 0.5 | | | | 0.5 | | | Foreign currency translation gains (c) | | | (0.6 | ) | | | - | | | | - | | | | (0.6 | ) | | Income taxes | | | - | | | | 8.3 | | | | 0.5 | | | | 8.8 | | | Total other comprehensive loss | | | (18.8 | ) | | | (24.6 | ) | | | (1.5 | ) | | | (44.9 | ) | | | | | | | | | | | | | | | | | | | | Balance, March 31, 2020 | | $ | (61.4 | ) | | $ | (160.9 | ) | | $ | (1.0 | ) | | $ | (223.3 | ) |
| | 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 | | | Cash Flow Hedges | | | Total | | | Balance, March 31, 2018 | | $ | (5.5 | ) | | $ | (134.9 | ) | | $ | 0.1 | | | $ | (140.3 | ) | | | | | | | | | | | | | | | | | | | | Other comprehensive income (loss) before reclassifications | | | (37.9 | ) | | | (7.1 | ) | | | 0.3 | | | | (44.7 | ) | | Reclassifications: | | | | | | | | | | | | | | | | | | Amortization of unrecognized net loss (a) | | | - | | | | 5.4 | | | | - | | | | 5.4 | | | Realized losses - net (b) | | | - | | | | - | | | | 0.2 | | | | 0.2 | | | Foreign currency translation losses (d) | | | 0.8 | | | | - | | | | - | | | | 0.8 | | | Income taxes | | | - | | | | 0.3 | | | | (0.1 | ) | | | 0.2 | | | Total other comprehensive income (loss) | | | (37.1 | ) | | | (1.4 | ) | | | 0.4 | | | | (38.1 | ) | | | | | | | | | | | | | | | | | | | | Balance, March 31, 2019 | | $ | (42.6 | ) | | $ | (136.3 | ) | | $ | 0.5 | | | $ | (178.4 | ) |
| | 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 18 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 investment in NEXpension plan as a component of the loss on sale recorded during fiscal 2020, the Company wrote off $0.6 million of accumulated foreign currency translation gains. |
| (d) | As a result of the sale of a business in South Africa during fiscal 2019, the Company wrote off $0.8 million of accumulated foreign currency translation losses.2022. See Note 1 for additional information. |
Note 22: Segment and Geographic Information
The Company’s product lines consist of heat-transfer componentssystems and systems.components. The Company serves vehicular and commercial, industrial, and building HVAC&R markets and vehicular markets.
The Company’s VTSClimate Solutions segment represents itsprovides heat transfer products, heating, ventilating, air conditioning and refrigeration products and data center cooling solutions to global customers. The Company’s Performance Technologies segment designs and manufactures air-and liquid-cooled technology for vehicular, businessstationary power, and primarily servesindustrial applications. In addition, the automotive,Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and off-highway markets. In addition, the VTS segment serves the automotive customers and commercial vehicle aftermarket in Brazil. The Company’s CIS segment provides coils, coolers,coatings products and coating solutions to customers throughout the world. The Company’s BHVAC segment provides heating, ventilating and air conditioning products to customers throughout the world.application services.
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, 2020,2022, the Company began managing its automotive business separate fromoperations under two operating segments, Climate Solutions and Performance Technologies. The Climate Solutions segment includes the other businesses withinpreviously-reported BHVAC and CIS segments, with the VTSexception 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 is managingbelieves 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 automotive business as a separate segment as the Company targets the sale or eventual exitCompany’s consolidated financial position, results of the businesses in this segment. Beginning for fiscal 2021, the Company will report theoperations, and cash flows. Segment financial resultsinformation for the automotive business asprior periods has been recast to conform to the Automotive segment. The remaining portion of the previous VTS segment will be named the Heavy-Duty Equipment segment and will include the heavy-duty commercial vehicle and off-highway businesses.current presentation.
The following is a summary of net sales, gross profit, and operating income by 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 | |
The following is a summary of net sales, gross profit, and operating income by segment:
| | 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, 2020 | | | | | External Sales | | | Inter-segment Sales | | | Total | | | Net sales: | | | | | | | | | | | VTS | | $ | 1,136.0 | | | $ | 41.2 | | | $ | 1,177.2 | | | CIS | | | 620.1 | | | | 3.8 | | | | 623.9 | | | BHVAC | | | 219.4 | | | | 1.7 | | | | 221.1 | | | Segment total | | | 1,975.5 | | | | 46.7 | | | | 2,022.2 | | | Corporate and eliminations | | | - | | | | (46.7 | ) | | | (46.7 | ) | | Net sales | | $ | 1,975.5 | | | $ | - | | | $ | 1,975.5 | |
| | Year ended March 31, 2019 | | | | | External Sales | | | Inter-segment Sales | | | Total | | | Net sales: | | | | | | | | | | | VTS | | $ | 1,298.9 | | | $ | 52.8 | | | $ | 1,351.7 | | | CIS | | | 704.7 | | | | 2.9 | | | | 707.6 | | | BHVAC | | | 209.1 | | | | 3.3 | | | | 212.4 | | | Segment total | | | 2,212.7 | | | | 59.0 | | | | 2,271.7 | | | Corporate and eliminations | | | - | | | | (59.0 | ) | | | (59.0 | ) | | Net sales | | $ | 2,212.7 | | | $ | - | | | $ | 2,212.7 | |
| | Year ended March 31, 2018 | | | | | External Sales | | | Inter-segment Sales | | | Total | | | Net sales: | | | | | | | | | | | VTS | | $ | 1,239.3 | | | $ | 56.4 | | | $ | 1,295.7 | | | CIS | | | 674.4 | | | | 1.3 | | | | 675.7 | | | BHVAC | | | 189.4 | | | | 1.8 | | | | 191.2 | | | Segment total | | | 2,103.1 | | | | 59.5 | | | | 2,162.6 | | | Corporate and eliminations | | | - | | | | (59.5 | ) | | | (59.5 | ) | | Net sales | | $ | 2,103.1 | | | $ | - | | | $ | 2,103.1 | |
| | 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, | | | | | 2020 | | | 2019 | | | 2018 | | | Gross profit: | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | VTS | | $ | 144.9 | | | | 12.3 | % | | $ | 186.9 | | | | 13.8 | % | | $ | 201.0 | | | | 15.5 | % | | CIS | | | 92.9 | | | | 14.9 | % | | | 114.9 | | | | 16.2 | % | | | 97.8 | | | | 14.5 | % | | BHVAC | | | 71.5 | | | | 32.3 | % | | | 63.4 | | | | 29.9 | % | | | 58.0 | | | | 30.3 | % | | Segment total | | | 309.3 | | | | 15.3 | % | | | 365.2 | | | | 16.1 | % | | | 356.8 | | | | 16.5 | % | | Corporate and eliminations | | | (1.8 | ) | | | - | | | | 0.3 | | | | - | | | | (0.3 | ) | | | - | | | Gross profit | | $ | 307.5 | | | | 15.6 | % | | $ | 365.5 | | | | 16.5 | % | | $ | 356.5 | | | | 17.0 | % |
| | 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: | | 2020 | | | 2019 | | | 2018 | | | VTS | | $ | 27.6 | | | $ | 64.8 | | | $ | 84.2 | | | CIS | | | 32.9 | | | | 53.4 | | | | 28.5 | | | BHVAC | | | 36.4 | | | | 26.9 | | | | 20.3 | | | Segment total | | | 96.9 | | | | 145.1 | | | | 133.0 | | | Corporate and eliminations (a) | | | (59.0 | ) | | | (35.4 | ) | | | (40.8 | ) | | Operating income | | $ | 37.9 | | | $ | 109.7 | | | $ | 92.2 | |
| | 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. During fiscal 2020 and 2019, the Company recorded $39.2 million and $7.1 million, respectively, of costs directly associated with its review of strategic alternatives for the VTS segment’s automotive business, including costs to separate and prepare the business for potential sale. |
The following is a summary of totalsegment assets, by segment:comprised entirely of trade accounts receivable and inventories, and other assets:
| | March 31, | | | | | 2020 | | | 2019 | | | VTS | | $ | 683.9 | | | $ | 749.9 | | | CIS | | | 617.7 | | | | 604.2 | | | BHVAC | | | 102.3 | | | | 89.4 | | | Corporate and eliminations | | | 132.2 | | | | 94.5 | | | Total assets | | $ | 1,536.1 | | | $ | 1,538.0 | |
| | 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 | |
| (a) | Represents cash and cash equivalents, other current assets, property plant and equipment, intangible assets, goodwill, deferred income taxes, and other noncurrent assets for the 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: | | 2020 | | | 2019 | | | 2018 | | | VTS | | $ | 53.2 | | | $ | 56.2 | | | $ | 61.4 | | | CIS | | | 15.0 | | | | 16.4 | | | | 9.0 | | | BHVAC | | | 3.1 | | | | 1.3 | | | | 0.6 | | | Total capital expenditures | | $ | 71.3 | | | $ | 73.9 | | | $ | 71.0 | |
| | 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: | | 2020 | | | 2019 | | | 2018 | | | VTS | | $ | 49.7 | | | $ | 49.5 | | | $ | 48.2 | | | CIS | | | 24.0 | | | | 23.9 | | | | 24.3 | | | BHVAC | | | 3.4 | | | | 3.5 | | | | 4.2 | | | Total depreciation and amortization expense | | $ | 77.1 | | | $ | 76.9 | | | $ | 76.7 | |
| | 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 | |
| (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. |
The following is a summary of net sales by geographicalgeographic area, based upon the location of the selling unit:
| | Years ended March 31, | | | | | 2020 | | | 2019 | | | 2018 | | | United States | | $ | 941.9 | | | $ | 1,032.3 | | | $ | 911.4 | | | Italy | | | 187.4 | | | | 217.3 | | | | 211.5 | | | China | | | 168.5 | | | | 172.1 | | | | 156.0 | | | Hungary | | | 142.4 | | | | 165.6 | | | | 153.9 | | | Germany | | | 97.5 | | | | 123.1 | | | | 132.6 | | | Austria | | | 93.0 | | | | 116.2 | | | | 151.7 | | | Other | | | 344.8 | | | | 386.1 | | | | 386.0 | | | Net sales | | $ | 1,975.5 | | | $ | 2,212.7 | | | $ | 2,103.1 | |
The following is a summary of property, plant and equipment by geographical area:
| | March 31, | | | | | 2020 | | | 2019 | | | United States | | $ | 114.6 | | | $ | 117.7 | | | China | | | 56.8 | | | | 57.6 | | | Hungary | | | 55.4 | | | | 55.3 | | | Mexico | | | 50.0 | | | | 56.3 | | | Italy | | | 49.8 | | | | 52.4 | | | Germany | | | 27.0 | | | | 32.8 | | | Austria | | | 26.0 | | | | 36.9 | | | Other | | | 68.4 | | | | 75.7 | | | Total property, plant and equipment | | $ | 448.0 | | | $ | 484.7 | |
The following is a summary of net sales by end market:
| | Years ended March 31, | | | | | 2020 | | | 2019 | | | 2018 | | | Commercial HVAC&R | | $ | 639.7 | | | $ | 674.0 | | | $ | 648.3 | | | Automotive | | | 508.8 | | | | 542.8 | | | | 526.0 | | | Commercial vehicle | | | 323.7 | | | | 387.6 | | | | 381.7 | | | Off-highway | | | 253.9 | | | | 314.1 | | | | 271.2 | | | Data center cooling | | | 150.2 | | | | 187.0 | | | | 137.6 | | | Industrial cooling | | | 43.5 | | | | 47.8 | | | | 67.6 | | | Other | | | 55.7 | | | | 59.4 | | | | 70.7 | | | Net sales | | $ | 1,975.5 | | | $ | 2,212.7 | | | $ | 2,103.1 | |
| | 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 | |
Note 23: Quarterly Financial Data (Unaudited)
The following is a summary of quarterly financial data:property, plant and equipment by geographic area:
| | Fiscal 2020 quarters ended | | | | | | | | June | | | Sept. | | | Dec. | | | March | | | Fiscal 2020 | | | | | | | | | | | | | | | | | | | | Net sales | | $ | 529.0 | | | $ | 500.2 | | | $ | 473.4 | | | $ | 472.9 | | | $ | 1,975.5 | | | Gross profit | | | 83.4 | | | | 75.7 | | | | 73.5 | | | | 74.9 | | | | 307.5 | | | Net earnings (loss) (a) | | | 8.2 | | | | (4.8 | ) | | | 1.0 | | | | (6.4 | ) | | | (2.0 | ) | | Net earnings (loss) attributable to Modine (a) | | | 8.0 | | | | (4.7 | ) | | | 1.2 | | | | (6.7 | ) | | | (2.2 | ) | | Net earnings (loss) per share attributable to Modine shareholders: | | | | | | | | | | | | | | | | | | | | | | Basic | | $ | 0.16 | | | $ | (0.09 | ) | | $ | 0.02 | | | $ | (0.13 | ) | | $ | (0.04 | ) | | Diluted | | | 0.16 | | | | (0.09 | ) | | | 0.02 | | | | (0.13 | ) | | | (0.04 | ) |
| | 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 | |
| | Fiscal 2019 quarters ended | | | | | | | | June | | | Sept. | | | Dec. | | | March | | | Fiscal 2019 | | | | | | | | | | | | | | | | | | | | Net sales | | $ | 566.1 | | | $ | 548.9 | | | $ | 541.0 | | | $ | 556.7 | | | $ | 2,212.7 | | | Gross profit | | | 94.3 | | | | 87.9 | | | | 91.7 | | | | 91.6 | | | | 365.5 | | | Net earnings (b) | | | 22.5 | | | | 38.7 | | | | 18.3 | | | | 6.4 | | | | 85.9 | | | Net earnings attributable to Modine (b) | | | 22.0 | | | | 38.5 | | | | 18.0 | | | | 6.3 | | | | 84.8 | | | Net earnings per share attributable to Modine shareholders: | | | | | | | | | | | | | | | | | | | | | | Basic | | $ | 0.43 | | | $ | 0.76 | | | $ | 0.36 | | | $ | 0.12 | | | $ | 1.67 | | | Diluted | | | 0.43 | | | | 0.75 | | | | 0.35 | | | | 0.12 | | | | 1.65 | |
| (a) | During fiscal 2020, restructuring expenses totaled $1.8 million, $2.3 million, $2.6 million, and $5.5 million for the quarters ended June 30, 2019, September 30, 2019, December 31, 2019, and March 31, 2020, respectively (see Note 5). During the third quarter of fiscal 2020, the Company sold a previously-closed manufacturing facility in Germany and, as a result, recorded a gain of $0.8 million (see Note 1). During the fourth quarter of fiscal 2020, the Company recorded asset impairment charges totaling $8.6 million related to long-lived assets and goodwill (see Note 5 and Note 14). During fiscal 2020, costs associated with the Company’s review of strategic alternatives for the VTS segment’s automotive business totaled $8.3 million, $11.9 million, $14.0 million, and $5.0 million for the quarters ended June 30, 2019, September 30, 2019, December 31, 2019, and March 31, 2020, respectively. During fiscal 2020, the Company adjusted its valuation allowances on deferred tax assets in the U.S and in Brazil. As a result, the Company recorded net income tax charges totaling $3.0 million and $4.1 million in the third and fourth quarters, respectively. Also during fiscal 2020, the Company recorded a net income tax charge totaling $2.9 million, $2.7 million of which was recorded in the third quarter, as a result of legal entity restructuring completed in preparation of a potential sale of the automotive business (see Note 7).
|
| (b) | During fiscal 2019, restructuring expenses totaled $0.2 million, $0.5 million, and $8.9 million for the quarters ended June 30, 2018, December 31, 2018, and March 31, 2019, respectively (see Note 5). During the second quarter of fiscal 2019, the Company sold its South African business within the BHVAC segment and, as a result, recorded a loss of $1.7 million (see Note 1). During the third quarter of fiscal 2019, the Company recorded a $0.4 million impairment charge related to a manufacturing facility in Austria (see Note 5). During the third and fourth quarter of fiscal 2019, the Company incurred $1.2 million and $5.9 million of costs associated with its review of strategic alternatives for the VTS segment’s automotive business. The Company’s income tax benefit for fiscal 2019 includes net benefits of $24.4 million and net charges of $2.2 million in the second and third quarters, respectively, related to the Tax Act and the recognition of foreign tax credits (see Note 7). During fiscal 2019, the Company adjusted its valuation allowances on deferred tax assets related to two separate subsidiaries in China and, as a result, recorded a $2.0 million income tax benefit and a $1.0 million income tax charge in the first and second quarters, respectively (see Note 7). |
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors and Shareholders of
Modine Manufacturing CompanyCompany:
Opinions on the Consolidated Financial Statements and Internal Control overOver Financial Reporting
We have audited the accompanying consolidated financial statements, including the related notes, as listed in the index appearing under Item 15(a)(1), and the financial statement schedule listed in the index appearing under Item 15(a)(2),balance sheet of Modine Manufacturing Company and its subsidiaries (the “Company”)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, referred to as the “consolidatedconsolidated financial statements”)statements). We also have audited the Company'sCompany’s internal control over financial reporting as of March 31, 2020,2023, based on criteria established in Internal Control -– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 31, 2020 and 2019,2023, and the results of its operations and its cash flows for each of the three years in the periodyear ended March 31, 20202023, in conformity with accounting principlesU.S. generally accepted in the United States of America.accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2020,2023 based on criteria established in Internal Control -– Integrated Framework (2013) issued by the COSO.
Changes in Accounting Principles
As discussed in Note 1 toCommittee of Sponsoring Organizations of the consolidated financial statements, the Company changed the manner in which it accounts for leases in fiscal 2020 and the manner in which it accounts for intra-entity transfers of assets other than inventory in fiscal 2019.Treadway Commission.
Basis for Opinions
The Company'sCompany’s management is responsible for these consolidated financial statements, 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 Over Financial Reporting appearing under Item 9A.Reporting. Our responsibility is to express opinionsan opinion on the Company’s consolidated financial statements and an opinion on the Company'sCompany’s internal control over financial reporting 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 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 regarding the amounts and disclosures in the consolidated financial statements. Our auditsaudit 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. 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.
Definition and Limitations of Internal Control overOver 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 MattersMatter
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 (i)that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (ii)(2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit mattersmatter 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.
Goodwill Impairment Assessment – CIS Reporting UnitsRealizability of certain domestic deferred tax assets
As describeddiscussed in Notes 1 and 148 to the consolidated financial statements, the Company’s consolidated goodwill balance was $166.1 millionCompany 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, 2020, and2023 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 goodwill associated with the CIS reporting units was $152.6 million. Management assesses goodwill for impairment annually as ofyear ended March 31, of each year, 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. Management determines the fair value of a reporting unit based upon the present value of estimated future cash flows. Determining the fair value of a reporting unit involves judgment and the use of significant estimates and assumptions by management, which include assumptions regarding the revenue growth rates and operating profit margins used to calculate estimated future cash flows, the risk-adjusted discount rates, business trends and market conditions.2023.
The principal considerations for our determination that performing procedures relating toWe identified the goodwill impairment assessmentevaluation of the CIS reporting units isrealizability of certain domestic deferred tax assets, specifically certain federal carryforward assets, as a critical audit mattermatter. 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 there was significant judgment by management when determining the fair valueprimary 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 reporting units. This in turn ledrealizability of the federal carryforward assets, including controls related to a high degreethe projections of auditor judgment, subjectivity, and effort in performing procedures and evaluating evidence relating to management’s estimated future cash flows and significant assumptions, including revenue growth rates, operating profit margins,taxable income and the risk-adjusted discount rates. In addition,application of tax laws to utilize the audit effort involvedfederal carryforward assets. We evaluated the usereasonableness of professionals with specialized skillmanagement’s projections of future taxable income, including positive and knowledge to assist in performing these procedures and evaluatingnegative evidence used, by comparing the audit evidence obtained.projections to:
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidatedrecent financial statements. These procedures included testing the effectiveness of controls relating to the goodwill impairment assessment, including controls over the estimated fair valueprofitability trends of the CIS reporting units. These procedures also included, among others, testing management’s process for developing the fair value estimates; evaluating the appropriateness of the discounted cash flow model; testing the completeness, accuracy, and relevance of underlying data used in the model; and evaluating the significant assumptions used by management including revenue growth rates, operating profit margins, and risk-adjusted discount rates. Evaluating management’s assumptions related to revenue growth rates and operating profit margins involved evaluating whether the assumptions used were reasonable considering (i) the current and past performance of the reporting units, (ii) the consistency with external market and Company industry data and (iii) whether these assumptions were consistent with economic trends, and evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used
We assessed the Company’s ability to assist in the evaluationproject future earnings based on comparisons of the Company’s discounted cash flow modelprevious annual projections to actual results. We performed a sensitivity analysis over the amount and certain significant assumptions, includingtiming of future taxable income to assess the risk-adjusted discount rates.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/ PricewaterhouseCoopersKPMG LLP Milwaukee, Wisconsin
May 29, 2020
We have served as the Company’s auditor since 1935.2022. Milwaukee, Wisconsin May 25, 2023
Report of Independent Registered Public Accounting Firm
77To 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 Company'sCompany’s disclosure controls and procedures were effective, at a reasonable assurance level, as of March 31, 2020.2023.
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, assessed the effectiveness of the Company’s internal control over financial reporting as of March 31, 2020.2023. In making its assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in “Internal Control—Integrated Framework (2013).” Based upon this assessment, management concluded that, as of March 31, 2020,2023, 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, 20202023 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 20202023 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 20202023 Annual Meeting of Shareholders to be held on July 23, 2020August 17, 2023 (the “2020“2023 Annual Meeting Proxy Statement”) under the caption “Election of Directors.”
Executive Officers. The information in response to this Item appears under the caption "Information“Information about our Executive Officers"Officers” in this Form 10-K.
Code of Conduct. The Company incorporates by reference the information appearing in the 20202023 Annual Meeting Proxy Statement under the caption “Corporate Governance – Code of Conduct.” The Company'sCompany’s Code of 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 20202023 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 20202023 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 20202023 Annual Meeting Proxy Statement under the caption “Shareholder Nominations and Recommendations of Director Candidates.”
Delinquent Section 16(a) Reports. Reports The Company incorporates by reference the information appearing in the 20202023 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 20202023 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 20202023 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 20202023 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 20202023 Annual Meeting Proxy Statement under the caption “Independent Auditor’sAuditors’ Fees for Fiscal 20202023 and 2019.2022.”
PART IV
| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. |
(a) | (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, 2020, 20192023, 2022 and 20182021 | 42 | Consolidated Statements of Comprehensive Income for the years ended March 31, 2020, 20192023, 2022 and 20182021 | 43 | Consolidated Balance Sheets at March 31, 20202023 and 20192022 | 44 | Consolidated Statements of Cash Flows for the years ended March 31, 2020, 20192023, 2022 and 20182021 | 45 | Consolidated Statements of Shareholders'Shareholders’ Equity for the years ended March 31, 2020, 20192023, 2022 and 20182021 | 46 | | Notes to Consolidated Financial Statements | 47-7547-81 | Report of Independent Registered Public Accounting Firm (KPMG PCAOB ID 185) | 76-7782
| 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, 2020, 20192023, 2022 and 20182021 | 8187 | | | | 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. | 82-8588-91 | | | | 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)
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS For the years ended March 31, 2020, 20192023, 2022 and 20182021 (In millions)
| | | | | Additions | | | | | | Description | | Balance at Beginning of Period | | | Charged (Benefit) to Costs and Expenses | | | Charged to Other Accounts | | | Balance at End of Period | | | | | | | | | | | | | | | | | 2020: Valuation Allowance for Deferred Tax Assets | | $ | 43.4 | | | $ | 4.5 | | | $ | (1.0 | )(a) | | $ | 46.9 | | | | | | | | | | | | | | | | | | | | | 2019: Valuation Allowance for Deferred Tax Assets | | $ | 48.9 | | | $ | (1.6 | ) | | $ | (3.9 | )(a) | | $ | 43.4 | | | | | | | | | | | | | | | | | | | | | 2018: Valuation Allowance for Deferred Tax Assets | | $ | 49.6 | | | $ | (6.7 | ) | | $ | 6.0 | (a) | | $ | 48.9 | |
| | | | | 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. The fiscal 2018 amounts also included increases associated with the Company’s acquisition of Luvata HTS. |
MODINE MANUFACTURING COMPANY (THE “REGISTRANT”) (COMMISSION FILE NO. 1-1373)
TO 20202023 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 October 24, 2019January 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.hereto | | | | | | | | | | | | | 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 (“August 12, 2010 8-K”) | | | | | | | | | | | | 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 8-K | | | | | | | | | | | | | 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 | | | | | | | | | | | | 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 | | | | | | | | | | | | 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 | | |
| | 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”) | | | | | | | | | | | | 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 | | | | | | | | | | | | 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”) | | | | | | | | | | | | | Credit FacilitySecond Amendment to Second Amended and Restated Note Purchase and Private Shelf Agreement among Modine Holding GmbH, Modine Europe GmbH and Deutsche Bank AG dated as of April 27, 2012.May 19, 2020. | | Exhibit 4.104.2 to Registrant’s Form 10-K for the fiscal year ended March 31, 2012May 19, 2020 8-K | | | | | | | | | |
| | ThirdAmendment No. 2 to Fourth Amended and Restated Credit Agreement dated as of November 15, 2016.May 18, 2021. | | Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated November 15, 2016May 18, 2021 (“November 15, 2016May 18, 2021 8-K”) | | | | | | | | | | | | | Third Amendment to Second Amended and Restated Note Purchase and Private Shelf Agreement dated as of November 15, 2016.May 18, 2021. | | Exhibit 4.2 to November 15, 2016 May 18, 2021 8-K | | | | | | | | | | | | | DescriptionFifth Amended and Restated Credit Agreement dated as of October 12, 2022. | | Exhibit 4.1 to Registrant’s securitiesCurrent Report on Form 8-K dated October 12, 2022 | | | | X | | | | | | | | | | | Fourth Amendment to Second Amended and Restated CreditNote Purchase and Private Shelf Agreement dated as of June 28, 2019.November 21, 2022. | | Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated June 28, 201910-Q for the third quarter ended December 31, 2022 | | | | | | | | | | | | | Second Amended and Restated Note Purchase and Private Shelf Agreement datedDirector Emeritus Retirement Plan effective April 1, 1992 (and frozen as of August 6, 2019July 1, 2000). | | Exhibit 4.110(a) to Registrant’s Form 10-Q10-K for the third quarterfiscal year ended DecemberMarch 31, 20192002 | | | | | | | | | | | | | First Amendment to Second AmendedForm of Change in Control and Restated Note PurchaseTermination Agreement (amended and Private Shelf Agreement dated as of January 31, 2020restated) between the Registrant and officers other than Neil Brinker. | | Exhibit 4.210(f) to Registrant’s Form 10-Q10-K for the third quarterfiscal year ended DecemberMarch 31, 20192004 | | | | | | | | | | | | | Amendment No. 1 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”) | | | | | | | | | | 4.19Executive Supplemental Retirement Plan (as amended). | | 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 | | | | | | | | | | | | Director Emeritus Retirement Plan effective April 1, 1992 (and frozen as of July 1, 2000). | | Exhibit 10(a)10(f) to Registrant’s Form 10-K for the fiscal year ended March 31, 2002 | | | | | | | | | | | | 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 | | |
| | 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 | | | | | | | | | | | | | Form of Change in Control and Termination Agreement (amended and restated) between the Registrant and officers other than Thomas A. Burke.Deferred Compensation Plan (as amended). | | Exhibit 10(f)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 10-K for the year ended March 31, 20048-K dated July 17, 2014 | | | | | | | | | | | | | Executive Supplemental Retirement Plan (as amended).Form of Fiscal 2023 Performance Cash Award Agreement. | | Exhibit 10(f)10.1 to Registrant'sthe Registrant’s Form 10-K10-Q for the fiscal yearfirst quarter ended March 31, 2000June 30, 2022 (“June 30, 2022 10-Q”) | | | | | | | | | | | | | Deferred Compensation Plan (as amended).Form of Fiscal 2023 Incentive Stock Option Award Agreement. | | Exhibit 10(y)10.2 to 2003 10-KJune 30, 2022 10-Q | | | | | | | | | | | | | 2008 Incentive Compensation Plan
(Amended and Restated effective May 7, 2014).Form of Fiscal 2023 Non-Qualified Stock Option Award Agreement..
| | Exhibit 10.110.3 to Registrant's Current Report on Form 8-K dated July 17, 2014June 30, 2022 10-Q | | | | | | | | | | | | | Form of Fiscal 2020 Performance2023 Restricted Stock Unit Award Agreement.Agreement.. | | Exhibit 10.110.4 to Registrant’s Form 10-Q for the quarter ended June 30, 20192022 10-Q | | | | | | | | | | | | | Form of Fiscal 2020 Incentive2023 Modine Non-Employee Director Restricted Stock OptionUnit Award Agreement.Agreement with Deferral. | | Exhibit 10.210.6 to Registrant’s Form 10-Q for the quarter ended June 30, 20192022 10-Q | | | | | | | | | | | | | Form of Fiscal 20202023 Modine Non-Employee Director Restricted Stock Unit Award Agreement.Agreement without Deferral. | | Exhibit 10.310.7 to Registrant’s Form 10-Q for the quarter ended June 30, 20192022 10-Q | | | | | | | | | | | | | FormChange in Control Agreement dated as of Fiscal 2020 Non-Qualified Stock Option Award Agreement.June 4, 2021, by and between Modine Manufacturing Company and Neil D. Brinker. | | Exhibit 10.410.1 to Registrant’s Current Report on Form 10-Q for the quarter ended8-K dated June 30, 20194, 2021 | | | | | | | | | | | | | 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.Neil Brinker. | | Exhibit 10.17 to Registrant'sRegistrant’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 | | | | | | | | | | | | | FormTransition and Separation Agreement between Thomas A. Burke and Modine Manufacturing Company effective as of Fiscal 2020 Non-Employee Director Restricted Stock Unit Award.August 4, 2020. | | Exhibit 10.110.6 to the Registrant’s Form 10-Q for the second quarter ended September 30, 20192020 | | | | | | | | | | | | | Separation[Corrected] Offer Letter for Dennis P. Appel dated as of September 26, 2019.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, 20192020 | | | | | | | | | | | | | Release Agreement executed as of October 17, 2019, between Modine Manufacturing Company2020 Incentive Compensation Plan (Amended and Dennis P. Appel.Restated effective July 21, 2022). | | Exhibit 10.210.1 to the Registrant’s Current Report on Form 10-Q for the quarter ended December 31, 2019 8-K dated July 21, 2022 | | | | | | | | | | | | | EmploymentForm of Retention Agreement forLetter, effective August 31, 2020, between the Company and each of Michael B. Lucareli, Scott Wollenberg, dated as of July 26, 2019.L. Bowser and Sylvia A. Stein. | | Exhibit 10.510.1 to the Registrant’s Current Report on Form 10-Q for the quarter ended June 30, 20198-K dated August 31, 2020 | | | | | | | | | | |
| | ListOffer Letter dated as of subsidiaries ofJuly 2, 2021, by and between the Registrant.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”) | | | | X | | | | | | | | | | | ConsentOffer Letter dated as of independent registered public accounting firm.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 Thomas A. Burke,Neil D. Brinker, President and Chief Executive Officer. | | | | X | | | | | | | | | | | Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Finance and Chief Financial Officer. | | | | X | | | | | | | | | | | Section 1350 Certification of Thomas A. Burke,Neil D. Brinker, President and Chief Executive Officer. | | | | X | | | | | | | | | | | Section 1350 Certification of Michael B. Lucareli, Executive Vice President, Finance and Chief Financial Officer. | | | | X | | | | | | | | | 101.INS | | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). | | | | X | | | | | | | | | 101.SCH | | Inline XBRL Taxonomy Extension Schema Document.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.LAB101.PRE | | Inline XBRL Taxonomy Extension LabelPresentation Linkbase Document. | | | | X | | | | | | | | | 101.PRE104 | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | | | | X | | | | | | | | 104 | | Cover Page Interactive Data Filepage interactive data file (formatted as inline XBRL and contained in ExhibitExhibits 101). | | | | 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. |
** | 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 29, 202025, 2023 | Modine Manufacturing Company | | | | | | By: | /s/ Thomas A. BurkeNeil D. Brinker | | | | Thomas A. Burke, Neil D. Brinker, President
| | | and Chief Executive Officer | | | | (Principal (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 | | Thomas A. BurkeNeil D. Brinker | May 29, 202025, 2023 | President, Chief Executive Officer and Director | | (Principal Executive Officer) | | | | | | /s/ Michael B. Lucareli | | Michael B. Lucareli | May 29, 202025, 2023 | Executive Vice President, Finance and Chief Financial Officer | | (Principal Financial and Accounting Officer) | | | | | | /s/ Marsha C. Williams | | Marsha C. Williams | May 29, 202025, 2023 | Director | | | | /s/ David J. Anderson | | David J. Anderson | May 29, 2020 | DirectorChairperson, Board of Directors | | | | | | /s/ Eric D. Ashleman | | Eric D. Ashleman | May 29, 202025, 2023 | Director | |
| | | /s/ Suresh V. Garimella |
| Suresh V. Garimella | May 25, 2023 | Director | | | | | /s/ David G. BillsKatherine C. Harper | | David G. BillsKatherine C. Harper | | Director | | | | /s/ Charles P. Cooley | | Charles P. Cooley | May 29, 2020 | Director | | | | /s/ Suresh V. Garimella | | Suresh V. Garimella | May 29, 2020 | Director | | | | | | /s/ Larry O. Moore |
| Larry O. Moore | May 29, 202025, 2023 | Director | | | | | | /s/ Christopher W. Patterson |
| Christopher W. Patterson | May 29, 202025, 2023 | Director | | | | | /s/ David J. Wilson | | David J. Wilson | May 25, 2023 | Director | | | | | /s/ William A. Wulfsohn |
| William A. Wulfsohn | May 25, 2023 | Director | | | | | | /s/ Christine Y. Yan |
| Christine Y. Yan | May 29, 202025, 2023 | Director | |
s | | | % of sales | | |
| | Years ended March 31, | | | Operating income: | | 2020 | | | 2019 | | | 2018 | | | VTS | | $ | 27.6 | | | $ | 64.8 | | | $ | 84.2 | | | CIS | | | 32.9 | | | | 53.4 | | | | 28.5 | | | BHVAC | | | 36.4 | | | | 26.9 | | | | 20.3 | | | Segment total | | | 96.9 | | | | 145.1 | | | | 133.0 | | | Corporate and eliminations (a) | | | (59.0 | ) | | | (35.4 | ) | | | (40.8 | ) | | Operating income | | $ | 37.9 | | | $ | 109.7 | | | $ | 92.2 | |
| | 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. During fiscal 2020 and 2019, the Company recorded $39.2 million and $7.1 million, respectively, of costs directly associated with its review of strategic alternatives for the VTS segment’s automotive business, including costs to separate and prepare the business for potential sale. |
The following is a summary of totalsegment assets, by segment:comprised entirely of trade accounts receivable and inventories, and other assets:
| | March 31, | | | | | 2020 | | | 2019 | | | VTS | | $ | 683.9 | | | $ | 749.9 | | | CIS | | | 617.7 | | | | 604.2 | | | BHVAC | | | 102.3 | | | | 89.4 | | | Corporate and eliminations | | | 132.2 | | | | 94.5 | | | Total assets | | $ | 1,536.1 | | | $ | 1,538.0 | |
| | 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 | |
| (a) | Represents cash and cash equivalents, other current assets, property plant and equipment, intangible assets, goodwill, deferred income taxes, and other noncurrent assets for the 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: | | 2020 | | | 2019 | | | 2018 | | | VTS | | $ | 53.2 | | | $ | 56.2 | | | $ | 61.4 | | | CIS | | | 15.0 | | | | 16.4 | | | | 9.0 | | | BHVAC | | | 3.1 | | | | 1.3 | | | | 0.6 | | | Total capital expenditures | | $ | 71.3 | | | $ | 73.9 | | | $ | 71.0 | |
| | 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: | | 2020 | | | 2019 | | | 2018 | | | VTS | | $ | 49.7 | | | $ | 49.5 | | | $ | 48.2 | | | CIS | | | 24.0 | | | | 23.9 | | | | 24.3 | | | BHVAC | | | 3.4 | | | | 3.5 | | | | 4.2 | | | Total depreciation and amortization expense | | $ | 77.1 | | | $ | 76.9 | | | $ | 76.7 | |
| | 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 | |
| (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. |
The following is a summary of net sales by geographicalgeographic area, based upon the location of the selling unit:
| | Years ended March 31, | | | | | 2020 | | | 2019 | | | 2018 | | | United States | | $ | 941.9 | | | $ | 1,032.3 | | | $ | 911.4 | | | Italy | | | 187.4 | | | | 217.3 | | | | 211.5 | | | China | | | 168.5 | | | | 172.1 | | | | 156.0 | | | Hungary | | | 142.4 | | | | 165.6 | | | | 153.9 | | | Germany | | | 97.5 | | | | 123.1 | | | | 132.6 | | | Austria | | | 93.0 | | | | 116.2 | | | | 151.7 | | | Other | | | 344.8 | | | | 386.1 | | | | 386.0 | | | Net sales | | $ | 1,975.5 | | | $ | 2,212.7 | | | $ | 2,103.1 | |
The following is a summary of property, plant and equipment by geographical area:
| | March 31, | | | | | 2020 | | | 2019 | | | United States | | $ | 114.6 | | | $ | 117.7 | | | China | | | 56.8 | | | | 57.6 | | | Hungary | | | 55.4 | | | | 55.3 | | | Mexico | | | 50.0 | | | | 56.3 | | | Italy | | | 49.8 | | | | 52.4 | | | Germany | | | 27.0 | | | | 32.8 | | | Austria | | | 26.0 | | | | 36.9 | | | Other | | | 68.4 | | | | 75.7 | | | Total property, plant and equipment | | $ | 448.0 | | | $ | 484.7 | |
The following is a summary of net sales by end market:
| | Years ended March 31, | | | | | 2020 | | | 2019 | | | 2018 | | | Commercial HVAC&R | | $ | 639.7 | | | $ | 674.0 | | | $ | 648.3 | | | Automotive | | | 508.8 | | | | 542.8 | | | | 526.0 | | | Commercial vehicle | | | 323.7 | | | | 387.6 | | | | 381.7 | | | Off-highway | | | 253.9 | | | | 314.1 | | | | 271.2 | | | Data center cooling | | | 150.2 | | | | 187.0 | | | | 137.6 | | | Industrial cooling | | | 43.5 | | | | 47.8 | | | | 67.6 | | | Other | | | 55.7 | | | | 59.4 | | | | 70.7 | | | Net sales | | $ | 1,975.5 | | | $ | 2,212.7 | | | $ | 2,103.1 | |
| | 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 | |
Note 23: Quarterly Financial Data (Unaudited)
The following is a summary of quarterly financial data:property, plant and equipment by geographic area:
| | Fiscal 2020 quarters ended | | | | | | | | June | | | Sept. | | | Dec. | | | March | | | Fiscal 2020 | | | | | | | | | | | | | | | | | | | | Net sales | | $ | 529.0 | | | $ | 500.2 | | | $ | 473.4 | | | $ | 472.9 | | | $ | 1,975.5 | | | Gross profit | | | 83.4 | | | | 75.7 | | | | 73.5 | | | | 74.9 | | | | 307.5 | | | Net earnings (loss) (a) | | | 8.2 | | | | (4.8 | ) | | | 1.0 | | | | (6.4 | ) | | | (2.0 | ) | | Net earnings (loss) attributable to Modine (a) | | | 8.0 | | | | (4.7 | ) | | | 1.2 | | | | (6.7 | ) | | | (2.2 | ) | | Net earnings (loss) per share attributable to Modine shareholders: | | | | | | | | | | | | | | | | | | | | | | Basic | | $ | 0.16 | | | $ | (0.09 | ) | | $ | 0.02 | | | $ | (0.13 | ) | | $ | (0.04 | ) | | Diluted | | | 0.16 | | | | (0.09 | ) | | | 0.02 | | | | (0.13 | ) | | | (0.04 | ) |
| | 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 | |
| | Fiscal 2019 quarters ended | | | | | | | | June | | | Sept. | | | Dec. | | | March | | | Fiscal 2019 | | | | | | | | | | | | | | | | | | | | Net sales | | $ | 566.1 | | | $ | 548.9 | | | $ | 541.0 | | | $ | 556.7 | | | $ | 2,212.7 | | | Gross profit | | | 94.3 | | | | 87.9 | | | | 91.7 | | | | 91.6 | | | | 365.5 | | | Net earnings (b) | | | 22.5 | | | | 38.7 | | | | 18.3 | | | | 6.4 | | | | 85.9 | | | Net earnings attributable to Modine (b) | | | 22.0 | | | | 38.5 | | | | 18.0 | | | | 6.3 | | | | 84.8 | | | Net earnings per share attributable to Modine shareholders: | | | | | | | | | | | | | | | | | | | | | | Basic | | $ | 0.43 | | | $ | 0.76 | | | $ | 0.36 | | | $ | 0.12 | | | $ | 1.67 | | | Diluted | | | 0.43 | | | | 0.75 | | | | 0.35 | | | | 0.12 | | | | 1.65 | |
| (a) | During fiscal 2020, restructuring expenses totaled $1.8 million, $2.3 million, $2.6 million, and $5.5 million for the quarters ended June 30, 2019, September 30, 2019, December 31, 2019, and March 31, 2020, respectively (see Note 5). During the third quarter of fiscal 2020, the Company sold a previously-closed manufacturing facility in Germany and, as a result, recorded a gain of $0.8 million (see Note 1). During the fourth quarter of fiscal 2020, the Company recorded asset impairment charges totaling $8.6 million related to long-lived assets and goodwill (see Note 5 and Note 14). During fiscal 2020, costs associated with the Company’s review of strategic alternatives for the VTS segment’s automotive business totaled $8.3 million, $11.9 million, $14.0 million, and $5.0 million for the quarters ended June 30, 2019, September 30, 2019, December 31, 2019, and March 31, 2020, respectively. During fiscal 2020, the Company adjusted its valuation allowances on deferred tax assets in the U.S and in Brazil. As a result, the Company recorded net income tax charges totaling $3.0 million and $4.1 million in the third and fourth quarters, respectively. Also during fiscal 2020, the Company recorded a net income tax charge totaling $2.9 million, $2.7 million of which was recorded in the third quarter, as a result of legal entity restructuring completed in preparation of a potential sale of the automotive business (see Note 7).
|
| (b) | During fiscal 2019, restructuring expenses totaled $0.2 million, $0.5 million, and $8.9 million for the quarters ended June 30, 2018, December 31, 2018, and March 31, 2019, respectively (see Note 5). During the second quarter of fiscal 2019, the Company sold its South African business within the BHVAC segment and, as a result, recorded a loss of $1.7 million (see Note 1). During the third quarter of fiscal 2019, the Company recorded a $0.4 million impairment charge related to a manufacturing facility in Austria (see Note 5). During the third and fourth quarter of fiscal 2019, the Company incurred $1.2 million and $5.9 million of costs associated with its review of strategic alternatives for the VTS segment’s automotive business. The Company’s income tax benefit for fiscal 2019 includes net benefits of $24.4 million and net charges of $2.2 million in the second and third quarters, respectively, related to the Tax Act and the recognition of foreign tax credits (see Note 7). During fiscal 2019, the Company adjusted its valuation allowances on deferred tax assets related to two separate subsidiaries in China and, as a result, recorded a $2.0 million income tax benefit and a $1.0 million income tax charge in the first and second quarters, respectively (see Note 7). |
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors and Shareholders of
Modine Manufacturing CompanyCompany:
Opinions on the Consolidated Financial Statements and Internal Control overOver Financial Reporting
We have audited the accompanying consolidated financial statements, including the related notes, as listed in the index appearing under Item 15(a)(1), and the financial statement schedule listed in the index appearing under Item 15(a)(2),balance sheet of Modine Manufacturing Company and its subsidiaries (the “Company”)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, referred to as the “consolidatedconsolidated financial statements”)statements). We also have audited the Company'sCompany’s internal control over financial reporting as of March 31, 2020,2023, based on criteria established in Internal Control -– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 31, 2020 and 2019,2023, and the results of its operations and its cash flows for each of the three years in the periodyear ended March 31, 20202023, in conformity with accounting principlesU.S. generally accepted in the United States of America.accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2020,2023 based on criteria established in Internal Control -– Integrated Framework (2013) issued by the COSO.
Changes in Accounting Principles
As discussed in Note 1 toCommittee of Sponsoring Organizations of the consolidated financial statements, the Company changed the manner in which it accounts for leases in fiscal 2020 and the manner in which it accounts for intra-entity transfers of assets other than inventory in fiscal 2019.Treadway Commission.
Basis for Opinions
The Company'sCompany’s management is responsible for these consolidated financial statements, 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 Over Financial Reporting appearing under Item 9A.Reporting. Our responsibility is to express opinionsan opinion on the Company’s consolidated financial statements and an opinion on the Company'sCompany’s internal control over financial reporting 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 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 regarding the amounts and disclosures in the consolidated financial statements. Our auditsaudit 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. 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.
Definition and Limitations of Internal Control overOver 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 MattersMatter
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 (i)that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (ii)(2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit mattersmatter 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.
Goodwill Impairment Assessment – CIS Reporting UnitsRealizability of certain domestic deferred tax assets
As describeddiscussed in Notes 1 and 148 to the consolidated financial statements, the Company’s consolidated goodwill balance was $166.1 millionCompany 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, 2020, and2023 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 goodwill associated with the CIS reporting units was $152.6 million. Management assesses goodwill for impairment annually as ofyear ended March 31, of each year, 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. Management determines the fair value of a reporting unit based upon the present value of estimated future cash flows. Determining the fair value of a reporting unit involves judgment and the use of significant estimates and assumptions by management, which include assumptions regarding the revenue growth rates and operating profit margins used to calculate estimated future cash flows, the risk-adjusted discount rates, business trends and market conditions.2023.
The principal considerations for our determination that performing procedures relating toWe identified the goodwill impairment assessmentevaluation of the CIS reporting units isrealizability of certain domestic deferred tax assets, specifically certain federal carryforward assets, as a critical audit mattermatter. 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 there was significant judgment by management when determining the fair valueprimary 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 reporting units. This in turn ledrealizability of the federal carryforward assets, including controls related to a high degreethe projections of auditor judgment, subjectivity, and effort in performing procedures and evaluating evidence relating to management’s estimated future cash flows and significant assumptions, including revenue growth rates, operating profit margins,taxable income and the risk-adjusted discount rates. In addition,application of tax laws to utilize the audit effort involvedfederal carryforward assets. We evaluated the usereasonableness of professionals with specialized skillmanagement’s projections of future taxable income, including positive and knowledge to assist in performing these procedures and evaluatingnegative evidence used, by comparing the audit evidence obtained.projections to:
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidatedrecent financial statements. These procedures included testing the effectiveness of controls relating to the goodwill impairment assessment, including controls over the estimated fair valueprofitability trends of the CIS reporting units. These procedures also included, among others, testing management’s process for developing the fair value estimates; evaluating the appropriateness of the discounted cash flow model; testing the completeness, accuracy, and relevance of underlying data used in the model; and evaluating the significant assumptions used by management including revenue growth rates, operating profit margins, and risk-adjusted discount rates. Evaluating management’s assumptions related to revenue growth rates and operating profit margins involved evaluating whether the assumptions used were reasonable considering (i) the current and past performance of the reporting units, (ii) the consistency with external market and Company industry data and (iii) whether these assumptions were consistent with economic trends, and evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used
We assessed the Company’s ability to assist in the evaluationproject future earnings based on comparisons of the Company’s discounted cash flow modelprevious annual projections to actual results. We performed a sensitivity analysis over the amount and certain significant assumptions, includingtiming of future taxable income to assess the risk-adjusted discount rates.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/ PricewaterhouseCoopersKPMG LLP Milwaukee, Wisconsin
May 29, 2020
We have served as the Company’s auditor since 1935.2022. Milwaukee, Wisconsin May 25, 2023
Report of Independent Registered Public Accounting Firm
77To 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 Company'sCompany’s disclosure controls and procedures were effective, at a reasonable assurance level, as of March 31, 2020.2023.
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, assessed the effectiveness of the Company’s internal control over financial reporting as of March 31, 2020.2023. In making its assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in “Internal Control—Integrated Framework (2013).” Based upon this assessment, management concluded that, as of March 31, 2020,2023, 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, 20202023 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 20202023 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 20202023 Annual Meeting of Shareholders to be held on July 23, 2020August 17, 2023 (the “2020“2023 Annual Meeting Proxy Statement”) under the caption “Election of Directors.”
Executive Officers. The information in response to this Item appears under the caption "Information“Information about our Executive Officers"Officers” in this Form 10-K.
Code of Conduct. The Company incorporates by reference the information appearing in the 20202023 Annual Meeting Proxy Statement under the caption “Corporate Governance – Code of Conduct.” The Company'sCompany’s Code of 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 20202023 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 20202023 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 20202023 Annual Meeting Proxy Statement under the caption “Shareholder Nominations and Recommendations of Director Candidates.”
Delinquent Section 16(a) Reports. Reports The Company incorporates by reference the information appearing in the 20202023 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 20202023 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 20202023 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 20202023 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 20202023 Annual Meeting Proxy Statement under the caption “Independent Auditor’sAuditors’ Fees for Fiscal 20202023 and 2019.2022.”
PART IV
| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. |
(a) | (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, 2020, 20192023, 2022 and 20182021 | 42 | Consolidated Statements of Comprehensive Income for the years ended March 31, 2020, 20192023, 2022 and 20182021 | 43 | Consolidated Balance Sheets at March 31, 20202023 and 20192022 | 44 | Consolidated Statements of Cash Flows for the years ended March 31, 2020, 20192023, 2022 and 20182021 | 45 | Consolidated Statements of Shareholders'Shareholders’ Equity for the years ended March 31, 2020, 20192023, 2022 and 20182021 | 46 | | Notes to Consolidated Financial Statements | 47-7547-81 | Report of Independent Registered Public Accounting Firm (KPMG PCAOB ID 185) | 76-7782
| 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, 2020, 20192023, 2022 and 20182021 | 8187 | | | | 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. | 82-8588-91 | | | | 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)
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS For the years ended March 31, 2020, 20192023, 2022 and 20182021 (In millions)
| | | | | Additions | | | | | | Description | | Balance at Beginning of Period | | | Charged (Benefit) to Costs and Expenses | | | Charged to Other Accounts | | | Balance at End of Period | | | | | | | | | | | | | | | | | 2020: Valuation Allowance for Deferred Tax Assets | | $ | 43.4 | | | $ | 4.5 | | | $ | (1.0 | )(a) | | $ | 46.9 | | | | | | | | | | | | | | | | | | | | | 2019: Valuation Allowance for Deferred Tax Assets | | $ | 48.9 | | | $ | (1.6 | ) | | $ | (3.9 | )(a) | | $ | 43.4 | | | | | | | | | | | | | | | | | | | | | 2018: Valuation Allowance for Deferred Tax Assets | | $ | 49.6 | | | $ | (6.7 | ) | | $ | 6.0 | (a) | | $ | 48.9 | |
| | | | | 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. The fiscal 2018 amounts also included increases associated with the Company’s acquisition of Luvata HTS. |
MODINE MANUFACTURING COMPANY (THE “REGISTRANT”) (COMMISSION FILE NO. 1-1373)
TO 20202023 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 October 24, 2019January 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.hereto | | | | | | | | | | | | | 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 (“August 12, 2010 8-K”) | | | | | | | | | | | | 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 8-K | | | | | | | | | | | | | 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 | | | | | | | | | | | | 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 | | | | | | | | | | | | 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 | | |
| | 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”) | | | | | | | | | | | | 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 | | | | | | | | | | | | 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”) | | | | | | | | | | | | | Credit FacilitySecond Amendment to Second Amended and Restated Note Purchase and Private Shelf Agreement among Modine Holding GmbH, Modine Europe GmbH and Deutsche Bank AG dated as of April 27, 2012.May 19, 2020. | | Exhibit 4.104.2 to Registrant’s Form 10-K for the fiscal year ended March 31, 2012May 19, 2020 8-K | | | | | | | | | |
| | ThirdAmendment No. 2 to Fourth Amended and Restated Credit Agreement dated as of November 15, 2016.May 18, 2021. | | Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated November 15, 2016May 18, 2021 (“November 15, 2016May 18, 2021 8-K”) | | | | | | | | | | | | | Third Amendment to Second Amended and Restated Note Purchase and Private Shelf Agreement dated as of November 15, 2016.May 18, 2021. | | Exhibit 4.2 to November 15, 2016 May 18, 2021 8-K | | | | | | | | | | | | | DescriptionFifth Amended and Restated Credit Agreement dated as of October 12, 2022. | | Exhibit 4.1 to Registrant’s securitiesCurrent Report on Form 8-K dated October 12, 2022 | | | | X | | | | | | | | | | | Fourth Amendment to Second Amended and Restated CreditNote Purchase and Private Shelf Agreement dated as of June 28, 2019.November 21, 2022. | | Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated June 28, 201910-Q for the third quarter ended December 31, 2022 | | | | | | | | | | | | | Second Amended and Restated Note Purchase and Private Shelf Agreement datedDirector Emeritus Retirement Plan effective April 1, 1992 (and frozen as of August 6, 2019July 1, 2000). | | Exhibit 4.110(a) to Registrant’s Form 10-Q10-K for the third quarterfiscal year ended DecemberMarch 31, 20192002 | | | | | | | | | | | | | First Amendment to Second AmendedForm of Change in Control and Restated Note PurchaseTermination Agreement (amended and Private Shelf Agreement dated as of January 31, 2020restated) between the Registrant and officers other than Neil Brinker. | | Exhibit 4.210(f) to Registrant’s Form 10-Q10-K for the third quarterfiscal year ended DecemberMarch 31, 20192004 | | | | | | | | | | | | | Amendment No. 1 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”) | | | | | | | | | | 4.19Executive Supplemental Retirement Plan (as amended). | | 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 | | | | | | | | | | | | Director Emeritus Retirement Plan effective April 1, 1992 (and frozen as of July 1, 2000). | | Exhibit 10(a)10(f) to Registrant’s Form 10-K for the fiscal year ended March 31, 2002 | | | | | | | | | | | | 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 | | |
| | 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 | | | | | | | | | | | | | Form of Change in Control and Termination Agreement (amended and restated) between the Registrant and officers other than Thomas A. Burke.Deferred Compensation Plan (as amended). | | Exhibit 10(f)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 10-K for the year ended March 31, 20048-K dated July 17, 2014 | | | | | | | | | | | | | Executive Supplemental Retirement Plan (as amended).Form of Fiscal 2023 Performance Cash Award Agreement. | | Exhibit 10(f)10.1 to Registrant'sthe Registrant’s Form 10-K10-Q for the fiscal yearfirst quarter ended March 31, 2000June 30, 2022 (“June 30, 2022 10-Q”) | | | | | | | | | | | | | Deferred Compensation Plan (as amended).Form of Fiscal 2023 Incentive Stock Option Award Agreement. | | Exhibit 10(y)10.2 to 2003 10-KJune 30, 2022 10-Q | | | | | | | | | | | | | 2008 Incentive Compensation Plan
(Amended and Restated effective May 7, 2014).Form of Fiscal 2023 Non-Qualified Stock Option Award Agreement..
| | Exhibit 10.110.3 to Registrant's Current Report on Form 8-K dated July 17, 2014June 30, 2022 10-Q | | | | | | | | | | | | | Form of Fiscal 2020 Performance2023 Restricted Stock Unit Award Agreement.Agreement.. | | Exhibit 10.110.4 to Registrant’s Form 10-Q for the quarter ended June 30, 20192022 10-Q | | | | | | | | | | | | | Form of Fiscal 2020 Incentive2023 Modine Non-Employee Director Restricted Stock OptionUnit Award Agreement.Agreement with Deferral. | | Exhibit 10.210.6 to Registrant’s Form 10-Q for the quarter ended June 30, 20192022 10-Q | | | | | | | | | | | | | Form of Fiscal 20202023 Modine Non-Employee Director Restricted Stock Unit Award Agreement.Agreement without Deferral. | | Exhibit 10.310.7 to Registrant’s Form 10-Q for the quarter ended June 30, 20192022 10-Q | | | | | | | | | | | | | FormChange in Control Agreement dated as of Fiscal 2020 Non-Qualified Stock Option Award Agreement.June 4, 2021, by and between Modine Manufacturing Company and Neil D. Brinker. | | Exhibit 10.410.1 to Registrant’s Current Report on Form 10-Q for the quarter ended8-K dated June 30, 20194, 2021 | | | | | | | | | | | | | 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.Neil Brinker. | | Exhibit 10.17 to Registrant'sRegistrant’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 | | | | | | | | | | | | | FormTransition and Separation Agreement between Thomas A. Burke and Modine Manufacturing Company effective as of Fiscal 2020 Non-Employee Director Restricted Stock Unit Award.August 4, 2020. | | Exhibit 10.110.6 to the Registrant’s Form 10-Q for the second quarter ended September 30, 20192020 | | | | | | | | | | | | | Separation[Corrected] Offer Letter for Dennis P. Appel dated as of September 26, 2019.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, 20192020 | | | | | | | | | | | | | Release Agreement executed as of October 17, 2019, between Modine Manufacturing Company2020 Incentive Compensation Plan (Amended and Dennis P. Appel.Restated effective July 21, 2022). | | Exhibit 10.210.1 to the Registrant’s Current Report on Form 10-Q for the quarter ended December 31, 2019 8-K dated July 21, 2022 | | | | | | | | | | | | | EmploymentForm of Retention Agreement forLetter, effective August 31, 2020, between the Company and each of Michael B. Lucareli, Scott Wollenberg, dated as of July 26, 2019.L. Bowser and Sylvia A. Stein. | | Exhibit 10.510.1 to the Registrant’s Current Report on Form 10-Q for the quarter ended June 30, 20198-K dated August 31, 2020 | | | | | | | | | | |
| | ListOffer Letter dated as of subsidiaries ofJuly 2, 2021, by and between the Registrant.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”) | | | | X | | | | | | | | | | | ConsentOffer Letter dated as of independent registered public accounting firm.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 Thomas A. Burke,Neil D. Brinker, President and Chief Executive Officer. | | | | X | | | | | | | | | | | Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Finance and Chief Financial Officer. | | | | X | | | | | | | | | | | Section 1350 Certification of Thomas A. Burke,Neil D. Brinker, President and Chief Executive Officer. | | | | X | | | | | | | | | | | Section 1350 Certification of Michael B. Lucareli, Executive Vice President, Finance and Chief Financial Officer. | | | | X | | | | | | | | | 101.INS | | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). | | | | X | | | | | | | | | 101.SCH | | Inline XBRL Taxonomy Extension Schema Document.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.LAB101.PRE | | Inline XBRL Taxonomy Extension LabelPresentation Linkbase Document. | | | | X | | | | | | | | | 101.PRE104 | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | | | | X | | | | | | | | 104 | | Cover Page Interactive Data Filepage interactive data file (formatted as inline XBRL and contained in ExhibitExhibits 101). | | | | 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. |
** | 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 29, 202025, 2023 | Modine Manufacturing Company | | | | | | By: | /s/ Thomas A. BurkeNeil D. Brinker | | | | Thomas A. Burke, Neil D. Brinker, President
| | | and Chief Executive Officer | | | | (Principal (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 | | Thomas A. BurkeNeil D. Brinker | May 29, 202025, 2023 | President, Chief Executive Officer and Director | | (Principal Executive Officer) | | | | | | /s/ Michael B. Lucareli | | Michael B. Lucareli | May 29, 202025, 2023 | Executive Vice President, Finance and Chief Financial Officer | | (Principal Financial and Accounting Officer) | | | | | | /s/ Marsha C. Williams | | Marsha C. Williams | May 29, 202025, 2023 | Director | | | | /s/ David J. Anderson | | David J. Anderson | May 29, 2020 | DirectorChairperson, Board of Directors | | | | | | /s/ Eric D. Ashleman | | Eric D. Ashleman | May 29, 202025, 2023 | Director | |
| | | /s/ Suresh V. Garimella |
| Suresh V. Garimella | May 25, 2023 | Director | | | | | /s/ David G. BillsKatherine C. Harper | | David G. BillsKatherine C. Harper | | Director | | | | /s/ Charles P. Cooley | | Charles P. Cooley | May 29, 2020 | Director | | | | /s/ Suresh V. Garimella | | Suresh V. Garimella | May 29, 2020 | Director | | | | | | /s/ Larry O. Moore |
| Larry O. Moore | May 29, 202025, 2023 | Director | | | | | | /s/ Christopher W. Patterson |
| Christopher W. Patterson | May 29, 202025, 2023 | Director | | | | | /s/ David J. Wilson | | David J. Wilson | May 25, 2023 | Director | | | | | /s/ William A. Wulfsohn |
| William A. Wulfsohn | May 25, 2023 | Director | | | | | | /s/ Christine Y. Yan |
| Christine Y. Yan | May 29, 202025, 2023 | Director | |
s | | | % of sales | | |
Year Ended March 31, 2023 Compared with Year Ended March 31, 2022
Fiscal 20202023 net sales of $1,976$2,298 million were $237$248 million, or 1112 percent, lowerhigher than the prior year, primarily due to lowerhigher sales volume in both of our VTS and CIS segments and favorable commercial pricing, including adjustments in response to raw material price increases. These increases were partially offset by a $46$111 million unfavorable impact of foreign currency exchange rate changes, partially offset by higher salesrates. Sales in our BHVAC segment. Sales decreased $175the Performance Technologies and Climate Solutions segments increased $144 million and $84$101 million, in our VTS and CIS segments, respectively. Sales increased $9 million in our BHVAC segment.
Fiscal 20202023 cost of sales of $1,668$1,909 million decreased $179increased $168 million, or 10 percent, primarily due to lowerhigher sales volume and higher raw material prices, which increased $34 million. These increases were partially offset by a $39$95 million favorable impact of foreign currency exchange rate changes.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 an $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 90110 basis points to 84.4 percent and was negatively impacted by approximately 80 basis points due to higher labor and inflationary costs and, to a lesser extent, by sales mix. These negative impacts were partially offset by favorable material costs, which impacted costs of sales by approximately 30 basis points. The favorable material costs primarily resulted from lower commodity pricing, which more than offset the negative impacts of tariffs. In addition, we recorded $3 million of costs at Corporate for program and equipment transfers associated with the separation of the VTS segment’s automotive business in preparation for a potential sale.84.9 percent.
As a result of lowerhigher sales and higher cost of sales as a percentage of sales, fiscal 20202022 gross profit decreased $58increased $16 million and gross margin declined 90110 basis points to 15.615.1 percent.
Fiscal 20202022 SG&A expenses increased $6$4 million. The increase in SG&A expenses was primarily due to separation and projecthigher 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 recorded at Corporate associated withrelated to our review of strategic alternatives for the VTS segment’s automotive business, which increased approximately $29 million. This increase was partially offset bybusinesses and lower compensation-related expenses,strategic reorganization costs, which decreased approximately $13$4 million lower environmental charges related to previously-owned manufacturing facilities in the U.S., which decreased approximatelyand $3 million, and a $4 million favorable impactrespectively. The lower strategic reorganization costs primarily resulted from foreign currency exchange rate changes.lower severance expenses for executive management positions.
Restructuring expenses totaled $12of $24 million duringin fiscal 2020 and2022 increased $2$11 million compared with the prior year. The fiscal 2020 restructuringyear, primarily due to higher severance-related expenses primarily consisted of severance expenses related to targeted headcount reductions in the VTSPerformance Technologies segment, and equipment transfer and plant consolidation costspartially offset by lower severance-related expenses in the CISClimate Solutions segment. The fiscal 2020 headcount reductions were in response to lower market demand and in support of our objective to reduce operational and SG&A cost structures. During
In fiscal 2021, we approved headcount reductionsrecorded $167 million of impairment charges to write down the long-lived assets in the VTSliquid-cooled and CIS segmentsAustrian 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, we expect to record approximately $4 millionrecorded a net impairment reversal of severance expenses during the first quarter of fiscal 2021.$56 million.
During fiscal 2020,We sold our Austrian air-cooled automotive business on April 30, 2021. As a result of the sale, we recorded impairment charges totaling $9a $7 million primarily related to two manufacturing facilities in the VTS segment.loss on sale at Corporate during fiscal 2022.
Operating income of $38$119 million during fiscal 2020 decreased $722022 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. This decreaseyear, the fiscal 2022 operating income was primarily due to an increasefavorably impacted by higher gross profit. Operating income was negatively impacted by higher restructuring expenses, the loss on sale of $32 million of separation and project costs associated with our review of strategic alternatives for ourthe Austrian air-cooled automotive business, and lower earnings in our VTS and CIS segments, which decreased $37 million and $20 million, respectively, partially offset by higher earnings in our BHVAC segment, which increased $9 million.SG&A expenses.
The provision for income taxes was $12$15 million and $90 million in fiscal 2020, compared with a benefit for income taxes of $52022 and 2021, respectively. The $75 million in fiscal 2019. The $17 million changedecrease was primarily due to the absence of income tax benefits totaling $25 million recorded in the prior year and income tax charges totaling $10 million in the current year, partially offset by lower operating earnings in fiscal 2020. The $25 million of income tax benefits recorded in fiscal 2019 related to the recognition of tax assets for foreign tax credits and a manufacturing deduction in the U.S. and our accounting for the Tax Act. The $10$117 million of income tax charges recorded in fiscal 2020 were comprised of net charges totaling $7 million resulting from adjustments of2021 to increase the valuation allowances on certain 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 jurisdictionjurisdictions. 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 $3$9 million associated with legal entity restructuring in preparation for a potential sale of our automotive business. See Note 7resulting from the allocation of the Notes to Consolidated Financial Statements for additional information.income tax provision between net earnings and other comprehensive income.
Segment Results of Operations
A detailed comparison of our segment financial results for fiscal 2019 and 2018 can be found in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section in the Company’s 2019 Annual Report on Form 10-K filed with the SEC on May 23, 2019.
Effective April 1, 2020,2022, 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 automotive business separate fromconsolidated financial position, results of operations, and cash flows. We have recast the other businesses within the VTS segment. We are managing the automotive business as a separate segment as we target the sale or eventual exit of the automotive businesses. Beginningfinancial information for fiscal 2022 and 2021 we will reportto conform to the financial results for the automotive business as the Automotive segment. The remaining portion of the previous VTS segment will be named the Heavy-Duty Equipment segment and will include the heavy-duty commercial vehicle and off-highway businesses.fiscal 2023 presentation.
VTS
| | | Years ended March 31, | | | | | 2020 | | | 2019 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 1,177 | | | | 100.0 | % | | $ | 1,352 | | | | 100.0 | % | | Cost of sales | | | 1,032 | | | | 87.7 | % | | | 1,165 | | | | 86.2 | % | | Gross profit | | | 145 | | | | 12.3 | % | | | 187 | | | | 13.8 | % | | Selling, general and administrative expenses | | | 100 | | | | 8.5 | % | | | 113 | | | | 8.3 | % | | Restructuring expenses | | | 10 | | | | 0.8 | % | | | 9 | | | | 0.7 | % | | Impairment charges | | | 8 | | | | 0.7 | % | | | - | | | | - | | | Gain on sale of assets | | | (1 | ) | | | -0.1 | % | | | - | | | | - | | | Operating income | | $ | 28 | | | | 2.3 | % | | $ | 65 | | | | 4.8 | % |
Climate Solutions
VTS net sales decreased $175 million, or 13 percent, in fiscal 2020 compared with the prior year, primarily due to lower sales volume, a $31 million unfavorable impact of foreign currency exchange rate changes, and, to a lesser extent, unfavorable customer pricing largely resulting from contractually-scheduled price-downs. Sales to commercial vehicle, off-highway, and automotive customers decreased $64 million, $60 million, and $34 million, respectively. These sales declines largely result from weakness in global vehicular markets and the planned wind-down of certain commercial vehicle programs.| | | 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 | % |
VTS cost ofYear Ended March 31, 2023 Compared with Year Ended March 31, 2022
Climate Solutions net sales decreased $133increased $101 million, or 11 percent, primarily due to lower sales volume and a $26 million favorable impact of foreign currency exchange rate changes. As a percentage of sales, cost of sales increased 150 basis points to 87.7 percent. Beyond the unfavorable impact of the lower sales volume, higher labor and inflationary costs and unfavorable customer pricing negatively impacted cost of sales by approximately 90 basis points and 70 basis points, respectively. Higher depreciation costs, primarily resulting from recent manufacturing capacity expansion in China and Hungary, also negatively impacted cost of sales to a lesser extent. These negative impacts were partially offset by favorable material costs, which impacted cost of sales by approximately 30 basis points, improved operating efficiencies and cost savings from procurement initiatives. The favorable material costs primarily resulted from lower commodity pricing, which more than offset the negative impacts of tariffs.
As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $42 million and gross margin declined 150 basis points to 12.3 percent.
VTS SG&A expenses decreased $13 million compared with the prior year yet increased 20 basis points as a percentage of sales. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $9 million, lower environmental charges related to previously-owned manufacturing facilities in the U.S, which decreased approximately $3 million, and a $3 million favorable impact of foreign currency exchange rate changes.
Restructuring expenses during fiscal 2020 increased $1 million, primarily due to higher severance expenses resulting from targeted headcount reductions in Europe and in the Americas.
During fiscal 2020, we recorded asset impairment charges totaling $8 million, primarily related to manufacturing facilities in Austria and Germany to write down property and equipment assets to fair value. We anticipate future cash flows at these facilities will be negatively impacted by planned wind downs of certain commercial vehicle and automotive programs.
During fiscal 2020, we completed the sale of a previously-closed manufacturing facility in Germany and, as a result, recorded a gain of $1 million.
Operating income in fiscal 2020 decreased $37 million to $28 million, primarily due to lower gross profit and higher impairment charges, partially offset by lower SG&A expenses.
| CIS | | | | | | | Years ended March 31, | | | | | 2020 | | | 2019 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 624 | | | | 100.0 | % | | $ | 708 | | | | 100.0 | % | | Cost of sales | | | 531 | | | | 85.1 | % | | | 593 | | | | 83.8 | % | | Gross profit | | | 93 | | | | 14.9 | % | | | 115 | | | | 16.2 | % | | Selling, general and administrative expenses | | | 57 | | | | 9.2 | % | | | 61 | | | | 8.6 | % | | Restructuring expenses | | | 2 | | | | 0.3 | % | | | - | | | | - | | | Impairment charges | | | 1 | | | | 0.1 | % | | | - | | | | 0.1 | % | | Operating income | | $ | 33 | | | | 5.3 | % | | $ | 53 | | | | 7.5 | % |
CIS net sales decreased $84 million, or 12 percent, in fiscal 2020 compared with the prior year, primarily due to lower sales volume and a $12 million unfavorable impact of foreign currency exchange rate changes. Sales to commercial HVAC&R and data center cooling customers decreased $43 million and $38 million, respectively.
CIS cost of sales decreased $62 million, or 10 percent, primarily due to lower sales volume and an $11 million favorable foreign currency exchange rate impact. As a percentage of sales, cost of sales increased 130 basis points to 85.1 percent, primarily due to the unfavorable impact of lower sales volume and unfavorable sales mix.
As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $22 million and gross margin declined 130 basis points to 14.9 percent.
CIS SG&A expenses decreased $4 million compared with the prior year yet increased 60 basis points as a percentage of sales. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $2 million, and the favorable impact of cost-control initiatives.
Restructuring expenses during fiscal 2020 increased $2 million, primarily due to higher equipment transfer and plant consolidation costs. We are currently transferring product lines to our manufacturing facility in Mexico in order to achieve operational improvements and organizational efficiencies.
During fiscal 2020, we recorded a $1 million asset impairment charge related to a previously-closed manufacturing facility in Austria.
Operating income in fiscal 2020 decreased $20 million to $33 million, primarily due to lower gross profit, partially offset by lower SG&A expenses.
| BHVAC | | | | | | | Years ended March 31, | | | | | 2020 | | | 2019 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 221 | | | | 100.0 | % | | $ | 212 | | | | 100.0 | % | | Cost of sales | | | 150 | | | | 67.7 | % | | | 149 | | | | 70.1 | % | | Gross profit | | | 72 | | | | 32.3 | % | | | 63 | | | | 29.9 | % | | Selling, general and administrative expenses | | | 35 | | | | 15.8 | % | | | 35 | | | | 16.4 | % | | Loss on sale of assets | | | - | | | | - | | | | 2 | | | | 0.8 | % | | Operating income | | $ | 36 | | | | 16.5 | % | | $ | 27 | | | | 12.6 | % |
BHVAC net sales increased $9 million, or 4 percent, in fiscal 20202023 compared with the prior year, primarily due to higher sales in the U.S., which increased $14 million,volume and favorable commercial pricing. These increases were partially offset by lower sales in the U.K., which decreased $5 million. The higher sales in the U.S. were primarily driven by the increased sales of ventilation and heating products. The lower sales in the U.K. were primarily due to lower sales of air conditioning and ventilation products and a $3$52 million unfavorable impact of foreign currency exchange rate changes, partially offset by higherrates. Compared with the prior year, sales of data center sales.cooling, heat transfer, and HVAC & refrigeration products increased $58 million, $33 million, and $11 million, respectively.
BHVACClimate Solutions cost of sales increased $1$44 million, or less than 16 percent, in fiscal 2020.2023, primarily due to higher sales volume, partially offset by a $44 million favorable impact of foreign currency exchange rates. As a percentage of sales, cost of sales decreased 240380 basis points to 67.777.9 percent, primarily due to the favorable impact of higher sales mixvolume, favorable commercial pricing, and favorable customer pricing.improved operating efficiencies, partially offset by higher labor and inflationary costs.
As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $9$58 million and gross margin improved 240380 basis points to 32.322.1 percent.
BHVACClimate Solutions SG&A expenses remained consistentincreased $7 million compared with the prior year, yet decreased 6030 basis points as a percentage of sales. The increase in SG&A expenses was primarily due to a $5 million increase in compensation-related expenses, including commission expenses, and increases in other general and administrative expenses that have been impacted by inflationary market conditions. These increases were partially offset by a $4 million favorable impact of foreign currency exchange rate changes.
DuringRestructuring expenses totaling $2 million during fiscal 2019, we sold our business in South Africa2023 were consistent with the prior year and as a result, recorded a lossprimarily consisted of $2 million.severance-related expenses.
Operating income in fiscal 2020 of $362023 increased $51 million increased $9to $124 million, primarily due to higher gross profit.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 as of March 31, 20202023 of $71$67 million, and an available borrowing capacity of $118$270 million under our revolving credit facility. Given our extensive international operations, approximately $31$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 may be subject to foreign withholding taxes if repatriated.
In response to lower customer demand resulting from the COVID-19 pandemic, we have taken actions to reduce operating expenses, conserve We believe our sources of liquidity will provide sufficient cash and maximize liquidity. These actions have included, but are not limited to, production staffing adjustments, furloughs, shortened work weeks, and temporary salary reductions at all levels of our organization. In addition, we are reducing operating and administrative expenses. Further, as described below, we are focused on reducing our capital expenditures and have executed amendments to our primary credit agreements to help ensure liquidity through financial covenant flexibility during the next two fiscal years. Together with anticipated cash flow from operations, we currently believe we have sufficient available cash and access to both committed and uncommitted credit facilities to adequately cover our funding needs on both a short-short-term and long-term basis. However, we are continuing to monitor the impacts of COVID-19 on our business and the credit and financial markets.
The full extentOur 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 impactsAmerican Rescue Plan Act of COVID-19, which will largely depend on the length and severity of the pandemic, could have a material adverse effect on2021, we do not expect to make cash contributions to our business, results of operations, and cash flows and could adversely affect our access to capital and/or financing.U.S. pension plans during fiscal 2024.
Net Cash Provided by Operating Activities
Net cash provided by operating activities in fiscal 20202023 was $58$108 million, an increase of $96 million from $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, as 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 and lower pension plan contributions in fiscal 2023, as compared with the prior year.
Net cash provided by operating activities in fiscal 2022 was $12 million, a decrease of $45$138 million from $103$150 million in the prior year. This decrease in operating cash flow was primarily due to lower operating earnings in the current year and payments for separation and project costs associated with our strategic review of alternatives for the VTS segment’s automotive business, partially offset by favorableunfavorable net changes in working capital. The favorable changes in working capital, including higher inventory and accounts receivable levels and higher payments for incentive compensation and employee benefits as compared with the prior year, included lower employee benefit and incentive compensation payments.
Net cash provided by operating activities in fiscal 2019 was $103 million, a decrease of $21year. Inventory increased $61 million from $124 million in fiscal 2018. This decrease in operating cash flow primarily resulted from unfavorable changes in working capital, partially offset by the favorable impact of stronger earnings. The unfavorable changes in working capital, as compared with the prior year, included higher incentive compensation and other employee benefit payments and higher inventory levels associated with higher sales levels.March 31, 2021 to March 31, 2022.
Capital Expenditures
Capital expenditures of $71$51 million during fiscal 2020 decreased $32023 increased $11 million compared with fiscal 2019, primarily due to lower capital investments in our VTS segment compared with the prior year, particularly in China and North America. Similar to prior years, our2022. Our capital spending in fiscal 2020 primarily occurred2023 in the VTS segment, whichPerformance Technologies and Climate Solutions segments totaled $53$25 million and included$24 million, respectively. Capital expenditures in the Performance Technologies segment include tooling and equipment purchases in conjunction with new and renewal programs with customers, as well as $7 million of capital investments associated with preparing our automotive business for a potential sale. In response to the economic impacts of the COVID-19 pandemic, we are taking steps to preserve our financial liquidity. As part of this initiative, we are focused on reducing our capital expenditures by delaying certain projects and the purchase of certain program-related equipment and tooling. At March 31, 2020, our capital expenditure commitments totaled $12 million and primarily consisted of commitments for tooling and equipment expenditures in support of new and renewal programscustomers. Capital spending in the VTS segment.Climate Solutions segment include investments supporting our strategic growth initiatives, including expanding our data center business.
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 $33decreased $25 million to $482$353 million at March 31, 20202023 compared with the prior year, primarily due to additional borrowingsrepayments during fiscal 2020. In response to the economic impacts of the COVID-19 pandemic, we executed amendments to our primary credit agreements in May 2020 to provide additional covenant flexibility. The amendments temporarily raise the leverage coverage ratio limit during the next two fiscal years.2023.
Our credit agreements require us to maintain compliance with various covenants. As specifiedcovenants, 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 agreement, the term loansagreements may require prepayments in the event of certain asset sales. In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.
The leverage ratio covenant within our primary credit agreements in the U.S., we are subject to a leverage ratio covenant, which requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, in relation to ourno more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”). The leverage ratio covenant limit was 3.25 to 1 through the fourth quarter of fiscal 2020. We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense. As of March 31, 2020,2023, we were in compliance with our debt covenants; our leverage ratio and interest coverage ratio were 2.4 and 8.1, respectively.
In May 2020, as noted above, we executed amendments to our primary credit agreements that provide additional financial covenant flexibility during the next two fiscal years in light of the risks and uncertainties associated with the COVID-19 pandemic. We believe this additional flexibility will enable us to be compliant with our debt covenants, even if the adverse effects of the COVID-19 pandemic on our business are more severe than we currently anticipate. However, failure to comply with the debt covenants could result in an event of default, which, if not cured or waived, could result in us being required to repay borrowings before their due date. Under the amended agreements, the leverage ratio covenant limit is temporarily raised. For fiscal 2021, the leverage ratio covenant limit is 4.00 to 1, 4.75 to 1, 5.25 to 1, and 5.75 to 1 for the first, second, third, and fourth quarters, respectively. In fiscal 2022, the leverage ratio covenant limit is 4.75 to 1, 3.75 to 1, and 3.50 to 1 for the first, second and third quarters, respectively, and subsequently returns to 3.25 to 1 for the fourth quarter of fiscal 2022.covenants. We expect to remain in compliance with our debt covenants during fiscal 20212024 and beyond.
See Note 17 of the Notes to Consolidated Financial Statements for additional information regarding our credit agreements.
Off-Balance Sheet ArrangementsShare Repurchase Program
None.
Contractual Obligations
| | | March 31, 2020 | | | (in millions) | | Total | | | Less than 1 year | | | 1 - 3 years | | | 4 - 5 years | | | More than 5 years | | | | | | | | | | | | | | | | | | | | Long-term debt | | $ | 468.9 | | | $ | 15.2 | | | $ | 42.6 | | | $ | 294.4 | | | $ | 116.7 | | | Interest associated with long-term debt | | | 89.3 | | | | 17.7 | | | | 33.4 | | | | 24.5 | | | | 13.7 | | | Operating lease obligations | | | 71.8 | | | | 12.8 | | | | 20.7 | | | | 12.1 | | | | 26.2 | | | Capital expenditure commitments | | | 12.0 | | | | 12.0 | | | | - | | | | - | | | | - | | | Other long-term obligations (a) | | | 9.9 | | | | 1.9 | | | | 3.1 | | | | 3.0 | | | | 1.9 | | | Total contractual obligations | | $ | 651.9 | | | $ | 59.6 | | | $ | 99.8 | | | $ | 334.0 | | | $ | 158.5 | |
| (a) | Includes finance lease obligations and other long-term obligations. |
Our liabilities for pensions, postretirement benefits, and uncertain tax positions totaled $145During fiscal 2023, we repurchased $7 million asof our common stock. As of March 31, 2020. 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 $20 million to our U.S. pension plans during fiscal 2021.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 statementstatements are disclosed in Note 1 of the Notes to Consolidated Financial Statements.
Revenue Recognition
In fiscal 2019, we adopted new revenue recognition accounting guidance. In accordance with this new accounting guidance, weWe recognize revenue based upon consideration specified in a contract and as we satisfy performance obligations by transferring control over our products to our customers, which may be at a point in time or over time. The majority of our revenue is recognized at a point in time, based upon shipment terms. A limited number of our customer contracts provide an enforceable right to payment for performance completed to date. For these contracts, we recognize revenue over time based upon our estimated progress towardstoward the satisfaction of the contract’s performance obligations. We record an allowance for doubtful accounts for estimated uncollectible receivablescredit losses and we accrue for estimated warranty costs at the time of sale. We base these estimates upon historical experience, current business trends and current economic conditions.conditions, and risks specific to the 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, 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, 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 underlying assets. Fair value is generally based upon 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 $448$315 million and $106$81 million, respectively, at March 31, 2020.2023. 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 CISClimate 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 2020,2022, we recorded asseta net impairment charges totaling $8reversal of $56 million, primarily related manufacturing facilitiesto assets that were held for sale in Austriathe Performance Technologies segment. In fiscal 2021, we recorded $167 million of impairment charges to write down the long-lived assets in the liquid- and Germany withinair-cooled automotive businesses when they were classified as held for sale. In fiscal 2022, we adjusted the VTS segment. Seelong-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 52 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. We consider factors such as operating losses, declining financial and market outlooks, and market capitalization when evaluating the necessity for an interim impairment analysis. We test goodwill for impairment at a reporting unit level. Reporting unitsGoodwill resulting from recent acquisitions generally representrepresents the highest risk of impairment, which typically decreases as the businesses are integrated into the Company and positioned for future operating and financial performance. We test goodwill for impairment by comparing the fair value of each reporting unit with 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 a reporting unit exceeds the carrying value of the reporting unit’s net assets, goodwill is not impaired. However, if the carrying value of the reporting unit’s net assets exceeds its fair value, we would conclude goodwill is impaired and would record an impairment charge equal to the amount that the reporting unit’s carrying value exceeds its fair 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 and risk-adjusted discount rates, 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 rates used in determining discounted cash flows are 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 the continued economic uncertainty andinflationary 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, 2020,2023, our goodwill totaled $166 million related to our CISClimate Solutions and BHVACPerformance Technologies segments. Each of these segments is comprised of two reporting units. We conducted annual goodwill impairment tests during the fourth quarteras of fiscal 2020March 31, 2023 by applying a fair value-based test and determined the fair value of the reporting units in each of our reporting unitsoperating segments exceeded thetheir respective book 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 adjust our warranty accruals, which totaled $8 million at March 31, 2020, 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, 2020,2023, our pension liabilities totaled $134$42 million. The most significant assumptions include the discount rate, long-term expected return on plan assets, and mortality 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 upon 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 pension plan assets and the large majority of our pension plan expense.
To determine the expected rate of return on pension plan assets, we consider such factors as (a) the actual return earned on plan assets, (b) historical rates of return on the various asset classes in the plan portfolio, (c) projections of returns on those asset classes, (d) the amount of active management of the assets, (e) capital market conditions and economic forecasts, and (f) administrative expenses paid with the plan assets. The long-term rate of return utilized in both fiscal 20202023 and 20192022 was 7.0 percent and 7.5 percent.percent, respectively. For fiscal 2021,2024, we have also assumed a rate of 7.56.5 percent. A change of 25 basis points in the expected rate of return on assets would impact our fiscal 20212024 pension expense by $0.4less 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 20202023 and 2019,2022, for purposes of determining pension expense, we used a discount rate of 4.0 percent.3.9 and 3.2 percent, respectively. We determined these rates based upon a yield curve that was created following an analysis of the projected cash flows fromfor our plans. See Note 18 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 20212024 pension expense and projected benefit obligation by less than $1 million.million and approximately $4 million, respectively.
Income Taxes
We operate in numerous taxing jurisdictions; therefore, we are 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 a particular jurisdiction will not be realized. This determination, which is made on a jurisdiction-by-jurisdictionlegal entity-by-legal entity basis, involves judgment and the use of significant estimates and assumptions, including expectations of future taxable income and tax planning strategies. We believe the assumptions that we used are appropriate and result in a reasonable determination regarding the future realizability of deferred tax assets. However, future events or circumstances, such as lower-than-expected taxable income or unfavorable changes in the financial outlook of our operations in certain jurisdictions, could cause us to record additional valuation allowances.
See Note 78 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 NoteNotes 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 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:
The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliers, customers, and employees;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;
Economic,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 in particular, foreign currency exchange rate fluctuations; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); inflation; changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade, public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the United StatesU.S. or abroad, as well as continuing uncertainty regarding the short- and long-term implications of “Brexit”;abroad;
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, whetherincluding through our quotation process or through contract provisions for prospective price adjustments, as well as the inherent lag in timing of such contract provisions; and
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 healthimpact of problems, including logistic and continually increasing price-down focus of our vehicular customers in light of economic and market-specific factors, and the potential impact on us from any deterioration in the stability or performance of any of our major customers;
Unanticipated problemstransportation challenges, associated with suppliers meeting our time, quantity, quality, price and pricetiming 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 maintain current customer programsrelationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;
UnanticipatedThe impact of product or manufacturing difficulties or operating inefficiencies, including unanticipatedany program launch and product transfer challenges and warranty claims and delays or inefficiencies resulting from restrictions imposed in response to the COVID-19 pandemic;claims;
UnanticipatedThe impact of delays or modifications initiated by major customers with respect to program launches, product applications or requirements;
Our ability to consistently structure our operations in order to develop and maintain a competitive cost base with appropriately skilled and stable labor, while also positioning ourselves geographically, so that we can continue to support our customers with the technical expertise and market-leading products they demand and expect from Modine;
Our ability to effectively and efficiently reducemanage our cost structure in response to sales volume declinesincreases or decreases and to complete restructuring activities and realize the anticipated benefits of those activities;
Costs and other effects of the investigation and remediation of environmental contamination; particularlyincluding 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 anya 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 unanticipated litigation, claims, or other obligations.
Strategic Risks:
Our ability to successfully exit the automotive business within our VTS segment in a manner that is in the best interest of our shareholders in order to optimize the segment’s future financial performance;
Our ability to successfully realize anticipated benefits from strategic initiatives and our increased “industrial”continued application of 80/20 principles to our business, through which we are focused on reducing complexity and growing businesses with strong market presence, with our CIS and BHVAC businesses, while maintaining appropriate focus on the market opportunities presented by our VTS business;drivers;
Our ability to identify and execute on organic growth opportunities and diversification opportunities in orderacquisitions, and to position us for long-term success;efficiently and successfully integrate acquired businesses;
37Our ability to successfully execute strategies to reduce costs and improve operating margins; and
The potential impacts from unanticipated actions by activist shareholders, including disruption of our business and related costs.
Financial Risks:
| • | Our ability to fund our global liquidity requirements efficiently for Modine’sour current operations and meet our long-term commitments particularly in light of the significant volatility and negative pressure in the financial markets as a result of the COVID-19 pandemic and in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy; |
The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations, and of the continued uncertainty around the utilization of LIBOR or alternative reference rates;obligations;
The impact of changes in federal, state or local taxes that could have the effect of increasing our income tax expense;
Our ability to comply with the financial covenants as amended in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);
The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and
Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.
Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.
ITEM 7A.7A.
| QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.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 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, and throughout Europe. We also have joint ventures in China 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. Whenever 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 entity engaging in the transaction. In 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 2020,2023, 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 impacted 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. In fiscal 2020, 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 2020,2023, changes in foreign currency exchange rates unfavorably impacted our sales by $46$111 million; however, the impact on our operating income was less than $3only $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 2020,2023, there would not have been a material impact on our fiscal 20202023 earnings.
We maintain foreign currency-denominated debt obligations and intercompany loans that are subject to foreign currency exchange risk. We seek to mitigate this risk through maintaining offsetting positions between external and intercompany loans; however, from time to time, we also enter into foreign currency derivative contracts to manage the currency exchange rate exposure. These derivative instruments are typically not accounted 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 typically offset the foreign currency changes on the outstanding loans.
Interest Rate Risk
We 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 variable-rate debt to manage exposure to changes in interest rates. Interest on both our term loans and borrowings under our primary multi-currency revolving credit facility, including swingline borrowings, is variable and is currently based upon a variable interest rate, primarily on either LIBORSOFR or EURIBOR, plus 137.5 to 250175 basis points, depending on our leverage ratio. For purposes of calculating the variable interest rate under our current credit agreement, LIBOR cannot be less than one percent. As 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, 2020,2023, our outstanding borrowings on variable-rate term loans and thetotaled $216 million. There were no outstanding borrowings on our revolving credit facility totaled $189 million and $127 million, respectively.as of March 31, 2023. Based upon our outstanding debt with variable interest rates at March 31, 2020,2023, a 100-basis point increase in interest rates would increase our annual interest expense in fiscal 20212024 by approximately $3$2 million.
Commodity Price and Supply RisksRisk
We are dependent uponTo produce the supply ofproducts we sell, we purchase raw materials and supplies in our production processes 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. Commodity price risk is most prevalent togas, helium, and nitrogen. In addition, we also purchase components and parts that are integrated into our vehicular businesses, which provide customized production and service parts to customers under multi-year programs. In orderend products.
We seek to mitigate commodity price risk specificprimarily by adjusting product pricing in response to these long-term sales programs, we maintain contract provisionsapplicable price increases. Our contracts with certain vehicular customers contain provisions that allow us to prospectively adjust pricesprovide for prospective price adjustments based upon changes in raw material price fluctuations.prices. These prospective price adjustments generally lag behind the actual raw material price fluctuations by three months or longer, and typically the contract provisions are limited to the underlying material cost based upon the London Metal Exchange and exclude additional cost elements, such as related premiums and fabrication. For our industrial businesses,In instances where the risk is not covered contractually, we predominantly seek to mitigate commodity price risk by adjustingadjust product pricing in response to any applicable price increases, including through our quotation process and through price list increases.
In an effortfiscal 2023, we continued to manageexperience a significant increase in raw material prices and reduceprice increases on other goods and services in connection with global supply chain challenges and inflationary market conditions. In response, we implemented selling price increases for our costs,products. Nevertheless, we are still subject to the risk 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 our suppliers to ensure availability of purchased commodities and components and we have been consolidatingadded key suppliers to our supply base. As a result,base during the last year. However, we are still dependent upon limited sources of supply for certain components used in the manufacture of our products, including aluminum, copper, steel and stainless steel (nickel). WeEven 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, (including the potential effects of trade laws and tariffs), 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, 2020, 342023, 37 percent of our trade accounts receivable balance was concentrated with our top ten customers. These customers operate primarily in the automotive, 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 COVID-19 pandemic.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, 2020;2023; |
| • | Trade accounts receivable – Prior to granting credit, we evaluate each customer, taking into consideration the customer'scustomer’s financial condition, payment experience and credit information. After credit is granted, we actively monitor the customer'scustomer’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, we are also exposed to risks associated with demandsprice reduction pressure applied by OEM customers. If contractual price downs are unavoidable, we contemplate them in our customers for decreases in the price of our products. We attemptoverall strategy and adjust pricing as necessary to offset this risk with firm agreements with our customers whenever possible, but these agreements sometimes contain provisions for future price reductions.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 products that provide thermal solutionssolution systems to customers operating in diverse markets, including the automotive, commercial vehicle, off-highway, and commercial, industrial, and building HVAC&R markets. The COVID-19 pandemic has negatively impacted these markets; the duration and severity of the impacts of COVID-19 on these markets are currently uncertain. We are monitoring economic conditions in the U.S.commercial vehicle, off-highway, and abroadautomotive and the impacts associated with the COVID-19 pandemic.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, coilsdata centers, indoor air quality, and coolers in certain markets, andaftermarket coatings. Our investmentinvestments in these areas isare subject to the risks associated with technological success, customer and market acceptance, and our ability to meet the demands of our customers as these markets grow.
Hedging and Foreign Currency Forward Contracts
We use derivative financial instruments as a tool to manage certain financial risks. We prohibit the use of leveraged derivatives.
Commodity derivatives: Derivatives From time to time, we enter into over-the-counter forward contracts related to forecasted purchases of aluminum and copper. Our strategy is to reduce our exposure to changing market prices of these commodities. In fiscal 2020 and 2019, we designatedWe periodically designate certain commodity forward contracts as cash flow hedges for accounting purposes. Accordingly, forFor 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 2020, 20192023, 2022, and 2018,2021, net gains and losses recognized in cost of sales related to commodity forward contracts were less thanapproximately $1 million or less in each year.
Foreign currency forward contracts: Currency Forward Contracts We use derivative financial instruments in a limited way to mitigate foreign currency exchange risk. We periodically enter into foreign currency forward contracts to hedge specific foreign currency-denominated assets and liabilities as well as forecasted transactions. We have designatedtransactions and designate certain hedges of forecasted transactions as cash flow hedges for accounting purposes. Accordingly, forFor 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 2020, 2019,2023, 2022, and 2018,2021, net gains and losses recognized in sales and cost of sales related to foreign currency forward contracts were less than $1 million or less in each year. We have not designated 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 maintain credit ratings acceptable to us. At March 31, 2020,2023, all counterparties had a sufficient long-term credit rating.
ITEM 8.8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.DATA. |
MODINE MANUFACTURING COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended March 31, 2020, 20192023, 2022 and 20182021 (In millions, except per share amounts)
| | 2020 | | | 2019 | | | 2018 | | | Net sales | | $ | 1,975.5 | | | $ | 2,212.7 | | | $ | 2,103.1 | | | Cost of sales | | | 1,668.0 | | | | 1,847.2 | | | | 1,746.6 | | | Gross profit | | | 307.5 | | | | 365.5 | | | | 356.5 | | | Selling, general and administrative expenses | | | 249.6 | | | | 244.1 | | | | 245.8 | | | Restructuring expenses | | | 12.2 | | | | 9.6 | | | | 16.0 | | | Impairment charges | | | 8.6 | | | | 0.4 | | | | 2.5 | | | (Gain) loss on sale of assets | | | (0.8 | ) | | | 1.7 | | | | - | | | Operating income | | | 37.9 | | | | 109.7 | | | | 92.2 | | | Interest expense | | | (22.7 | ) | | | (24.8 | ) | | | (25.6 | ) | | Other expense - net | | | (4.8 | ) | | | (4.1 | ) | | | (3.3 | ) | | Earnings before income taxes | | | 10.4 | | | | 80.8 | | | | 63.3 | | | (Provision) benefit for income taxes | | | (12.4 | ) | | | 5.1 | | | | (39.5 | ) | | Net (loss) earnings | | | (2.0 | ) | | | 85.9 | | | | 23.8 | | | Net earnings attributable to noncontrolling interest | | | (0.2 | ) | | | (1.1 | ) | | | (1.6 | ) | | Net (loss) earnings attributable to Modine | | $ | (2.2 | ) | | $ | 84.8 | | | $ | 22.2 | | | | | | | | | | | | | | | | | Net (loss) earnings per share attributable to Modine shareholders: | | | | | | | | | | | | | | Basic | | $ | (0.04 | ) | | $ | 1.67 | | | $ | 0.44 | | | Diluted | | $ | (0.04 | ) | | $ | 1.65 | | | $ | 0.43 | | | | | | | | | | | | | | | | | Weighted-average shares outstanding: | | | | | | | | | | | | | | Basic | | | 50.8 | | | | 50.5 | | | | 49.9 | | | Diluted | | | 50.8 | | | | 51.3 | | | | 50.9 | |
| | 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, 2020, 20192023, 2022 and 20182021 (In millions)
| | 2020 | | | 2019 | | | 2018 | | | Net (loss) earnings | | $ | (2.0 | ) | | $ | 85.9 | | | $ | 23.8 | | | Other comprehensive income (loss): | | | | | | | | | | | | | | Foreign currency translation | | | (19.2 | ) | | | (37.6 | ) | | | 41.8 | | | Defined benefit plans, net of income taxes of ($8.3), ($0.3) and ($0.2) million | | | (24.6 | ) | | | (1.4 | ) | | | 0.1 | | | Cash flow hedges, net of income taxes of ($0.5), $0.1 and $0.1 million | | | (1.5 | ) | | | 0.4 | | | | 0.1 | | | Total other comprehensive income (loss) | | | (45.3 | ) | | | (38.6 | ) | | | 42.0 | | | | | | | | | | | | | | | | | Comprehensive income (loss) | | | (47.3 | ) | | | 47.3 | | | | 65.8 | | | Comprehensive (income) loss attributable to noncontrolling interest | | | 0.2 | | | | (0.6 | ) | | | (2.1 | ) | | Comprehensive income (loss) attributable to Modine | | $ | (47.1 | ) | | $ | 46.7 | | | $ | 63.7 | |
| | 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, 20202023 and 20192022 (In millions, except per share amounts)
| | 2020 | | | 2019 | | | ASSETS | | | | | | | | Cash and cash equivalents | | $ | 70.9 | | | $ | 41.7 | | | Trade accounts receivable – net | | | 292.5 | | | | 338.6 | | | Inventories | | | 207.4 | | | | 200.7 | | | Other current assets | | | 62.5 | | | | 65.8 | | | Total current assets | | | 633.3 | | | | 646.8 | | | Property, plant and equipment – net | | | 448.0 | | | | 484.7 | | | Intangible assets – net | | | 106.3 | | | | 116.2 | | | Goodwill | | | 166.1 | | | | 168.5 | | | Deferred income taxes | | | 104.8 | | | | 97.1 | | | Other noncurrent assets | | | 77.6 | | | | 24.7 | | | Total assets | | $ | 1,536.1 | | | $ | 1,538.0 | | | | | | | | | | | | | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | | Short-term debt | | $ | 14.8 | | | $ | 18.9 | | | Long-term debt – current portion | | | 15.6 | | | | 48.6 | | | Accounts payable | | | 227.4 | | | | 280.9 | | | Accrued compensation and employee benefits | | | 65.0 | | | | 81.7 | | | Other current liabilities | | | 49.2 | | | | 39.9 | | | Total current liabilities | | | 372.0 | | | | 470.0 | | | Long-term debt | | | 452.0 | | | | 382.2 | | | Deferred income taxes | | | 8.1 | | | | 8.2 | | | Pensions | | | 130.9 | | | | 101.7 | | | Other noncurrent liabilities | | | 79.5 | | | | 34.8 | | | Total liabilities | | | 1,042.5 | | | | 996.9 | | | Commitments and contingencies (see Note 20) | | | | | | | | | | Shareholders’ equity: | | | | | | | | | | Preferred stock, $0.025 par value, authorized 16.0 million shares, issued - NaN | | | - | | | | - | | | Common stock, $0.625 par value, authorized 80.0 million shares, issued 53.4 million and 52.8 million shares | | | 33.3 | | | | 33.0 | | | Additional paid-in capital | | | 245.1 | | | | 238.6 | | | Retained earnings | | | 469.9 | | | | 472.1 | | | Accumulated other comprehensive loss | | | (223.3 | ) | | | (178.4 | ) | | Treasury stock, at cost, 2.5 million and 2.1 million shares | | | (37.1 | ) | | | (31.4 | ) | | Total Modine shareholders’ equity | | | 487.9 | | | | 533.9 | | | Noncontrolling interest | | | 5.7 | | | | 7.2 | | | Total equity | | | 493.6 | | | | 541.1 | | | Total liabilities and equity | | $ | 1,536.1 | | | $ | 1,538.0 | |
| | 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, 2020, 20192023, 2022 and 20182021 (In millions)
| | 2020 | | | 2019 | | | 2018 | | | Cash flows from operating activities: | | | | | | | | | | | Net (loss) earnings | | $ | (2.0 | ) | | $ | 85.9 | | | $ | 23.8 | | | Adjustments to reconcile net (loss) earnings to net cash provided by operating activities: | | | | | | | | | | | | | | Depreciation and amortization | | | 77.1 | | | | 76.9 | | | | 76.7 | | | Impairment charges | | | 8.6 | | | | 0.4 | | | | 2.5 | | | (Gain) loss on sale of assets | | | (0.8 | ) | | | 1.7 | | | | - | | | Stock-based compensation expense | | | 6.6 | | | | 7.9 | | | | 9.5 | | | Deferred income taxes | | | 1.0 | | | | (4.4 | ) | | | 12.1 | | | Other – net | | | 5.6 | | | | 5.3 | | | | 9.0 | | | Changes in operating assets and liabilities: | | | | | | | | | | | | | | Trade accounts receivable | | | 36.6 | | | | (15.3 | ) | | | (26.1 | ) | | Inventories | | | (12.0 | ) | | | (22.0 | ) | | | (12.5 | ) | | Accounts payable | | | (37.7 | ) | | | 16.6 | | | | 25.2 | | | Accrued compensation and employee benefits | | | (15.2 | ) | | | (10.1 | ) | | | 16.4 | | | Other assets | | | 14.7 | | | | (11.8 | ) | | | (5.0 | ) | | Other liabilities | | | (24.6 | ) | | | (27.8 | ) | | | (7.4 | ) | | Net cash provided by operating activities | | | 57.9 | | | | 103.3 | | | | 124.2 | | | | | | | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | | | | | | Expenditures for property, plant and equipment | | | (71.3 | ) | | | (73.9 | ) | | | (71.0 | ) | | Proceeds from dispositions of assets | | | 6.2 | | | | 0.3 | | | | 0.3 | | | Proceeds from sale of investment in affiliate | | | 3.8 | | | | - | | | | - | | | Proceeds from maturities of short-term investments | | | 4.1 | | | | 4.9 | | | | 4.8 | | | Purchases of short-term investments | | | (3.3 | ) | | | (3.8 | ) | | | (5.5 | ) | | Other – net | | | - | | | | (0.3 | ) | | | (0.2 | ) | | Net cash used for investing activities | | | (60.5 | ) | | | (72.8 | ) | | | (71.6 | ) | | | | | | | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | | | | | | Borrowings of debt | | | 692.4 | | | | 231.2 | | | | 171.0 | | | Repayments of debt | | | (649.5 | ) | | | (251.9 | ) | | | (222.9 | ) | | Dividend paid to noncontrolling interest | | | (1.3 | ) | | | (1.8 | ) | | | (0.9 | ) | | Purchase of treasury stock under share repurchase program | | | (2.4 | ) | | | (0.6 | ) | | | - | | | Financing fees paid | | | (2.8 | ) | | | - | | | | - | | | Other – net | | | (3.1 | ) | | | (2.8 | ) | | | 2.7 | | | Net cash provided by (used for) financing activities | | | 33.3 | | | | (25.9 | ) | | | (50.1 | ) | | | | | | | | | | | | | | | | Effect of exchange rate changes on cash | | | (1.6 | ) | | | (2.7 | ) | | | 3.0 | | | Net increase in cash, cash equivalents and restricted cash | | | 29.1 | | | | 1.9 | | | | 5.5 | | | Cash, cash equivalents and restricted cash - beginning of year | | | 42.2 | | | | 40.3 | | | | 34.8 | | | Cash, cash equivalents and restricted cash - end of year | | $ | 71.3 | | | $ | 42.2 | | | $ | 40.3 | |
| | 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’ EQUITY For the years ended March 31, 2020, 20192023, 2022 and 20182021 (In millions)
| | Common stock | | | Additional paid-in | | | Retained | | | Accumulated other | | | Treasury stock, | | | Non-controlling | | | | | | | | Shares | | | Amount | | | capital | | | earnings | | | comprehensive loss | | | at cost | | | interest | | | Total | | | Balance, March 31, 2017 | | | 51.8 | | | $ | 32.4 | | | $ | 216.4 | | | $ | 372.4 | | | $ | (181.8 | ) | | $ | (25.4 | ) | | $ | 7.2 | | | $ | 421.2 | | | Net earnings attributable to Modine | | | - | | | | - | | | | - | | | | 22.2 | | | | - | | | | - | | | | - | | | | 22.2 | | | Other comprehensive income | | | - | | | | - | | | | - | | | | - | | | | 41.5 | | | | - | | | | 0.5 | | | | 42.0 | | | Stock options and awards | | | 0.5 | | | | 0.3 | | | | 3.9 | | | | - | | | | - | | | | - | | | | - | | | | 4.2 | | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1.7 | ) | | | - | | | | (1.7 | ) | | Adoption of new accounting guidance (Note 1) | | | - | | | | - | | | | 0.1 | | | | 0.3 | | | | - | | | | - | | | | - | | | | 0.4 | | | Stock-based compensation expense | | | - | | | | - | | | | 9.5 | | | | - | | | | - | | | | - | | | | - | | | | 9.5 | | | Dividend paid to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.9 | ) | | | (0.9 | ) | | Net earnings attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1.6 | | | | 1.6 | | | Balance, March 31, 2018 | | | 52.3 | | | | 32.7 | | | | 229.9 | | | | 394.9 | | | | (140.3 | ) | | | (27.1 | ) | | | 8.4 | | | | 498.5 | | | Adoption of new accounting guidance (Note 1) | | | - | | | | - | | | | - | | | | (7.6 | ) | | | - | | | | - | | | | - | | | | (7.6 | ) | | Net earnings attributable to Modine | | | - | | | | - | | | | - | | | | 84.8 | | | | - | | | | - | | | | - | | | | 84.8 | | | Other comprehensive loss | | | - | | | | - | | | | - | | | | - | | | | (38.1 | ) | | | - | | | | (0.5 | ) | | | (38.6 | ) | | Stock options and awards | | | 0.5 | | | | 0.3 | | | | 0.8 | | | | - | | | | - | | | | - | | | | - | | | | 1.1 | | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (4.3 | ) | | | - | | | | (4.3 | ) | | Stock-based compensation expense | | | - | | | | - | | | | 7.9 | | | | - | | | | - | | | | - | | | | - | | | | 7.9 | | | Dividend paid to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1.8 | ) | | | (1.8 | ) | | Net earnings attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1.1 | | | | 1.1 | | | Balance, March 31, 2019 | | | 52.8 | | | | 33.0 | | | | 238.6 | | | | 472.1 | | | | (178.4 | ) | | | (31.4 | ) | | | 7.2 | | | | 541.1 | | | Net loss attributable to Modine | | | - | | | | - | | | | - | | | | (2.2 | ) | | | - | | | | - | | | | - | | | | (2.2 | ) | | Other comprehensive loss | | | - | | | | - | | | | - | | | | - | | | | (44.9 | ) | | | - | | | | (0.4 | ) | | | (45.3 | ) | | Stock options and awards | | | 0.6 | | | | 0.3 | | | | (0.1 | ) | | | - | | | | - | | | | - | | | | - | | | | 0.2 | | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (5.7 | ) | | | - | | | | (5.7 | ) | | Stock-based compensation expense | | | - | | | | - | | | | 6.6 | | | | - | | | | - | | | | - | | | | - | | | | 6.6 | | | Dividend paid to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1.3 | ) | | | (1.3 | ) | | Net earnings attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 0.2 | | | | 0.2 | | | Balance, March 31, 2020 | | | 53.4 | | | $ | 33.3 | | | $ | 245.1 | | | $ | 469.9 | | | $ | (223.3 | ) | | $ | (37.1 | ) | | $ | 5.7 | | | $ | 493.6 | |
| | 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.
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 products and solutions to diversified global markets and customers. Thecustomers in a wide array of commercial, industrial, and building heating, ventilating, air conditioning, and refrigeration (“HVAC&R”) markets. In addition, the Company is a leading provider of engineered heat transfer systems and high-quality heat transfer components for use in on- and off-highway original equipment manufacturer (“OEM”) vehicular applications. In addition, the Company is a global leader in thermal management technology and solutions for sale into a wide array of commercial, industrial, and building heating, ventilating, air conditioning, and refrigeration (“HVAC&R”) markets. The Company’s primary product groups include i) powertrain coolingheat transfer; ii) HVAC & refrigeration; iii) data center cooling; iv) air-cooled; v) liquid-cooled; and engine cooling; ii) coils, coolers, and coatings; and iii) heating, ventilation and air conditioning. vi) advanced solutions.
COVID-19: In March 2020, the World Health Organization declared the outbreak of the novel coronavirus, COVID-19, a pandemic. See Note 20 for additional information regarding the risks and uncertainties to our business resulting from this global pandemic.
SaleDisposition of facilityAustrian Air-cooled Automotive Business in Germany:Fiscal 2022
During fiscal 2020,On April 30, 2021, the Company completed the sale ofsold its Austrian a previously-closed manufacturing facility in Germany for a selling price of $6.0 million. As a result of this transaction, the Company recorded a gain of $0.8 million within the Vehicular Thermal Solutions segment. The Company reported this gain within the gain on sale of assets line on the consolidated statements of operations.
Sale of Nikkei Heat Exchanger Company, Ltd. (“NEX”): During fiscal 2020, the Company completed the sale of its 50 percent ownership interest in NEX for a selling price of $3.8 million. As a result of this sale, the Company recorded a gain of $0.1 million, which included the write-off of accumulated foreign currency translation gains of $0.6 million, within other income and expense on the consolidated statements of operations. Priorir-cooled automotive business to its sale, the Company accounted for its investment in NEX using the equity method. Utilizing the equity method, the Company reported its investment at cost, plus or minus a proportionate share of undistributed net earnings, and included Modine’s share of the affiliate’s net earnings in other income and expense. See Note 12 for additional information.
Sale of AIAC Air Conditioning South Africa (Pty) Ltd.: During fiscal 2019, the Company completed the sale of its AIAC Air Conditioning South Africa (Pty) Ltd. business, which was reported within the Building HVAC Systems segment, for a selling price of $0.5 million.Schmid Metall GmbH. As a result of this transaction, the Company recorded a loss of $1.7$6.6 million during fiscal 2022, which included the write-off of accumulated foreign currency translation$1.7 million of net actuarial losses of $0.8 million.related to its pension plan. The Company reported this loss within the loss on sale of assets line on the consolidated statementsstatement of operations. AnnualUpon 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 attributable toof this disposed 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 of $0.3 million within the Climate Solutions segment to write down the property to fair value less than $2.0 million.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 CEO. The Board of Directors subsequently conducted a search for his successor and, effective December 1, 2020, appointed Neil D. Brinker as President and CEO.
As a result of Mr. Burke’s departure and in connection with the search for and transition to his successor, the Company recorded costs totaling $6.7 million during fiscal 2021. These costs, which were recorded as selling, general and administrative (“SG&A”) expenses at Corporate, primarily consisted of severance and benefit-related expenses based upon the terms of Mr. Burke’s transition and separation agreement and costs directly associated with the CEO search, partially offset by the impact of Mr. Burke’s forfeited stock-based compensation awards. 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:Recognition The Company recognizes revenue based upon consideration specified in a contract and as it satisfies performance obligations by transferring control over its products to its customers, 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. A portion of the Company’s revenue is recognized over time, based upon estimated progress towardstoward satisfaction of the contractual performance obligations. See Note 23 for additional information.
Shipping and handling costs: 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: 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 recordsmaintains an allowance for doubtfulcredit losses, representing its estimate of expected losses associated with its trade accounts for estimated uncollectible receivables based upon historical experience or specific customer economic data.receivable. The Company recorded anbases 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 doubtful accounts of $1.9credit losses was $2.2 million and $1.6$1.7 million, at March 31, 2020respectively. The changes to the Company’s allowance for credit losses during fiscal 2023 and 2019, respectively, representing its estimated uncollectible receivables. 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 2020, 2019,2023, 2022, and 2018,2021, the Company sold $75.4$150.6 million, $85.1$126.4 million, and $65.8$88.7 million, respectively, of accounts receivable to accelerate cash receipts. During fiscal 2020, 2019,2023, 2022, and 2018,2021, the Company recorded a loss on the sale ofcosts totaling $1.2 million, $0.3 million, and $0.2 million, respectively, related to selling accounts receivable of $0.5 million, $0.6 million, and $0.4 million, respectively, in the consolidated statements of operations.
Warranty
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
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 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.years. At March 31, 20202023 and 2019,2022, Company-owned tooling totaled $23.3$17.1 million and $24.2$18.3 million, respectively.
In certain instances, tooling is customer-owned.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. TheIf the customer has agreed to reimburse the Company, accounts for unbilled customer-owned tooling costs are recorded as a receivable within other current assets when the customer has guaranteed reimbursement to the Company.assets. No significant arrangements exist where customer-owned tooling costs were not accompanied by guaranteed reimbursement. At March 31, 20202023 and 2019, cost reimbursement receivables related to2022, customer-owned tooling receivables totaled $7.8$10.9 million and $11.6$12.3 million, respectively.
Stock-based compensation: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 45 for additional information.
Research and development:Development The Company expenses research and development costs as incurred within SG&A expenses. During fiscal 2020, 2019,2023, 2022, and 2018,2021, research and development costs charged to operations totaled $59.5 $44.0 million, $69.8$50.3 million, and $65.8$46.3 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’ 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 forward 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 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 19 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 78 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 potential common shares if their inclusion would have an anti-dilutive effect. Certain outstanding restricted stock awards provide recipients with 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 89 for additional information.
Cash and cash equivalents: Cash Equivalents The Company considers all highly-liquid investments with original maturities of three months or less to be cash equivalents. Under the Company’s cash management system, cash balances at certain banks are funded when checks are presented for payment. To the extent checks issued, but not yet presented for payment, exceed the balance on hand at the specific bank against which they were written, the Company reports the amount of those checks within accounts payable in the consolidated balance sheets.
Short-term investments: Investments The Company invests in time deposits with original maturities of more than three months but not 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, 20202023 and 2019,2022, the Company’s short-term investments totaled $3.2$3.5 million and $4.3$3.7 million, respectively.
Inventories
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 lives of the 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 $8.7$13.6 million $17.9, $9.0 million, and $15.8$7.9 million were accrued within accounts payable at March 31, 2020, 2019,2023, 2022 and 2018,2021, respectively.
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, 20202023 and as a result, recorded a $0.5 million impairment charge withindetermined the VTS segment.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. During fiscal 2020, the Company recorded impairment charges totaling $8.1 million related to long-lived assets. See Note 5 for additional information.
Assets heldHeld for sale: Sale The Company considers assets to beclassifies 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,value; (ii) the asset is available for immediate sale in its present condition,condition; (iii) an active program to locate a buyer and other actions required to complete the sale have been initiated,initiated; (iv) the sale of the asset is expected to be completed within one yearyear; and (v) it is unlikely that significant changes will be made to the plan. Upon designationclassification as held for sale, the Company records the carrying value of the assetsasset at the lower of its carrying value or its estimated fair value, less costs to sell, within other noncurrent assets. Thesell. In addition, the Company ceases to record depreciation expense at the time of designation asfor assets held for sale. The carrying value of assets heldSee Note 2 for sale totaled $0.6 million and $1.1 million at March 31, 2020 and 2019, respectively.additional information.
Deferred compensation trusts: Compensation Trusts The Company maintains deferred compensation trusts to fund future obligations under its non-qualified deferred compensation plans. The trusts’ investments in third-party debt and equity securities are presented within other noncurrent assets in the consolidated balance sheets.
Self-insurance reserves:Reserves The Company retains a portion of the financial risk for certain 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.
Environmental liabilities:Liabilities The Company records liabilities for environmental assessments and remediation activities in the period in which its responsibility is probable and the costs can be reasonably estimated. The Company records environmental indemnification assets from third parties, including prior owners, when recovery is probable. To the extent that the required remediation procedures change, or additional contamination is identified, the Company’s estimated environmental liabilities may also change. See Note 20 for additional information.
Supplemental 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:information related to the Company’s leases.
| | Years ended March 31, | | | | | 2020 | | | 2019 | | | 2018 | | | Interest paid | | $ | 21.4 | | | $ | 22.3 | | | $ | 23.4 | | | Income taxes paid | | | 18.8 | | | | 22.2 | | | | 20.1 | |
New Accounting Guidance Adopted in Fiscal 2020:
LeasesSupplier Finance Programs
In February 2016,September 2022, the Financial Accounting Standards Board (“FASB”) issued new comprehensive lease accounting guidance that supersedes existing leasewill require companies that use supplier finance programs to disclose information about the 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 fiscal 2024 financial statements, with the exception of the roll forward disclosure requirement, which will become effective one year later. The Company is currently evaluating the new disclosures, but does not expect the guidance will have a material impact on its consolidated financial statements.
Income Tax Simplification In December 2019, the FASB issued new guidance designed to simplify the accounting for income taxes. The new guidance eliminated certain exceptions related to the approach for intraperiod tax allocations and requires balance sheet recognitionthe methodology for most leases.deferred tax liabilities. The Company adopted this guidance effectiveas of April 1, 2019 using a modified-retrospective transition method, under which it elected not to adjust comparative periods.2021. The Company elected the package of practical expedients permitted under the new guidance, and, as a result, the Company did not reassess the classification of existing leases or initial direct costs thereof, or whether existing contracts contain leases. In addition, the Company elected accounting policies to not record short-term leases on the balance sheet and to not separate lease and non-lease components. The Company did not elect the hindsight practical expedient.
The Company assessed its global lease portfolio and implemented a new lease accounting software solution and new processes and controls to account for leases in accordance with the new guidance. The Company’s most significant leases represent leases of real estate, such as manufacturing facilities, warehouses, and office buildings. The Company also leases certain manufacturing and IT equipment and vehicles. Upon adoption of this new guidance on April 1, 2019, the Company recognized right-of-use assets for operating leases totaling $61.3 million and corresponding current and noncurrent operating lease liabilities of $12.4 million and $48.9 million, respectively. In addition, the Company assessed 2 existing build-to-suit arrangements, for which it had recorded property, plant and equipment and long-term debt on its consolidated balance sheet as of March 31, 2019. The Company determined these arrangements represent operating leases under the new accounting guidance. As a result, the Company derecognized the previously-recorded balances and recorded $5.2 million of operating lease right-of-use assets and corresponding lease liabilities. As a result of adopting the new guidance, there was not a significant impact on the Company’s accounting for its previously-recorded capital leases, which are now classified as finance leases under the new guidance. In addition, there was no impact to retained earnings. Also, the adoption did not have a material impact on the Company’s consolidated statement of operations or consolidated statement of cash flows. See Note 16 for additional information regarding the Company’s leases.financial statements.
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive IncomeCredit Losses
In February 2018,June 2016, the FASB issued new guidance related to the accounting for credit losses for certain stranded income tax effects in accumulated other comprehensive income (loss) resulting from tax reform legislation that was enacted infinancial assets, including trade accounts receivable and contract assets. The new guidance modified the U.S. in December 2017. This guidance provided companies the optioncredit loss model to reclassify stranded income tax effects to retained earnings.measure and recognize credit losses based upon expected losses rather than incurred losses. The Company adopted this guidance as of April 1, 2019 and chose not to reclassify stranded income tax effects; therefore, the2020. The adoption of this guidance did not impact the Company’s consolidated financial statements.
New Accounting Guidance Adopted in Fiscal 2019:
Revenue Recognition
In May 2014, the FASB issued new guidance that outlines a comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The core principle of the new guidance is that companies are to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company adopted this new guidance for fiscal 2019 using the modified-retrospective transition method.
The Company assessed customer contracts and evaluated contractual provisions in light of the new guidance. Through its evaluation process, the Company identified a limited number of customer contracts that provide an enforceable right to payment for customized products, which require revenue recognition prior to the product being shipped to the customer. As a result of its adoption of the new guidance, the Company recorded an increase of $0.7 million to retained earnings as of April 1, 2018, along with related balance sheet reclassifications. The increase to retained earnings represented $3.0 million of net sales that, had the new guidance been in effect, the Company would have recognized as of March 31, 2018. See Note 2 for additional information regarding revenue recognition.
Income Taxes: Intra-Entity Transfers of Assets Other than Inventory
In October 2016, the FASB issued new guidance related to income tax accounting for intercompany asset transfers. This new guidance requires companies to recognize the income tax effects of intercompany asset transfers other than inventory at the transaction date. The income tax effects of these transfers were previously deferred. The Company adopted this new guidance for fiscal 2019 using the modified-retrospective transition method. Upon adoption, the Company recorded a decrease to retained earnings of $8.3 million as of April 1, 2018.
New Accounting Guidance Adopted in Fiscal 2018:
Stock-based Compensation
In March 2016, the FASB issued new guidance to simplify several aspects of accounting for stock-based payment transactions. The Company adopted this guidance beginning in its first quarter of fiscal 2018. The Company elected to account for forfeitures in the period in which they occur and recorded a cumulative-effect adjustment to equity. In addition, the Company prospectively adopted the guidance requiring all excess tax benefits or deficiencies to be recognized as income tax expense or benefit when share-based awards are settled. The provisions of this guidance did not have a material impact on the Company'sCompany’s consolidated financial statements.balance sheets, statements of operations or statements of cash flows.
Note 2: Assets Held for Sale
On November 2, 2020, the Company signed a definitive agreement to sell its liquid-cooled automotive business to Dana Incorporated (“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 sale 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, of adopting this new guidance, the Company recorded a $0.4remeasured the long-lived assets reverting back to held and used classification at the lower of their (i) carrying value, as if held for sale classification had not been met; or (ii) fair value at the date of the decision not to sell and reversed $57.2 million increase to both deferred taxof held for sale impairment charges during the third quarter of fiscal 2022. The long-lived assets primarily consisted of property, plant and equipment assets and equitywere fully impaired while classified as held for sale. For purposes of April 1, 2017. 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 cost valuation approaches and utilized third-party information from various industry-accepted sources, including applicable government-published statistics and data from appraisal and resale service providers. The market approach focused on prices for comparable assets in arm’s length transactions. For land and building assets, for example, sales of similar properties near the Company’s facilities were analyzed. For machinery and equipment assets, the Company referenced available third-party information regarding the selling prices of similar equipment. The cost approach focused on the amount for which an asset could be replaced or reproduced. The cost of an asset was then adjusted downward based on various factors including, but not limited to, age, location, and physical condition. After estimating the fair values of the assets reverting back to held and used classification, the Company compared the fair value for each asset to its carrying value. Carrying value represented each asset’s carrying value before the initial impairment charge, reduced for depreciation that would have been recorded if the asset had not been classified as held for sale. The Company then adjusted each asset to the lower of fair value or carrying value, resulting in the reversal of $57.2 million of previous impairment charges. In addition, the Company resumed depreciating the property, plant and equipment assets of the liquid-cooled automotive business based on the remeasured asset values during the third quarter of fiscal 2022.
The $57.2 million held for sale impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net held for sale impairment charges recorded 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 evaluations, the Company recorded a total of $8.6 million of impairment charges during the first and second quarters of fiscal 2022. These impairment charges reduced the net carrying value of property, plant and equipment additions during each quarter to zero. 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.
Note 2:3: Revenue Recognition
Effective April 1, 2018, the Company adopted new revenue recognition accounting guidance; see Note 1 for additional information .
The Company generates revenue from selling innovative thermal management products and solutions to diversified global markets and customers. The Company recognizes revenue based upon consideration specified in a contract and as it satisfies performance obligations by transferring control over its products to its customers, 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 doubtful accounts for estimated uncollectible receivablescredit 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:
Vehicular ThermalClimate Solutions (“VTS”) The VTSClimate Solutions segment principally generates revenue from providing engineeredselling heat transfer systemsproducts, heating, ventilating, air conditioning, and componentsrefrigeration (“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 use in on-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 off-highway original equipment. Thisdata 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 powertrainproducts and engine coolingsolutions 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 including, but not limited to,include radiators, charge air coolers, condensers, and engine cooling modules. Liquid-cooled products include engine oil coolers, EGRcharge air coolers, condensers, and fuel coolers, to original equipment manufacturers (“OEMs”) in the automotive, commercial vehicle, and off-highway markets in the Americas, Europe, and Asia regions.exhaust gas recirculation coolers. In addition, the VTSPerformance Technologies segment designs customer-owned tooling for OEMsprovides advanced solutions, which are designed to improve battery range and also serves Brazil’s automotivevehicle life, to zero-emission and hybrid commercial vehicle, aftermarkets.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 VTSPerformance 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 VTS 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 VTSPerformance 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 VTSthe 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 towardstoward satisfaction of the performance obligations. The VTSPerformance 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.
Commercial and Industrial Solutions (“CIS”)
The CIS segment principally generates revenue from providing thermal management products, including customized coils and coolers, to the heating, ventilating, air conditioning, and refrigeration (“HVAC&R”) markets in North America, Europe, and Asia. In addition, the segment applies corrosion protection solutions, which are referred to as coatings, to heat-transfer equipment.
For the sale of coils and coolers, individual customer purchase orders generally represent the Company’s contract with its customers. With the exception of a small number of customers, the applicable customer contracts do not provide the Company with an enforceable right to payment for performance completed to date. As a result, the CIS segment recognizes revenue for its sale of coils and coolers primarily at the time control is transferred to the customer based upon shipping terms, which is generally upon shipment.
For both sales to customers whose contract cancellation terms provide an enforceable right to payment and sales from the coatings businesses, in which the customers control the heat-transfer equipment being enhanced by the coating application, the CIS segment recognizes revenue over time based upon its estimated progress towards satisfaction of the performance obligations. The segment measures progress by evaluating the production status towards completion of ordered products or services not yet shipped to its customers.
Building HVAC Systems (“BHVAC”)
The BHVAC segment principally generates revenue from providing a variety of heating, ventilating, and air conditioning products, primarily for commercial buildings and related applications in North America and the U.K., as well as mainland Europe and the Middle East.
Heating products are manufactured in the U.S. and are generally 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 BHVAC segment recognizes revenue at the time control is transferred to the customer, generally the independent distributor, based upon shipping terms, which is generally upon shipment.
Ventilation and air conditioning products are highly-specified to a customer’s needs; however, the underlying sales contracts do not provide the Company with an enforceable right to payment for performance completed to date. As a result, the BHVAC segment recognizes revenue for these products at the time control is transferred to the customer based upon shipping terms, which is generally upon shipment.
Disaggregation of Revenue The tabletables below presentspresent revenue to external customers for each of the Company’s businessoperating segments, Climate Solutions and Performance Technologies. Each segment’s revenue is disaggregated by primary end market,product group, by geographic location and based upon the timing of revenue recognition:recognition.
| | Year ended March 31, 2020 | | | Year ended March 31, 2019 | | | | | VTS | | | CIS | | | BHVAC | | | Segment Total | | | VTS | | | CIS | | | BHVAC | | | Segment Total | | | Primary end market: | | | | | | | | | | | | | | | | | | | | | | | | | | Automotive | | $ | 508.8 | | | $ | - | | | $ | - | | | $ | 508.8 | | | $ | 542.8 | | | $ | - | | | $ | - | | | $ | 542.8 | | | Commercial vehicle | | | 323.7 | | | | - | | | | - | | | | 323.7 | | | | 387.6 | | | | - | | | | - | | | | 387.6 | | | Off-highway | | | 253.9 | | | | - | | | | - | | | | 253.9 | | | | 314.1 | | | | - | | | | - | | | | 314.1 | | | Commercial HVAC&R | | | - | | | | 463.1 | | | | 176.6 | | | | 639.7 | | | | - | | | | 506.3 | | | | 167.7 | | | | 674.0 | | | Data center cooling | | | - | | | | 107.5 | | | | 42.7 | | | | 150.2 | | | | - | | | | 145.7 | | | | 41.3 | | | | 187.0 | | | Industrial cooling | | | - | | | | 43.5 | | | | - | | | | 43.5 | | | | - | | | | 47.8 | | | | - | | | | 47.8 | | | Other | | | 90.8 | | | | 9.8 | | | | 1.8 | | | | 102.4 | | | | 107.2 | | | | 7.8 | | | | 3.4 | | | | 118.4 | | | Net sales | | $ | 1,177.2 | | | $ | 623.9 | | | $ | 221.1 | | | $ | 2,022.2 | | | $ | 1,351.7 | | | $ | 707.6 | | | $ | 212.4 | | | $ | 2,271.7 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Geographic location: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Americas | | $ | 554.4 | | | $ | 345.9 | | | $ | 139.1 | | | $ | 1,039.4 | | | $ | 613.7 | | | $ | 413.6 | | | $ | 124.9 | | | $ | 1,152.2 | | | Europe | | | 449.3 | | | | 232.6 | | | | 82.0 | | | | 763.9 | | | | 538.2 | | | | 244.8 | | | | 87.5 | | | | 870.5 | | | Asia | | | 173.5 | | | | 45.4 | | | | - | | | | 218.9 | | | | 199.8 | | | | 49.2 | | | | - | | | | 249.0 | | | Net sales | | $ | 1,177.2 | | | $ | 623.9 | | | $ | 221.1 | | | $ | 2,022.2 | | | $ | 1,351.7 | | | $ | 707.6 | | | $ | 212.4 | | | $ | 2,271.7 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Timing of revenue recognition: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Products transferred at a point in time | | $ | 1,146.4 | | | $ | 518.2 | | | $ | 221.1 | | | $ | 1,885.7 | | | $ | 1,308.5 | | | $ | 571.1 | | | $ | 212.4 | | | $ | 2,092.0 | | | Products transferred over time | | | 30.8 | | | | 105.7 | | | | - | | | | 136.5 | | | | 43.2 | | | | 136.5 | | | | - | | | | 179.7 | | | Net sales | | $ | 1,177.2 | | | $ | 623.9 | | | $ | 221.1 | | | $ | 2,022.2 | | | $ | 1,351.7 | | | $ | 707.6 | | | $ | 212.4 | | | $ | 2,271.7 | |
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 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, 2020 | | | March 31, 2019 | | | Contract assets | | $ | 21.7 | | | $ | 22.6 | | | Contract liabilities | | | 5.6 | | | | 4.0 | |
| | 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 $0.9$7.5 million decrease in contract assets during fiscal 20202023 primarily resulted from a decrease in capitalized costs related to customer-owned tooling contracts, partially offset by an increase in contract assets for revenue recognized over time.
Contract liabilities, included within other current liabilities in the consolidated balance sheets, consist of payments received in advance of satisfying performance obligations under customer contracts, including contracts for customer-owned tooling. The $1.6$9.7 million increase in contract liabilities during fiscal 2020 was2023 primarily related to customer contracts for which payment had beenresulted from payments received in advance of the Company’s satisfaction of performance obligations.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 3:4: Fair Value Measurements
Fair value is defined as the price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. Fair value measurements are classified under the following hierarchy:
Level 1 – Quoted prices for identical instruments in active markets. Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets. Level 3 – Model-derived valuations in which one or more significant inputs are not observable.
When available, the Company uses quoted market prices to determine fair value and classifies such measurements as Level 1. In some cases, where market prices are not available, the Company uses observable market-based inputs to calculate fair value, in which case the measurements are classified as Level 2. If quoted or observable market prices are not available, the Company determines fair value based upon valuation models that use, where possible, market-based data such as interest rates, yield curves or currency rates. These measurements are classified as Level 3.
The carrying values of cash, cash equivalents, restricted cash, short-term investments, trade accounts receivable, accounts payable, and short-term debt approximate fair value due to the short-term nature of these instruments. In addition, the Company assesses the fair value of a disposal group for each reporting period it is held for sale. See Note 2 for additional information regarding assets held for sale. The fair value of the Company’s long-term debt is disclosed in Note 17.
The Company holds investments in deferred compensation trusts to fund obligations under certain non-qualified deferred compensation plans. The Company records the fair value of these investments within other noncurrent assets on its consolidated balance sheets. The Company classifies money market investments held by the trusts within Level 2 of the valuation hierarchy. The Company classifies all other investments held by the trusts within Level 1 of the valuation hierarchy, as it uses quoted market prices to determine the investments’ fair value. The Company’s deferred compensation obligations, which are recorded as other noncurrent liabilities, are recorded at the fair values of the investments held by the trust. TheAt March 31, 2023 and 2022, the fair values of the investments and obligations for the Company’s deferred compensation plans each totaled $3.8$2.3 million and $6.0$2.9 million, asrespectively.
Plan assets related to the Company’s pension plans were classified as follows:
| | March 31, 2020 | | | | | Level 1 | | | Level 2 | | | Total | | | | | | | | | | | | | | Money market investments | | $ | - | | | $ | 2.4 | | | $ | 2.4 | | | Fixed income securities | | | - | | | | 8.7 | | | | 8.7 | | | Pooled equity funds | | | 17.9 | | | | - | | | | 17.9 | | | U.S. government and agency securities | | | - | | | | 13.1 | | | | 13.1 | | | Other | | | 0.1 | | | | 0.7 | | | | 0.8 | | | Fair value excluding investments measured at net asset value | | | 18.0 | | | | 24.9 | | | | 42.9 | | | Investments measured at net asset value | | | | | | | | | | | 88.2 | | | Total fair value | | | | | | | | | | $ | 131.1 | |
| | 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, 2019 | | | | | Level 1 | | | Level 2 | | | Total | | | | | | | | | | | | | | Money market investments | | $ | - | | | $ | 3.9 | | | $ | 3.9 | | | Fixed income securities | | | - | | | | 9.4 | | | | 9.4 | | | Pooled equity funds | | | 27.7 | | | | - | | | | 27.7 | | | U.S. government and agency securities | | | - | | | | 12.3 | | | | 12.3 | | | Other | | | 0.1 | | | | 0.9 | | | | 1.0 | | | Fair value excluding investment measured at net asset value | | | 27.8 | | | | 26.5 | | | | 54.3 | | | Investment measured at net asset value | | | | | | | | | | | 100.8 | | | Total fair value | | | | | | | | | | $ | 155.1 | |
| | 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 pooled equity funds based upon quoted prices from active markets and classified them within Level 1 of the valuation hierarchy. The Company determined the fair value of certain fixed 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, 20202023 and 2019,2022, the Company held 0no Level 3 assets within its pension plans.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
As a practical expedient, the Company valued certain investments, including pooled equity, fixed income and a real estate fund,funds, using their net asset value (NAV)(“NAV”) per unit, and therefore, has not classified these investments within the fair value hierarchy. The terms and conditions for redemptions vary for the investments valued at NAV. The real estate and fixed income investment fundsfund may be redeemed quarterly and monthly, respectively, with a 90-day and 60-day notice period, respectively.period. Other investments valued at NAV do not have significantly-restrictive redemption frequency or notice period requirements. The Company does not intend to sell or otherwise dispose of these investments at prices different than the NAV per unit.
Note 4:5: 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 stock awards, stock options, and performance-based stock awards granted for retention and performance, (2) a discretionary equity program for other management and key employees, and (3) stock awards for non-employee directors. The Company’s Board of Directors and the Officer NominationHuman Capital and Compensation Committee, as applicable, have discretionary authority to set the terms of the stock-based awards. Grants to employees during fiscal 20202023 were issued under the Company’s 2017Amended and Restated 2020 Incentive Compensation 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, 2020,2023, approximately 1.82.2 million shares authorized under the 2017Amended 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 $6.6$6.6 million $7.9, $5.7 million, and $9.5$6.3 million in fiscal 2020, 2019,2023, 2022, and 2018,2021, respectively.
Stock Options:Options The Company recorded $1.3$1.2 million $1.2, $1.1 million, and $1.2$0.9 million of compensation expense related to stock options in fiscal 2020, 2019,2023, 2022, and 2018,2021, respectively. During fiscal 2020, 2019, and 2018, theThe grant date fair value of stock options that vested during fiscal 2023, 2022, and 2021,was $1.2 million.$1.0 million, $0.9 million, and $1.3 million, respectively. As of March 31, 2020,2023, the total compensation expense not yet recognized related to non-vested stock options was $2.4$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:
| | Years ended March 31, | | | | | 2020 | | | 2019 | | | 2018 | | | Fair value of options | | $ | 5.56 | | | $ | 7.81 | | | $ | 7.30 | | | Expected life of awards in years | | | 6.3 | | | | 6.3 | | | | 6.4 | | | Risk-free interest rate | | | 2.2 | % | | | 2.8 | % | | | 1.9 | % | | Expected volatility of the Company's stock | | | 39.2 | % | | | 39.7 | % | | | 44.3 | % | | 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 | % |
Stock options expire no later than 10 years after the grant date and have an exercise price equal to the fair market value of Modine’s common stock on the date of grant. The risk-free interest rate was based upon 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 upon 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 upon 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.
A summary of stock option activity for fiscal 20202023 was as follows:
| | Shares | | | Weighted-average
exercise price | | | Weighted-average remaining contractual term (years) | | | Aggregate intrinsic value | | | Outstanding, beginning | | | 1.2 | | | $ | 12.24 | | | | | | | | | Granted | | | 0.3 | | | | 13.26 | | | | | | | | | Exercised | | | - | | | | 7.13 | | | | | | | | | Forfeited or expired | | | (0.1 | ) | | | 12.68 | | | | | | | | | Outstanding, ending | | | 1.4 | | | $ | 12.49 | | | | 5.6 | | | $ | - | | | | | | | | | | | | | | | | | | | | | Exercisable, March 31, 2020 | | | 0.9 | | | $ | 11.28 | | | | 3.9 | | | $ | - | |
| | 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 | |
AggregateThe aggregate intrinsic value represents the difference between the closing price of Modine’s common shares on the last trading day of fiscal 20202023 over the exercise price of the stock options, multiplied by the number of options outstanding or exercisable. As of March 31, 2020,The aggregate intrinsic value is not recorded for financial statement purposes, and this value will change based upon daily changes in the exercise price of outstanding options exceeded the closing price of ModineModine’s common shares and, as a result, the options had no intrinsic value.shares.
Additional information related to stock options exercised is as follows:
| | 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 | |
Additional information related to stock options exercised is as follows:
| | Years ended March 31, | | | | | 2020 | | | 2019 | | | 2018 | | | Intrinsic value of stock options exercised | | $ | 0.1 | | | $ | 0.7 | | | $ | 4.9 | | | Proceeds from stock options exercised | | | 0.1 | | | | 1.1 | | | | 4.3 | |
Restricted Stock:The Company recorded $4.5$5.4 million, $4.3$5.0 million, and $3.9$4.3 million of compensation expense related to restricted stock in fiscal 2020, 2019,2023, 2022, and 2018,2021, respectively. The grant date fair value of restricted stock awards that vested during fiscal 2020, 2019,2023, 2022, and 20182021 was $4.4$4.7 million, $4.3$4.4 million, and $3.9$4.5 million, respectively. At March 31, 2020,2023, the Company had $5.1$6.4 million of unrecognized compensation expense related to non-vested restricted stock, which it expects to recognize over a weighted-average period of 2.61.8 years. The Company values restricted stock awards using the closing market price 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 20202023 was as follows:
| | Shares | | | Weighted-average price | | | Non-vested balance, beginning | | | 0.5 | | | $ | 14.95 | | | Granted | | | 0.4 | | | | 13.54 | | | Vested | | | (0.3 | ) | | | 14.02 | | | Forfeited | | | (0.1 | ) | | | 14.99 | | | Non-vested balance, ending | | | 0.5 | | | $ | 14.48 | |
| | 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 $0.8 million, $2.4 million,granted performance-based cash awards in fiscal 2023, 2022, and $4.4 million2021 in lieu of compensation expense related toperformance-based stock awards. For performance-based stock awards, in fiscal 2020, 2019, and 2018, respectively. At March 31, 2020, the Company had $1.1 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 1.9 years. The Company values performance-based stockthe awards using the closing market price 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.
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. The performance componentsmetrics 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 programs initiatedthree-yearperformance period, commencing with the fiscal year of grant. The performance metrics for the performance-based cash awards granted in fiscal 20202022 and 2019fiscal 2023 are based upon both a target three-year average consolidated cash flow return on invested capital 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. The performance components of the program initiated in fiscal 2018 are based upon both a target three-year average consolidated return on capital employed and a target three-year average annual revenue growth at the end of a three-year performance period.
Note 5:6: Restructuring Activities
During fiscal 20202023, restructuring and 2019,repositioning expenses primarily consisted of severance-related expenses for targeted headcount reductions in each the Climate Solutions and Performance Technologies segments and supported the Company’s 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.
During fiscal 2022, the Company committed to restructuring actions intended to reduce SG&A and operational 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 Performance Technologies segment and primarily related to targeted headcount reductions in Europe. In addition, the Company implemented targeted headcount reductions in the Climate Solutions segment. Also in fiscal 2022, the Company incurred equipment transfer costs within the Performance Technologies segment.
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 VTSPerformance Technologies segment and supportsupported the Company’s objective to reduceof reducing operational and SG&A cost structures. Also,During fiscal 2021, the Company is in the process of transferring product lines totransferred production from its CIS manufacturing facility in Mexico in orderZhongshan, China to achieve operational improvements and organizational efficiencies.
During fiscal 2018, the Company ceased production at its Gailtal, Austriaanother Climate Solutions segment manufacturing facility primarily to reduce excess capacity and lower manufacturing costs in Europe.China. As a result of this facility closure,plant consolidation, the Company recorded $8.3 million of restructuring expenses within the CIS segment, primarily related to employee severance and related benefits. Fiscal 2018 restructuring activities also included plant consolidation activities, targeted headcount reductions, and certain product line transfers in Europe within the VTS segment. In addition, the Company recorded restructuring expenses associated with the discontinuance of its geothermal product line within the BHVAC segment.
During fiscal 2021, the Company approved headcount reductions in the VTS and CIS segments and, as a result, expects to record approximately $4.0$3.7 million of severance expenses during the first quarter of fiscal 2021. Other plant consolidation activities in fiscal 2021 included transferring product lines to the Company’s Climate Solutions manufacturing facility in Mexico.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Restructuring and repositioning expenses were as follows:
| | Years ended March 31, | | | | | 2020 | | | 2019 | | | 2018 | | | Employee severance and related benefits | | $ | 10.2 | | | $ | 8.7 | | | $ | 13.0 | | | Other restructuring and repositioning expenses | | | 2.0 | | | | 0.9 | | | | 3.0 | | | Total | | $ | 12.2 | | | $ | 9.6 | | | $ | 16.0 | |
| | 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, | | | | | 2020 | | | 2019 | | | Beginning balance | | $ | 10.0 | | | $ | 11.0 | | | Additions | | | 10.2 | | | | 8.7 | | | Payments | | | (15.1 | ) | | | (9.1 | ) | | Effect of exchange rate changes | | | (0.1 | ) | | | (0.6 | ) | | Ending balance | | $ | 5.0 | | | $ | 10.0 | |
| | 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 2020,2022 and 2021, the Company identified potential impairment indicators related to manufacturing facilities in Austria and Germany within the VTS segment. The Company anticipates the future cash flowsrecorded $56.0 million of these asset groups will be negatively impacted by planned wind downs of certain commercial vehicle and automotive programs. In response, the Company performed an impairment evaluation and recordeda net asset impairment reversal and $166.8 million of impairment charges, totaling $7.5 millionrespectively, within its VTS segment to write down property and equipment assets to fair value. The Company determined fair value using Level 3 inputs, primarily consisting of appraisals, which considered the market rental value, market conditions, physical condition of the assets, salability in the marketplace and estimated scrap values, based on the specialized nature of the machinery and equipment.Performance Technologies segment. See Note 2 for additional information.
Also during fiscal 2020,2022, the Company recorded a $0.6 millionan impairment charge of $0.3 million to reduce the carrying value of the previously-closed CIS Austriana previously closed Climate Solutions facility to its current estimated fair value, less costs to sell. During fiscal 2019 and 2018, the Company recorded asset impairment charges of $0.4 million and $1.3 million, respectively, related to this closed facility.
Note 6:7: Other Income and Expense
Other income and expense consisted of the following:
| | Years ended March 31, | | | | | 2020 | | | 2019 | | | 2018 | | | Equity in earnings of non-consolidated affiliate (a) | | $ | 0.2 | | | $ | 0.7 | | | $ | 0.2 | | | Interest income | | | 0.4 | | | | 0.4 | | | | 0.4 | | | Foreign currency transactions (b) | | | (2.4 | ) | | | (2.3 | ) | | | (0.6 | ) | | Net periodic benefit cost (c) | | | (3.0 | ) | | | (2.9 | ) | | | (3.3 | ) | | Total other expense - net | | $ | (4.8 | ) | | $ | (4.1 | ) | | $ | (3.3 | ) |
| | 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) | During fiscal 2020, the Company sold its ownership interest in Nikkei Heat Exchanger Company, Ltd. As a result of the sale, the Company recorded a gain of $0.1 million, which is included within the fiscal 2020 amount. See Note 12 for additional information.
|
| (b) | 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) | (c) | Net periodic benefit cost for the Company’s pension and postretirement plans is exclusive of service cost. cost. |
Note 7:8: Income Taxes
The U.S. and foreign components of earnings or loss before income taxes and the provisionbenefit or benefitprovision for income taxes consisted of the following:
| | Years ended March 31, | | | | | 2020 | | | 2019 | | | 2018 | | | Components of earnings (loss) before income taxes: | | | | | | | | | | | United States | | $ | (26.1 | ) | | $ | 22.4 | | | $ | 2.5 | | | Foreign | | | 36.5 | | | | 58.4 | | | | 60.8 | | | Total earnings before income taxes | | $ | 10.4 | | | $ | 80.8 | | | $ | 63.3 | |
| | 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 provision (benefit): | | | | | | | | | | | Federal: | | | | | | | | | | | Current | | $ | (3.4 | ) | | $ | (20.4 | ) | | $ | 11.6 | | | Deferred | | | (1.7 | ) | | | (4.2 | ) | | | 23.3 | | | State: | | | | | | | | | | | | | | Current | | | (0.1 | ) | | | 0.7 | | | | (0.3 | ) | | Deferred | | | (2.3 | ) | | | 1.9 | | | | 2.0 | | | Foreign: | | | | | | | | | | | | | | Current | | | 14.9 | | | | 19.0 | | | | 16.1 | | | Deferred | | | 5.0 | | | | (2.1 | ) | | | (13.2 | ) | | Total income tax provision (benefit) | | $ | 12.4 | | | $ | (5.1 | ) | | $ | 39.5 | |
| 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 | |
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Act. Shortly after the Tax Act was enacted, the SEC issued accounting guidance which provided a one-year measurement period during which a company could complete its accounting for the impacts of the Tax Act. To the extent a company’s accounting for certain income tax effects of the Tax Act was incomplete, the company could determine a reasonable estimate for those effects and record a provisional estimate in its financial statements. If a company could not determine a provisional estimate to be included in the financial statements, it was to continue applying the provisions of the tax laws that were in effect immediately prior to the Tax Act being enacted.
During fiscal 2018, the Company recorded provisional discrete tax charges totaling $38.0 million related to the Tax Act. The Company adjusted its U.S. deferred tax assets by $19.0 million due to the reduction in the U.S. federal corporate tax rate. This net reduction in deferred tax assets also included the estimated impact on the Company’s net state deferred tax assets. In addition, the Company recorded a $19.0 million charge for the transition tax required under the Tax Act.
During fiscal 2019, the Company completed its accounting for the Tax Act, which resulted in an income tax benefit totaling $7.7 million. The Company utilized its deferred tax attributes against the transition tax and finalized its fiscal 2018 U.S. federal income tax return. As a result, the Company decreased the provisional charge recorded for the reduction in the U.S. federal corporate tax rate by $9.3 million, since more deferred tax assets were utilized to offset taxable income at a higher fiscal 2018 U.S. federal corporate tax rate. The Company also decreased the transition tax liability to $18.9 million, a reduction of $0.1 million. In addition, the Company recorded a charge of $1.7 million for a reduction to state deferred tax assets.
The Tax Act included a new provision designed to tax global intangible low taxed income (“GILTI”) starting in fiscal 2019. The Company elected to record the tax effects of the GILTI provision as a period expense in the applicable tax year. To determine whether its net operating loss carryforward deferred tax assets are expected to be realized, the Company considers the applicable tax law ordering. Based upon this approach, net operating loss carryforwards are deemed to be realizable if they will reduce the expected tax liability when utilized, regardless of whether the 50% GILTI deduction or applicable tax credits may have been available.
The Company’s accounting policy is to allocate the income tax provision between net earnings and other comprehensive income. The Company applies its accounting for income taxes by tax jurisdiction, and in periods in which there is a loss before income taxes and pre-tax income in other comprehensive income, it first allocates the income tax provision to other comprehensive income, and then records a related tax benefit in the income tax provision.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The reconciliation between the U.S. federal statutory rate and the Company’s effective tax rate was as follows:
| | Years ended March 31, | | | | | 2020 | | | 2019 | | | 2018 | | | Statutory federal tax | | | 21.0 | % | | | 21.0 | % | | | 31.5 | % | | State taxes, net of federal benefit | | | (12.0 | ) | | | 3.6 | | | | 2.9 | | | Taxes on non-U.S. earnings and losses | | | 32.9 | | | | 3.9 | | | | (3.8 | ) | | Valuation allowances | | | 156.9 | | | | 4.0 | | | | (5.6 | ) | | Tax credits | | | (36.7 | ) | | | (26.1 | ) | | | (17.3 | ) | | Compensation | | | 4.0 | | | | (0.1 | ) | | | (0.8 | ) | | Tax rate or law changes | | | 3.6 | | | | (12.0 | ) | | | 60.1 | | | Uncertain tax positions, net of settlements | | | (37.9 | ) | | | 0.4 | | | | (0.8 | ) | | Notional interest deductions | | | (12.5 | ) | | | (2.5 | ) | | | (3.2 | ) | | Dividends and taxable foreign inclusions | | | (11.0 | ) | | | 1.6 | | | | 0.2 | | | Other | | | 10.9 | | | | (0.1 | ) | | | (0.8 | ) | | Effective tax rate | | | 119.2 | % | | | (6.3 | %) | | | 62.4 | % |
| | 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 DuringCompany’s fiscal 2020, the Company recorded net income2023 effective tax charges totaling $2.9 million as a result of legal entity restructuring completed in preparation of a potential sale of the automotive business and a $1.4 millionrate was favorably impacted by an income tax benefit resulting fromrelated to the recognition of a tax incentive in Italy. Also in fiscal 2020, the Company changed its determination of whether it was more likely than not certainvaluation allowance on deferred tax assets in the U.S. The effective tax rates in both fiscal 2022 and in a foreign jurisdiction would be realized and, as a result, adjusted the respective valuation allowances and recorded an income tax charge of $8.4 million and an income tax benefit of $1.3 million, respectively. In addition, the Company recorded a net increase of deferred tax asset valuation allowances totaling $9.2 million related to other tax jurisdictions and recorded a $4.5 million income tax benefit associated with the reduction in unrecognized tax benefits resulting from a lapse in statutes of limitations and settlements.
During fiscal 2019, the Company recorded income tax benefits totaling $7.7 million2021 were significantly impacted by impairment charges or reversals, largely related to the Tax Act, as discussed above; recordedliquid-cooled automotive business, and income tax charges or benefits totaling $14.5 million as a result of amending previous-year tax returnsrelated to recognize foreign tax credits that are expected to be realized based upon future sources of income;valuation allowances. See Note 2 for information regarding the impairment charges and recorded a $2.5 millionreversals. The income tax benefitcharges or benefits related to a manufacturing deduction in the United States. Also in fiscal 2019, the Company changed its determination of whether it was more likely than not certain deferred tax assets of two separate subsidiaries in a foreign jurisdiction would be realized and, as a result, adjusted the respective valuation allowances and recorded an income tax benefit totaling $1.0 million. In addition, the Company recorded a net increase of deferred tax asset valuation allowances totaling $4.3 million related to other tax jurisdictions and recorded a $2.2 million income tax benefit associated with the reduction in unrecognized tax benefits resulting from a lapse in statutes of limitations.are described below.
During fiscal 2018, the Company recorded provisional charges totaling $38.0 million related to the Tax Act, as discussed above, and recognized a $9.0 million Hungarian development tax credit. Also in fiscal 2018, the Company reversed a portion61
The Company has recordedrecords valuation allowances against its net deferred tax assets to the extent it has determineddetermines 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. As further discussed in Note 20, the COVID-19 pandemic has resulted in risks and uncertainties to our business. Future events or circumstances, such as lower taxable income or unfavorable changes in the financial outlook of the Company’s operations in certain jurisdictions, could necessitate the establishment of further valuation allowances, which could have a material adverse effect on the Company’s results of operations and financial condition.allowances.
The tax effects of temporary differences that gave rise to deferred tax assets and liabilities were as follows:
| | March 31, | | | | | 2020 | | | 2019 | | | Deferred tax assets: | | | | | | | | Accounts receivable | | $ | 0.3 | | | $ | 0.2 | | | Inventories | | | 4.5 | | | | 3.4 | | | Plant and equipment | | | 4.7 | | | | 1.8 | | | Lease liabilities | | | 15.7 | | | | - | | | Pension and employee benefits | | | 45.1 | | | | 32.7 | | | Net operating and capital losses | | | 70.2 | | | | 73.5 | | | Credit carryforwards | | | 56.8 | | | | 60.3 | | | Other, principally accrued liabilities | | | 8.1 | | | | 10.0 | | | Total gross deferred tax assets | | | 205.4 | | | | 181.9 | | | Less: valuation allowances | | | (46.9 | ) | | | (43.4 | ) | | Net deferred tax assets | | | 158.5 | | | | 138.5 | | | | | | | | | | | | | Deferred tax liabilities: | | | | | | | | | | Plant and equipment | | | 13.1 | | | | 15.1 | | | Lease assets | | | 15.6 | | | | - | | | Goodwill | | | 4.8 | | | | 4.8 | | | Intangible assets | | | 26.4 | | | | 28.8 | | | Other | | | 1.9 | | | | 0.9 | | | Total gross deferred tax liabilities | | | 61.8 | | | | 49.6 | | | Net deferred tax assets | | $ | 96.7 | | | $ | 88.9 | |
| | 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 | |
Unrecognized tax benefits were as follows:
| | Years ended March 31, | | | | | 2020 | | | 2019 | | | Beginning balance | | $ | 13.8 | | | $ | 13.6 | | | Gross increases - tax positions in prior period | | | 0.3 | | | | 1.6 | | | Gross decreases - tax positions in prior period | | | (1.0 | ) | | | (0.2 | ) | | Gross increases - tax positions in current period | | | 1.1 | | | | 1.1 | | | Settlements | | | (2.1 | ) | | | (0.1 | ) | | Lapse of statute of limitations | | | (2.4 | ) | | | (2.2 | ) | | Ending balance | | $ | 9.7 | | | $ | 13.8 | |
| | 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, 20202023 was $9.7 million and, if recognized, $7.9$7.8 million would have an effective tax rate impact. The Company estimates a $0.6$2.0 million net decrease in unrecognized tax benefits during fiscal 20212024 mainly due to lapses in statutes of limitations and settlements.limitations. If recognized, these reductions would not have a significantan 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 20202023, 2022 and 2019,2021, interest and penalties included within income tax expense in the consolidated statements of operations were not significant. At March 31, 20202023 and 2019,2022, accrued interest and penalties totaled $0.5$0.8 million and $1.1$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, 2020,2023, the Company was under income tax examination in a number of jurisdictions. The following tax years remain subject to examination for the Company’s major tax jurisdictions:
| Germany | Fiscal 20112017 - Fiscal 20192022 | | Italy | Calendar 2015Fiscal 2018 - Fiscal 20192022 | | United States | Fiscal 20172020 - Fiscal 20192022 |
At March 31, 2020, the Company had federal and state tax credits of $61.6 million that, if not utilized against U.S. taxes, will expire between fiscal 2021 and 2040. The Company also had state and local tax loss carryforwards totaling $149.8 million that, if not utilized against state apportioned taxable income, will expire between fiscal 2021 and 2040. In addition, the Company had tax loss and foreign attribute carryforwards totaling $314.7 million in various tax jurisdictions throughout the world. Certain of the carryforwards in the U.S. and in foreign jurisdictions are offset by valuation allowances. If not utilized against taxable income, $8.1 million of these carryforwards will expire between fiscal 2021 and 2034, and $306.6 million, mainly related to Germany and Italy, will not expire due to an unlimited carryforward period.
At March 31, 2023, the Company had federal and state tax credits of $60.4 million that, if not utilized against U.S. taxes, will expire between fiscal 2024 and 2043. The Company also had state and local tax loss carryforwards totaling $136.7 million. If not utilized against state apportioned taxable income, certain state and local carryforwards will expire between fiscal 2024 and 2042, while some will not expire due to an unlimited carryforward period. In addition, the Company had tax loss and foreign attribute carryforwards totaling $285.0 million in various tax jurisdictions throughout the world. Certain of the carryforwards in foreign jurisdictions are offset by valuation allowances. If not utilized against taxable income, $54.9 million of these carryforwards will expire between fiscal 2024 and 2034, and $230.1 million, mainly related to Germany and Italy, will not expire due to an unlimited carryforward period.
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 has not recorded foreign withholding taxes or deferred income taxes for these earnings. The Company has estimated the net amount of unrecognized foreign withholding tax and deferred tax liabilities would total approximately $7.0$12.0 million if the accumulated foreign earnings were distributed; however, the actual tax cost would be dependent on circumstances existing when remittance occurs.
Note 8:9: Earnings Per Share
The components of basic and diluted earnings per share were as follows:
| | Years ended March 31, | | | | | 2020 | | | 2019 | | | 2018 | | | Basic Earnings Per Share: | | | | | | | | | | | Net (loss) earnings attributable to Modine | | $ | (2.2 | ) | | $ | 84.8 | | | $ | 22.2 | | | Less: Undistributed earnings attributable to unvested shares | | | - | | | | (0.4 | ) | | | (0.2 | ) | | Net (loss) earnings available to Modine shareholders | | $ | (2.2 | ) | | $ | 84.4 | | | $ | 22.0 | | | | | | | | | | | | | | | | | Weighted-average shares outstanding - basic | | | 50.8 | | | | 50.5 | | | | 49.9 | | | | | | | | | | | | | | | | | Net (loss) earnings per share - basic | | $ | (0.04 | ) | | $ | 1.67 | | | $ | 0.44 | | | | | | | | | | | | | | | | | Diluted Earnings Per Share: | | | | | | | | | | | | | | Net (loss) earnings attributable to Modine | | $ | (2.2 | ) | | $ | 84.8 | | | $ | 22.2 | | | Less: Undistributed earnings attributable to unvested shares | | | - | | | | (0.2 | ) | | | (0.1 | ) | | Net (loss) earnings available to Modine shareholders | | $ | (2.2 | ) | | $ | 84.6 | | | $ | 22.1 | | | | | | | | | | | | | | | | | Weighted-average shares outstanding - basic | | | 50.8 | | | | 50.5 | | | | 49.9 | | | Effect of dilutive securities | | | - | | | | 0.8 | | | | 1.0 | | | Weighted-average shares outstanding - diluted | | | 50.8 | | | | 51.3 | | | | 50.9 | | | | | | | | | | | | | | | | | Net (loss) earnings per share - diluted | | $ | (0.04 | ) | | $ | 1.65 | | | $ | 0.43 | |
| | 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 fiscal 2020, 20192023, 2022 and 2018,2021, the calculation of diluted earnings per share excluded 1.10.5 million, 0.40.5 million, and 0.21.0 million, stock options, respectively, because they were anti-dilutive. For fiscal 20202023, 2022 and 2019,2021, the calculation of diluted earnings per share excluded 0.50.2 million, 0.2 million, and 0.30.4 million restricted stock awards, respectively, because they were anti-dilutive. For fiscal 2020,2021 the total number of potentially-dilutive securities was 0.30.2 million. However, these securities were not included in the computation of diluted net loss per share since to do so would have decreased the loss per share.
Note 9:10: Cash, Cash Equivalents and Restricted Cash
Cash, cash equivalents and restricted cash consisted of the following:
| | March 31, | | | | | 2020 | | | 2019 | | | Cash and cash equivalents | | $ | 70.9 | | | $ | 41.7 | | | Restricted cash | | | 0.4 | | | | 0.5 | | | Total cash, cash equivalents and restricted cash | | $ | 71.3 | | | $ | 42.2 | |
| | 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.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 10:11: Inventories
Inventories consisted of the following:
| | March 31, | | | | | 2020 | | | 2019 | | | Raw materials | | $ | 123.6 | | | $ | 122.8 | | | Work in process | | | 34.6 | | | | 32.2 | | | Finished goods | | | 49.2 | | | | 45.7 | | | Total inventories | | $ | 207.4 | | | $ | 200.7 | |
| | 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 | |
Note 11:12: Property, Plant and Equipment
Property, plant and equipment, including depreciable lives, consisted of the following:
| | March 31, | | | | | 2020 | | | 2019 | | | Land | | $ | 19.7 | | | $ | 20.7 | | | Buildings and improvements (10-40 years) | | | 276.7 | | | | 285.9 | | | Machinery and equipment (3-15 years) | | | 870.3 | | | | 848.7 | | | Office equipment (3-10 years) | | | 95.2 | | | | 92.0 | | | Construction in progress | | | 40.5 | | | | 57.4 | | | | | | 1,302.4 | | | | 1,304.7 | | | Less: accumulated depreciation | | | (854.4 | ) | | | (820.0 | ) | | Net property, plant and equipment | | $ | 448.0 | | | $ | 484.7 | |
| | 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 $68.2$46.5 million, $67.9$46.4 million, and $67.0$60.1 million for fiscal 2020, 2019,2023, 2022, and 2018,2021, respectively.
Gains and losses related to the disposal of property, plant and equipment are recorded within SG&A expenses. For fiscal 2020, 2019,2023 and 2018,2021, losses related to the disposal of property, plant and equipment totaled $0.6 million, $0.9$0.1 million and $0.7 million, respectively.
Note 12: Investment in Affiliate For fiscal 2022, gains related to the disposal of property, plant and equipment totaled $0.1 million.
During fiscal 2020, the Company completed the sale of its 50 percent ownership interest in Nikkei Heat Exchanger Company, Ltd. (“NEX”) for a selling price of $3.8 million. As a result of this sale, the Company recorded a gain of $0.1 million, which included the write-off of accumulated foreign currency translation gains of $0.6 million, within other income and expense on the consolidated statement of operations.
Prior to the sale, the Company accounted for its investment in this non-consolidated affiliate using the equity method. The Company included its investment in NEX of $3.8 million within other noncurrent assets on the March 31, 2019 consolidated balance sheet. The Company reported its equity in earnings from NEX within other income and expense in the consolidated statements of operations, using a one-month reporting delay. The Company’s share of NEX’s earnings for fiscal 2020, 2019, and 2018 was $0.1 million, $0.7 million, and $0.2 million, respectively.
Note 13: Intangible Assets
Intangible assets consisted of the following:
| | March 31, 2020 | | | March 31, 2019 | | | | | Gross Carrying Value | | | Accumulated Amortization | | | Net Intangible Assets | | | Gross Carrying Value | | | Accumulated Amortization | | | Net Intangible Assets | | | Customer relationships | | $ | 60.8 | | | $ | (12.6 | ) | | $ | 48.2 | | | $ | 61.5 | | | $ | (9.1 | ) | | $ | 52.4 | | | Trade names | | | 58.3 | | | | (16.2 | ) | | | 42.1 | | | | 58.9 | | | | (13.5 | ) | | | 45.4 | | | Acquired technology | | | 23.6 | | | | (7.6 | ) | | | 16.0 | | | | 23.9 | | | | (5.5 | ) | | | 18.4 | | | Total intangible assets | | $ | 142.7 | | | $ | (36.4 | ) | | $ | 106.3 | | | $ | 144.3 | | | $ | (28.1 | ) | | $ | 116.2 | |
The Company recorded $8.9 million, $9.0 million, and $9.7 million of amortization expense during fiscal 2020, 2019, and 2018, respectively. The Company estimates that it will record $8.4 million of amortization expense in fiscal 2021 and approximately $8.0 million of annual amortization expense in fiscal 2022 through 2025.
During fiscal 2018, the BHVAC segment discontinued its geothermal product line and, as a result, recorded a $1.2 million impairment charge for acquired technology intangible assets.
| | 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 $8.0 million, $8.4 million, and $8.5 million of amortization expense during fiscal 2023, 2022, and 2021, respectively. The Company estimates that it will record approximately $8.0 million of annual amortization expense in fiscal 2024 through 2028.
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.
| | VTS | | | CIS | | | BHVAC | | | Total | | | Balance, March 31, 2018 | | $ | 0.5 | | | $ | 158.3 | | | $ | 15.0 | | | $ | 173.8 | | | Effect of exchange rate changes | | | - | | | | (4.4 | ) | | | (0.9 | ) | | | (5.3 | ) | | Balance, March 31, 2019 | | | 0.5 | | | | 153.9 | | | | 14.1 | | | | 168.5 | | | Impairment charge | | | (0.5 | ) | | | - | | | | - | | | | (0.5 | ) | | Effect of exchange rate changes | | | - | | | | (1.3 | ) | | | (0.6 | ) | | | (1.9 | ) | | Balance, March 31, 2020 | | $ | - | | | $ | 152.6 | | | $ | 13.5 | | | $ | 166.1 | |
| | 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. Annually, the Company conducts itsTo test goodwill for impairment, assessment during the fourth quarter by applying a fair value-based test. For purposes of its assessment, the Company determines the fair value of each reporting unit based upon the present value of estimated future cash flows.flows and compares the fair value of each reporting unit with its carrying value. The Company’s determination of fair value involves judgment and the use of significant estimates and assumptions, including assumptions regarding the revenue growth rates and operating profit margins used to calculate estimated future cash flows and risk-adjusted discount rates, business trends and market conditions.rates.
As a result of its annual goodwill impairment testtests performed during the fourth quarteras of fiscal 2020,March 31, 2023, the Company determined that the fair value of each of the reporting units within its CISClimate Solutions and BHVACPerformance Technologies segments exceeded their respective book values. The Company determined, however, that the goodwill recorded within its VTS segment was fully impaired and recorded a $0.5 million impairment charge as a result. The impairment charge was primarily caused by a recent decline in the estimated fair value of the automotive business within the VTS segment.
At both March 31, 20202023 and 2019,2022, accumulated goodwill impairment losses totaled $40.8 million and $40.3 million, respectively, within the VTS segment. Performance Technologies segment.
Note 15: Product Warranties and Other Commitments
Product warrantiesWarranties : Many 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 and adjusts its warranty accruals if it becomes probable that expected claims will differ from previous estimates.
Changes in accrued warranty costs were as follows:
| | Years ended March 31, | | | | | 2020 | | | 2019 | | | Beginning balance | | $ | 9.2 | | | $ | 9.3 | | | Warranties recorded at time of sale | | | 5.3 | | | | 5.5 | | | Adjustments to pre-existing warranties | | | (1.6 | ) | | | 2.2 | | | Settlements | | | (4.8 | ) | | | (7.3 | ) | | Effect of exchange rate changes | | | (0.2 | ) | | | (0.5 | ) | | Ending balance | | $ | 7.9 | | | $ | 9.2 | |
| | 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 | |
Indemnification agreements: 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, 20202023 was not material.
Commitments Commitments: At March 31, 2020,2023, the Company had capital expenditure commitments of $12.0 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 VTSPerformance 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.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 16: Leases
Effective April 1, 2019, the Company adopted new lease accounting guidance and, as a result, recorded $61.3 million of right-of-use (“ROU”) assets and corresponding lease liabilities for operating leases on its consolidated balance sheet. The consolidated financial statements for fiscal 2020 reflect the adoption of this new guidance; however, fiscal 2019, fiscal 2018 and prior-years have not been adjusted. See Note 1 for additional information regarding the Company’s adoption of the new guidance.
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 based uponto calculate the information available atROU asset and lease commencement.liability. In determining the incremental borrowing rate, the Company considers its current collateralized borrowing rate, the term of the lease, and the economic environmentsenvironment 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 and recognizes payments for these leases as lease expense.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 office buildings.offices. In addition, the Company leases certain manufacturing and IT equipment and vehicles. The Company’s most significant leases have remaining lease terms of 1 to 1511 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 any material residual value guarantees or material restrictive covenants.
Lease Assets and Liabilities: Liabilities The following table provides a summary of leases recorded on the consolidated balance sheet. sheets.
| Balance Sheet Location | | March 31, 2020 | | Lease Assets | | | | | | Operating lease ROU assets | Other noncurrent assets | | $ | 61.4 | | Finance lease ROU assets (a) | Property, plant and equipment - net | | | 8.5 | | | | | | | | Lease Liabilities | | | | | | Operating lease liabilities | Other current liabilities | | $ | 10.9 | | Operating lease liabilities | Other noncurrent liabilities | | | 50.3 | | Finance lease liabilities | Long-term debt - current portion | | | 0.4 | | Finance lease liabilities | Long-term debt | | | 3.3 |
| | 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 | |
| (a) | Finance lease ROU assets were recorded net of accumulated amortization of $1.8$3.2 million and $2.8 million as of March 31, 2020.2023 and 2022, respectively. |
Components of Lease Expense: 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 | |
63| (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 | |
The components of lease expense were as follows:
| | Year ended March 31, 2020 | | | Operating lease expense (a) | | $ | 21.2 | | | Finance lease expense: | | | | | | Depreciation of ROU assets | | | 0.5 | | | Interest on lease liabilities | | | 0.2 | | | Total lease expense | | $ | 21.9 | |
| (a) | In fiscal 2020, operating lease expense included short-term lease expense of $4.1 million. Variable lease expense was not significant. |
Supplemental Cash Flow Information
| | Year ended March 31, 2020 | | | Cash paid for amounts included in the measurement of lease liabilities: | | | | | Operating cash flows for operating leases | | $ | 14.7 | | | Financing cash flows for finance leases | | | 0.5 | | | | | | | | | ROU assets obtained in exchange for lease liabilities | | | | | | Operating leases | | $ | 9.0 | | | Finance leases | | | 0.2 | |
Lease Term and Discount Rates
| | March 31, 2020 | | Weighted-average remaining lease term: | | | | Operating leases | | 9.3 years | | Finance leases | | 8.8 years | | | | | | Weighted-average discount rate: | | | | Operating leases | | | 3.5 | % | Finance leases | | | 4.7 | % |
| | 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 under New Lease Accounting Guidance: Future minimum rental payments for leases with initial non-cancellable lease terms in excess of one year were as follows at March 31, 2020:2023:
| Fiscal Year | | Operating Leases | | | Finance Leases | | | 2021 | | $ | 12.8 | | | $ | 0.5 | | | 2022 | | | 11.4 | | | | 0.5 | | | 2023 | | | 9.3 | | | | 0.5 | | | 2024 | | | 6.3 | | | | 0.5 | | | 2025 | | | 5.8 | | | | 0.5 | | | 2026 and beyond | | | 26.2 | | | | 2.0 | | | Total lease payments | | | 71.8 | | | | 4.5 | | | Less: Interest | | | (10.6 | ) | | | (0.8 | ) | | Present value of lease liabilities | | $ | 61.2 | | | $ | 3.7 | |
| 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 64
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.
Maturity of Lease Liabilities under Previous Lease Accounting Guidance: Future minimum rental payments for operating leases with initial non-cancellable lease terms in excess of one year were as follows at March 31, 2019:
| Fiscal Year | | | | | 2020 | | $ | 14.2 | | | 2021 | | | 12.4 | | | 2022 | | | 9.1 | | | 2023 | | | 7.1 | | | 2024 | | | 4.7 | | | 2025 and beyond | | | 22.9 | | | Total | | $ | 70.4 | |
The Company recorded $19.3 million and $18.5 million of rental expense related to operating leases in fiscal 2019 and 2018, respectively.
Note 17: IndebtednessLong-term debt consisted of the following:
| 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 finance lease obligations. |
In June 2019,Long-term debt, including the Company executedcurrent 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 Fourth Amended and Restated Credit Agreement with a syndicate of banks that provides for a multi-currency $250.0 million revolving credit, facility expiring in June 2024, which modified the Company’s then-existing revolver that would have expired in November 2021. In addition, this credit agreement provided for both U.S. dollar- and euro-denominated term loan facilities, with repayments continuing into fiscal 2025. These term loans replaced the previously-existing term loans with repayments scheduled through fiscal 2022. As a result of the credit agreement modification, the Company deferred debt issuance costs of $1.1 million, which are being amortized over the term of the debt. Borrowings under both the revolving creditswingline and term loan facilities bear interest at a variable rate, based upon the applicable reference rate and including a margin percentage dependent upon the Company’s leverage ratio, as described below. At March 31, 2020,2023, the weighted-average interest ratesrate for revolving credit facility borrowings and the term loans were 3.0 percent and 2.8 percent, respectively. At March 31, 2020, the Company’s revolving credit facility borrowings totaled $127.2 million and domestic letters of credit totaled $5.3 million, resulting in available borrowings under the revolving credit facility of $117.5 million.
In January 2020, the Company issued $100.0 million of 5.9 percent Senior Notes with repayments ending in fiscal 2029. The Company used the majority of the proceeds to satisfy the remaining principal balance of the 6.8 percent Senior Notes, which were scheduled to mature in August 2020. As a result of the credit agreement modification, the Company deferred debt issuance costs of $1.7 million, which are being amortized over the term of the debt.
was 6.0 percent. Based upon the terms of the credit agreement, the Company determined thatclassifies borrowings under its revolving credit facility should be classifiedand swingline facilities as long-term debt. Accordingly,and short-term debt, respectively, on its consolidated balance sheets.
At March 31, 2023, the Company has reclassifiedhad no outstanding borrowings related to the revolving credit and swingling facilities and domestic letters of $47.1credit 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 facility fromand swingline facilities totaled $64.9 million and $7.0 million, respectively.
The Company also maintains credit agreements for its foreign subsidiaries. The outstanding short-term borrowings related to long-term debt on thethese foreign credit agreements totaled $3.7 million and $0.7 million at March 31, 2019 balance sheet2023 and within the related disclosures.March 31, 2022, respectively.
Long-term debt consisted
Indebtedness under the Company’s credit agreement and Senior Note agreements is secured by liens on substantially all domestic assets. These agreements further require compliance with various covenants that may limit the Company’s ability to incur 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 the following:certain asset sales. | io | Fiscal year of maturity | | March 31, 2020 | | | March 31, 2019 | | | | | | | | | | | | Term loans | 2025 | | $ | 189.4 | | | $ | 238.4 | | | Revolving credit facility | 2025 | | | 127.2 | | | | 47.1 | | | 5.9% Senior Notes | 2029 | | | 100.0 | | | | - | | | 5.8% Senior Notes | 2027 | | | 50.0 | | | | 50.0 | | | 6.8% Senior Notes | 2021 | | | - | | | | 85.0 | | | Other (a) | | | | 6.0 | | | | 14.3 | | | | | | | 472.6 | | | | 434.8 | | | Less: current portion | | | | (15.6 | ) | | | (48.6 | ) | | Less: unamortized debt issuance costs | | | | (5.0 | ) | | | (4.0 | ) | | Total long-term debt | | | $ | 452.0 | | | $ | 382.2 | |
| (a) | Other long-term debt primarily includes borrowings by foreign subsidiaries and finance lease obligations. |
Long-term debt matures as follows:
| Fiscal Year | | | | | 2021 | | $ | 15.6 | | | 2022 | | | 21.7 | | | 2023 | | | 21.7 | | | 2024 | | | 21.7 | | | 2025 | | | 273.6 | | | 2026 & beyond | | | 118.3 | | | Total | | $ | 472.6 | |
The Company also maintainsFinancial covenants within its credit agreements for its foreign subsidiaries, with outstanding short-term borrowings at March 31, 2020 and 2019 of $14.8 million and $18.9 million, respectively.
Provisions in the Company’s credit agreement, Senior Note agreements, and various foreign credit agreements require the Company to maintain compliance with various covenants and include certain cross-default clauses. Under its primary credit agreements in the U.S., the Company has provided liens on substantially all domestic assets. Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales. In addition, at the time of each incremental borrowing under the revolving credit facility, the Company is required to represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on its business, property, or results of operations.
The Company is subject to a leverage ratio covenant, which requires the Company to limit its consolidated indebtedness, less a portion of its cash balance,balances, both as defined by the credit agreements, in relation to itsno more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”.). The leverage ratio covenant limit was 3.25 to 1 through the fourth quarter of fiscal 2020. The Company ismust also subject to an interest expense coveragemaintain a ratio covenant, 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, 2020.covenants.
In May 2020, the Company executed amendments to its primary credit agreements in the U.S. Under the amended agreements, the leverage ratio covenant limit is temporarily raised. The leverage ratio covenant limit in fiscal 2021 is 4.00 to 1, 4.75 to 1, 5.25 to 1, and 5.75 to 1 for the first, second, third, and fourth quarters, respectively. In fiscal 2022, the leverage ratio covenant limit is 4.75 to 1, 3.75 to 1, and 3.50 to 1 for the first, second and third quarters, respectively, and subsequently returns to 3.25 to 1 for the fourth quarter of fiscal 2022.
The Company estimates the fair value of long-term debt using discounted future cash flows at rates offered to the Company for similar debt instruments of comparable maturities. As of March 31, 20202023 and 2019,2022, the carrying value of the Company’s long-term debt approximated fair value, with the exception of the Senior Notes, which had an aggregate fair value of approximately $131.3$125.9 million and $137.2$138.9 million, respectively. The fair value of the Company’s long-term debt is categorized as Level 2 within the fair value hierarchy. Refer to Note 34 for the definition of a Level 2 fair value measurement.
Note 18: Pension and Employee Benefit Plans
Defined Contribution Employee Benefit Plans:
The Company maintains a domestic 401(k) plan that allows employees to contribute a portion of their salary to help them save for retirement. The Company currently matches employee contributions up to 4.5 percent of their compensationcompensation. During fiscal 2021, as part of its response to the negative impacts of the COVID-19 pandemic, the Company suspended matching employee contributions for participants.part of the year. The Company’s expense for defined contribution employee benefit plans during fiscal 2020, 2019,2023, 2022, and 20182021 was $6.6 $6.9 million, $6.4 million, and $5.2$3.0 million, respectively.
In addition, the Company maintains non-qualified deferred compensation plans 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:
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 substantially unfunded in accordance with local laws.
Pension Plans
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Defined Benefit Employee Benefit 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 domestic employees hired on or before December 31, 2003 and provide benefits based primarily upon years of service and average compensation for salaried and some hourly employees. Benefits for other hourly employees are based upon a monthly retirement benefit amount. 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 Austria, and Italy and are closed to new participants. The Company previously 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.
TheIn connection with funding relief provisions within the American Rescue Plan Act of 2021, the Company contributed $3.5 million, $8.0 million, and $13.4 milliondid not make cash contributions to its U.S. pension plans during fiscal 2020, 2019,2023. The Company contributed $3.5 million and 2018,$19.3 million to its U.S. pension plans during fiscal 2022 and 2021, respectively. In addition, the Company contributed $2.3$1.5 million, $5.9$1.5 million, and $2.6$2.2 million to its non-U.S. pension plans during fiscal 2020, 2019,2023, 2022, and 2018,2021, respectively. These contributions are reported in the change in other liabilities in the consolidated statements of cash flows.
Postretirement plans: 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 2020, 2019,2023, 2022, and 20182021 was $0.3 million, $0.3 million, and $0.2 million, respectively.million.
Measurement date: 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, were as follows:
| | Years ended March 31, | | | | | 2020 | | | 2019 | | | Change in benefit obligation: | | | | | | | | Benefit obligation at beginning of year | | $ | 258.8 | | | $ | 273.6 | | | Service cost | | | 0.4 | | | | 0.5 | | | Interest cost | | | 9.1 | | | | 9.6 | | | Actuarial loss | | | 15.5 | | | | 1.7 | | | Benefits paid | | | (18.2 | ) | | | (22.8 | ) | | Curtailment gain (a) | | | (0.3 | ) | | | - | | | Effect of exchange rate changes | | | (0.6 | ) | | | (3.8 | ) | | Benefit obligation at end of year | | $ | 264.7 | | | $ | 258.8 | | | | | | | | | | | | | Change in plan assets: | | | | | | | | | | Fair value of plan assets at beginning of year | | $ | 155.1 | | | $ | 157.7 | | | Actual return on plan assets | | | (11.6 | ) | | | 6.3 | | | Benefits paid | | | (18.2 | ) | | | (22.8 | ) | | Employer contributions | | | 5.8 | | | | 13.9 | | | Fair value of plan assets at end of year | | $ | 131.1 | | | $ | 155.1 | | | Funded status at end of year | | $ | (133.6 | ) | | $ | (103.7 | ) | | | | | | | | | | | | Amounts recognized in the consolidated balance sheets: | | | | | | | | | | Current liability | | $ | (2.7 | ) | | $ | (2.0 | ) | | Noncurrent liability | | | (130.9 | ) | | | (101.7 | ) | | | | $ | (133.6 | ) | | $ | (103.7 | ) |
| | 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) | The $0.3 million curtailment gain, which is associated with headcount reductions in Europe within the VTS segment, will be recognized as a component of net periodic benefit cost following the completion of the headcount reductions. See Note 5 for additional information on the Company’s restructuring activities. |
As of March 31, 2020, 2019,2023, 2022, and 2018,2021, the benefit obligation associated with the Company’s non-U.S. pension plans totaled $35.7$21.2 million, $36.5$26.5 million, and $43.4$36.4 million, respectively. In fiscal 2020, the $0.8The $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 resulteddue to net actuarial gains during the year from an increase in discount rates and employer contributions of $2.2 million for benefits paid to plan participants duringwhich decreased the year,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 $0.9$0.7 million. In fiscal 2019,2022, the $6.9$9.9 million decrease was primarily due to the sale of the air-cooled automotive business in Austria, which resulted from employer contributions of $5.9in a $5.5 million for benefits paid to plan participantsdecrease. In addition, net actuarial gains during the year, and 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 $1.1$0.6 million.
The accumulated benefit obligation for pension plans was $194.4 million and $228.1 million as of March 31, 2023 and 2022, respectively. The net actuarial loss related to the pension plans recognized in accumulated other comprehensive loss was $123.5 million and $131.5 million as of March 31, 2023 and 2022, respectively.
The accumulated benefit obligation for pension plans was $263.1 million and $256.9 million as of March 31, 2020 and 2019, respectively. The net actuarial loss related to the pension plans recognized in accumulated other comprehensive loss was $191.5 million and $159.1 million as of March 31, 2020 and 2019, respectively.
Costs for the Company’s global pension plans included the following components:
| | Years ended March 31, | | | | | 2020 | | | 2019 | | | 2018 | | | Components of net periodic benefit cost: | | | | | | | | | | | Service cost | | $ | 0.4 | | | $ | 0.5 | | | $ | 0.5 | | | Interest cost | | | 9.1 | | | | 9.6 | | | | 9.9 | | | Expected return on plan assets | | | (12.0 | ) | | | (12.3 | ) | | | (11.9 | ) | | Amortization of net actuarial loss | | | 6.0 | | | | 5.6 | | | | 5.6 | | | Settlements (a) | | | 0.2 | | | | 0.2 | | | | 0.3 | | | Curtailment gain (a) | | | - | | | | - | | | | (0.3 | ) | | Net periodic benefit cost | | $ | 3.7 | | | $ | 3.6 | | | $ | 4.1 | | | | | | | | | | | | | | | | | Other changes in benefit obligation recognized in other comprehensive income (loss): | | | | | | | | | | | | | | Net actuarial loss | | $ | (38.7 | ) | | $ | (7.7 | ) | | $ | (5.8 | ) | | Amortization of net actuarial loss | | | 6.2 | | | | 5.8 | | | | 5.9 | | | Total recognized in other comprehensive income (loss) | | $ | (32.5 | ) | | $ | (1.9 | ) | | $ | 0.1 | |
| | 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 and curtailment gain 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 amortized $6.2$5.7 million, $5.6$8.6 million, and $5.6 $7.1million of net actuarial loss in fiscal 2020, 2019,2023, 2022, and 2018,2021, respectively. In each Exclusive of these years,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$1.0 million of the amortization was attributable to the Company’s non-U.S. pension plans. The Company estimates $6.9 millionplans in each of net actuarial loss for its pension plans will be amortized from accumulated other comprehensive loss into net periodic benefit cost during fiscal 2021. The fiscal 2021 estimated amortization includes less than $1.0 million related to the Company’s non-U.S. pension plans.these years.
The Company used a discount rate of 3.4%5.2% and 4.0%3.9% as of March 31, 20202023 and 2019,2022, respectively, for determining its benefit obligations under its U.S. pension plans. The Company used a weighted-average discount rate of 1.0%3.8% and 1.4%1.8% as of March 31, 20202023 and 2019,2022, respectively, for determining its benefit obligations under its non-U.S. pension plans. The Company used a discount rate of 4.0%3.9%, 4.0%3.2%, and 4.1%3.4% to determine its costs under its U.S. pension plans for fiscal 2020, 2019,2023, 2022, and 2018,2021, respectively. The Company used a weighted-average discount rate of 1.7%2.9%, 1.9%1.6%, and 1.9%1.4% to determine its costs under its non-U.S. pension plans for fiscal 2020, 2019,2023, 2022, and 2018,2021, 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. pension 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, 20202023 and 20192022 were as follows:
| | Target allocation | | | Plan assets | | | | | | | | 2020 | | | 2019 | | | Equity securities | | | 65 | % | | | 60 | % | | | 66 | % | | Debt securities | | | 21 | % | | | 22 | % | | | 19 | % | | Real estate investments | | | 13 | % | | | 16 | % | | | 12 | % | | Cash and cash equivalents | | | 1 | % | | | 2 | % | | | 3 | % | | | | | 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, 20202023 and 2019,2022, the Company’s pension plans did not directly own shares of Modine common stock.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The Company employs a total return investment approach, whereby a mix of investments are used to maximize the long-term growth of 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 2020, 2019,2023, U.S. pension plan expense, the expected rate of return on plan assets was 7.0 percent. For fiscal 2022, and 20182021 U.S. pension plan expense, the expected rate of return on plan assets was 7.5 percent. For fiscal 20212024 U.S. pension plan expense, the Company has assumed a rate of return on plan assets of 7.56.5 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 contribute approximately $20 millionmake cash contributions to theseits U.S. plans during fiscal 2021.2024.
Estimated pension benefit payments for the next ten fiscal years are as follows:
| Fiscal Year | | Estimated Pension Benefit Payments | | | 2021 | | $ | 17.2 | | | 2022 | | | 16.8 | | | 2023 | | | 16.7 | | | 2024 | | | 16.7 | | | 2025 | | | 16.8 | | | 2026-2030 | | | 80.6 | |
| 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 | |
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 as a hedge, and, if so, on the nature of the hedging activity.
Commodity derivatives: Derivatives The Company periodically enters into over-the-counter forward contracts related to forecasted purchases of aluminum and copper. The Company’s strategy in entering into these contracts is to reduce its exposure to changing market prices of these commodities. The Company designates certain commodity forward contracts 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 accumulated other comprehensive income (loss) (“AOCI”) within shareholders’ equity and subsequently recognizes the gains and losses within cost of 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 forward contracts to hedge specific foreign currency-denominated assets and 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, the Company records unrealized gains and losses related to changes in fair value 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.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The fair value of the Company’s derivative financial instruments recorded in the consolidated balance sheets were as follows:
| _ | Balance Sheet Location | | March 31, 2020 | | | March 31, 2019 | | | Derivatives designated as hedges: | | | | | | | | | Commodity derivatives | Other current assets | | $ | - | | | $ | 0.6 | | | Commodity derivatives | Other current liabilities | | | 1.3 | | | | 0.3 | | | Foreign exchange contracts | Other current assets | | | 0.1 | | | | 0.2 | | | | | | | | | | | | | | Derivatives not designated as hedges: | | | | | | | | | | | Foreign exchange contracts | Other current liabilities | | $ | - | | | $ | 0.5 | |
| _ | 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 associated with derivative financial instruments that the Company designated for hedge accounting during the years ended March 31 were as follows:
| | Gain (loss) recognized in other comprehensive income | | Statement of Operations | | Gain (loss) reclassified from AOCI | | | | | 2020 | | | 2019 | | | 2018 | | Location | | 2020 | | | 2019 | | | 2018 | | | Commodity derivatives | | $ | (2.6 | ) | | $ | (0.3 | ) | | $ | 0.2 | | Cost of sales | | $ | (0.8 | ) | | $ | (0.4 | ) | | $ | - | | | Foreign exchange contracts | | | (0.1 | ) | | | (0.4 | ) | | | 0.1 | | Net sales | | | (0.1 | ) | | | (0.4 | ) | | | 0.1 | | | Foreign exchange contracts | | | 0.2 | | | | 1.0 | | | | - | | Cost of sales | | | 0.4 | | | | 0.6 | | | | - | | | Total gains (losses) | | $ | (2.5 | ) | | $ | 0.3 | | | $ | 0.3 | | | | $ | (0.5 | ) | | $ | (0.2 | ) | | $ | 0.1 | |
| | 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 | ) |
The amounts associated with derivative financial instruments that the Company did not designate for hedge accounting were as follows:
| Statement of Operations Location | | Years ended March 31, | | | _ | | | 2020 | | | 2019 | | | 2018 | | | Commodity derivatives | Cost of sales | | $ | - | | | $ | - | | | $ | 0.4 | | | Foreign exchange contracts | Net sales | | | (0.1 | ) | | | (0.7 | ) | | | (0.1 | ) | | Foreign exchange contracts | Other income (expense) - net | | | (0.1 | ) | | | (0.3 | ) | | | (0.5 | ) | | Total losses | | | $ | (0.2 | ) | | $ | (1.0 | ) | | $ | (0.2 | ) |
| 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
COVID-19
In March 2020,Supply Chain Disruptions and Inflationary Market Conditions
Market and economic dynamics, including the World Health Organization declared the outbreakimpacts of the novel coronavirus, COVID-19 a pandemic. The spreadpandemic, have contributed to global supply chain challenges and inflationary market conditions. Since the fourth quarter of COVID-19fiscal 2022, the military conflict between Russia and Ukraine and the resulting work and travel restrictions, including international border closings, have disrupted, and may continue to disrupt, global supply chains and have negatively impacted the global economy. As a result of this pandemic, the Company has experienced significant impacts on its operations and has suspended production at certain manufacturing facilities in China, India, Italy, Spain, Germany, the Netherlands, Austria, Hungary, the U.S., Mexico and Brazil due to local government requirements or customer shutdowns and is operating other facilitiesrelated sanctions imposed by governments in the U.S. and abroad at reduced capacity levels. Although the temporarily-closed facilities have since reopened, many are operating at a significantly reduced volume because of low customer demand. also impacted these market conditions. The Company is focused on protecting the health and wellbeing of its employees and the communities in which it operates, while also ensuring the continuity of its business operations and timely delivery of quality products and services to its customers. Beginning largely in April 2020 and in an effort to mitigatemitigating the negative impacts of COVID-19,labor 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 has taken actions, including, but not limited to, production staffing adjustments, furloughs, shortened work weeks,cannot reasonably estimate the full impact that the supply chain challenges and temporary salary reductions at all levels of our organization. In addition, the Company is focused on reducing operatingother related economic and administrative expenses.
The Company’s consolidated financial statements reflect estimates and assumptions made by management, including assumptions regarding the future impacts of the COVID-19 pandemic, that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenue and expenses during the reporting periods presented. For example, assets particularly sensitive to assumptions that could be adversely impacted by the COVID-19 pandemic include goodwill and deferred tax assets. While the Company believes it used appropriate estimates and assumptions to prepare the consolidated financial statements, actual amounts could differ materially and future events or circumstances couldmarket dynamics will have a potential negative effect on the assumptions used. If the Company, its suppliers, or its customers experience further shutdowns or other significant business disruptions associated with the COVID-19 pandemic, its ability to conduct business in the manner and on the timelines presently planned could be materially and negatively impacted, which could have a material adverse effect on the Company’s business, financial position, results of operations and cash flows.flows in the future.
Market Risk
The Company sells a broad range of products that provide thermal solutions to customers operating in diverse markets, including the automotive, commercial vehicle, off-highway, and commercial, industrial, and building HVAC&R markets. The COVID-19 pandemic has negatively impacted these markets; the duration and severity of the impacts of COVID-19 on these markets are currently uncertain.
Credit 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 2020, 1 customer within the VTS segment2023 and 2022, no customers accounted for more than ten percent of the Company’s total sales. In fiscal 2019 and 2018, 2 customers within the VTS segment each2021, 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 were 4539 percent, 5039 percent, and 4843 percent of total sales in fiscal 2020, 2019,2023, 2022, and 2018,2021, respectively. At March 31, 20202023 and 2019, 342022, 37 percent and 3829 percent, respectively, of the Company'sCompany’s trade accounts receivable were due from the Company'sCompany’s top 10ten customers. These customers operate primarily in the automotive, commercial vehicle, off-highway, automotive and light vehicle, data center cooling, and commercial air conditioning and refrigeration markets. CollateralThe 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 nor has experienced a significant increase in credit losses in connection with the COVID-19 pandemic.served.
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 financial ratings that are acceptable to the Company.
Counterparty Risk The Company manages counterparty risk 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 Company has recorded environmental investigation and remediation accruals related to soil and groundwater contamination at manufacturing facilities in the United States,U.S., one of which the Company currently owns and operates, and at its former manufacturing facility in the Netherlands, along with accruals for lesser environmental matters at certain other facilities in the United States and Brazil.Netherlands. These accruals generallyprimarily relate to soil and groundwater contamination at facilities where past operations followed practices and procedures that were considered acceptable under then-existing regulations, or where the Company is a successor to the obligations of prior owners, and current laws and regulations require investigative and/or remedial work to ensure sufficient environmental compliance. In instances where a range of loss can be reasonably estimated for a probable environmental liability, but no amount within the range is a better estimate than any other amount, the Company accrues the minimum of the range. The Company’s accruals for these environmental matters totaled $18.2$17.6 million and $18.9$18.2 million at March 31, 20202023 and 2019,2022, 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 liabilities related to these matters and revise the estimated accruals, if necessary. BasedWhile 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.
Other Litigation In the normal course of business, the Company and its subsidiaries are named as defendants in various lawsuits and enforcement proceedings by private parties, governmental agencies and/or others in which claims are asserted against Modine. The Company believes that any additional loss in excess of amounts already accrued would not have a material effect on the Company’s consolidated balance sheet, results of operations, and cash flows. In addition, management expects that the liabilities which may ultimately result from such lawsuits or proceedings, if any, would not have a material adverse effect on the Company’s financial position.
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 21: Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss were as follows:
| | Foreign Currency Translation | | | Defined Benefit Plans | | | Cash Flow Hedges | | | Total | | | Balance, March 31, 2019 | | $ | (42.6 | ) | | $ | (136.3 | ) | | $ | 0.5 | | | $ | (178.4 | ) | | | | | | | | | | | | | | | | | | | | Other comprehensive loss before reclassifications | | | (18.2 | ) | | | (38.7 | ) | | | (2.5 | ) | | | (59.4 | ) | | Reclassifications: | | | | | | | | | | | | | | | | | | Amortization of unrecognized net loss (a) | | | - | | | | 5.8 | | | | - | | | | 5.8 | | | Realized losses - net (b) | | | - | | | | - | | | | 0.5 | | | | 0.5 | | | Foreign currency translation gains (c) | | | (0.6 | ) | | | - | | | | - | | | | (0.6 | ) | | Income taxes | | | - | | | | 8.3 | | | | 0.5 | | | | 8.8 | | | Total other comprehensive loss | | | (18.8 | ) | | | (24.6 | ) | | | (1.5 | ) | | | (44.9 | ) | | | | | | | | | | | | | | | | | | | | Balance, March 31, 2020 | | $ | (61.4 | ) | | $ | (160.9 | ) | | $ | (1.0 | ) | | $ | (223.3 | ) |
| | 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 | | | Cash Flow Hedges | | | Total | | | Balance, March 31, 2018 | | $ | (5.5 | ) | | $ | (134.9 | ) | | $ | 0.1 | | | $ | (140.3 | ) | | | | | | | | | | | | | | | | | | | | Other comprehensive income (loss) before reclassifications | | | (37.9 | ) | | | (7.1 | ) | | | 0.3 | | | | (44.7 | ) | | Reclassifications: | | | | | | | | | | | | | | | | | | Amortization of unrecognized net loss (a) | | | - | | | | 5.4 | | | | - | | | | 5.4 | | | Realized losses - net (b) | | | - | | | | - | | | | 0.2 | | | | 0.2 | | | Foreign currency translation losses (d) | | | 0.8 | | | | - | | | | - | | | | 0.8 | | | Income taxes | | | - | | | | 0.3 | | | | (0.1 | ) | | | 0.2 | | | Total other comprehensive income (loss) | | | (37.1 | ) | | | (1.4 | ) | | | 0.4 | | | | (38.1 | ) | | | | | | | | | | | | | | | | | | | | Balance, March 31, 2019 | | $ | (42.6 | ) | | $ | (136.3 | ) | | $ | 0.5 | | | $ | (178.4 | ) |
| | 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 18 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 investment in NEXpension plan as a component of the loss on sale recorded during fiscal 2020, the Company wrote off $0.6 million of accumulated foreign currency translation gains. |
| (d) | As a result of the sale of a business in South Africa during fiscal 2019, the Company wrote off $0.8 million of accumulated foreign currency translation losses.2022. See Note 1 for additional information. |
Note 22: Segment and Geographic Information
The Company’s product lines consist of heat-transfer componentssystems and systems.components. The Company serves vehicular and commercial, industrial, and building HVAC&R markets and vehicular markets.
The Company’s VTSClimate Solutions segment represents itsprovides heat transfer products, heating, ventilating, air conditioning and refrigeration products and data center cooling solutions to global customers. The Company’s Performance Technologies segment designs and manufactures air-and liquid-cooled technology for vehicular, businessstationary power, and primarily servesindustrial applications. In addition, the automotive,Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and off-highway markets. In addition, the VTS segment serves the automotive customers and commercial vehicle aftermarket in Brazil. The Company’s CIS segment provides coils, coolers,coatings products and coating solutions to customers throughout the world. The Company’s BHVAC segment provides heating, ventilating and air conditioning products to customers throughout the world.application services.
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, 2020,2022, the Company began managing its automotive business separate fromoperations under two operating segments, Climate Solutions and Performance Technologies. The Climate Solutions segment includes the other businesses withinpreviously-reported BHVAC and CIS segments, with the VTSexception 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 is managingbelieves 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 automotive business as a separate segment as the Company targets the sale or eventual exitCompany’s consolidated financial position, results of the businesses in this segment. Beginning for fiscal 2021, the Company will report theoperations, and cash flows. Segment financial resultsinformation for the automotive business asprior periods has been recast to conform to the Automotive segment. The remaining portion of the previous VTS segment will be named the Heavy-Duty Equipment segment and will include the heavy-duty commercial vehicle and off-highway businesses.current presentation.
The following is a summary of net sales, gross profit, and operating income by 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 | |
The following is a summary of net sales, gross profit, and operating income by segment:
| | 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, 2020 | | | | | External Sales | | | Inter-segment Sales | | | Total | | | Net sales: | | | | | | | | | | | VTS | | $ | 1,136.0 | | | $ | 41.2 | | | $ | 1,177.2 | | | CIS | | | 620.1 | | | | 3.8 | | | | 623.9 | | | BHVAC | | | 219.4 | | | | 1.7 | | | | 221.1 | | | Segment total | | | 1,975.5 | | | | 46.7 | | | | 2,022.2 | | | Corporate and eliminations | | | - | | | | (46.7 | ) | | | (46.7 | ) | | Net sales | | $ | 1,975.5 | | | $ | - | | | $ | 1,975.5 | |
| | Year ended March 31, 2019 | | | | | External Sales | | | Inter-segment Sales | | | Total | | | Net sales: | | | | | | | | | | | VTS | | $ | 1,298.9 | | | $ | 52.8 | | | $ | 1,351.7 | | | CIS | | | 704.7 | | | | 2.9 | | | | 707.6 | | | BHVAC | | | 209.1 | | | | 3.3 | | | | 212.4 | | | Segment total | | | 2,212.7 | | | | 59.0 | | | | 2,271.7 | | | Corporate and eliminations | | | - | | | | (59.0 | ) | | | (59.0 | ) | | Net sales | | $ | 2,212.7 | | | $ | - | | | $ | 2,212.7 | |
| | Year ended March 31, 2018 | | | | | External Sales | | | Inter-segment Sales | | | Total | | | Net sales: | | | | | | | | | | | VTS | | $ | 1,239.3 | | | $ | 56.4 | | | $ | 1,295.7 | | | CIS | | | 674.4 | | | | 1.3 | | | | 675.7 | | | BHVAC | | | 189.4 | | | | 1.8 | | | | 191.2 | | | Segment total | | | 2,103.1 | | | | 59.5 | | | | 2,162.6 | | | Corporate and eliminations | | | - | | | | (59.5 | ) | | | (59.5 | ) | | Net sales | | $ | 2,103.1 | | | $ | - | | | $ | 2,103.1 | |
| | 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, | | | | | 2020 | | | 2019 | | | 2018 | | | Gross profit: | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | VTS | | $ | 144.9 | | | | 12.3 | % | | $ | 186.9 | | | | 13.8 | % | | $ | 201.0 | | | | 15.5 | % | | CIS | | | 92.9 | | | | 14.9 | % | | | 114.9 | | | | 16.2 | % | | | 97.8 | | | | 14.5 | % | | BHVAC | | | 71.5 | | | | 32.3 | % | | | 63.4 | | | | 29.9 | % | | | 58.0 | | | | 30.3 | % | | Segment total | | | 309.3 | | | | 15.3 | % | | | 365.2 | | | | 16.1 | % | | | 356.8 | | | | 16.5 | % | | Corporate and eliminations | | | (1.8 | ) | | | - | | | | 0.3 | | | | - | | | | (0.3 | ) | | | - | | | Gross profit | | $ | 307.5 | | | | 15.6 | % | | $ | 365.5 | | | | 16.5 | % | | $ | 356.5 | | | | 17.0 | % |
| | 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: | | 2020 | | | 2019 | | | 2018 | | | VTS | | $ | 27.6 | | | $ | 64.8 | | | $ | 84.2 | | | CIS | | | 32.9 | | | | 53.4 | | | | 28.5 | | | BHVAC | | | 36.4 | | | | 26.9 | | | | 20.3 | | | Segment total | | | 96.9 | | | | 145.1 | | | | 133.0 | | | Corporate and eliminations (a) | | | (59.0 | ) | | | (35.4 | ) | | | (40.8 | ) | | Operating income | | $ | 37.9 | | | $ | 109.7 | | | $ | 92.2 | |
| | 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. During fiscal 2020 and 2019, the Company recorded $39.2 million and $7.1 million, respectively, of costs directly associated with its review of strategic alternatives for the VTS segment’s automotive business, including costs to separate and prepare the business for potential sale. |
The following is a summary of totalsegment assets, by segment:comprised entirely of trade accounts receivable and inventories, and other assets:
| | March 31, | | | | | 2020 | | | 2019 | | | VTS | | $ | 683.9 | | | $ | 749.9 | | | CIS | | | 617.7 | | | | 604.2 | | | BHVAC | | | 102.3 | | | | 89.4 | | | Corporate and eliminations | | | 132.2 | | | | 94.5 | | | Total assets | | $ | 1,536.1 | | | $ | 1,538.0 | |
| | 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 | |
| (a) | Represents cash and cash equivalents, other current assets, property plant and equipment, intangible assets, goodwill, deferred income taxes, and other noncurrent assets for the 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: | | 2020 | | | 2019 | | | 2018 | | | VTS | | $ | 53.2 | | | $ | 56.2 | | | $ | 61.4 | | | CIS | | | 15.0 | | | | 16.4 | | | | 9.0 | | | BHVAC | | | 3.1 | | | | 1.3 | | | | 0.6 | | | Total capital expenditures | | $ | 71.3 | | | $ | 73.9 | | | $ | 71.0 | |
| | 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: | | 2020 | | | 2019 | | | 2018 | | | VTS | | $ | 49.7 | | | $ | 49.5 | | | $ | 48.2 | | | CIS | | | 24.0 | | | | 23.9 | | | | 24.3 | | | BHVAC | | | 3.4 | | | | 3.5 | | | | 4.2 | | | Total depreciation and amortization expense | | $ | 77.1 | | | $ | 76.9 | | | $ | 76.7 | |
| | 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 | |
| (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. |
The following is a summary of net sales by geographicalgeographic area, based upon the location of the selling unit:
| | Years ended March 31, | | | | | 2020 | | | 2019 | | | 2018 | | | United States | | $ | 941.9 | | | $ | 1,032.3 | | | $ | 911.4 | | | Italy | | | 187.4 | | | | 217.3 | | | | 211.5 | | | China | | | 168.5 | | | | 172.1 | | | | 156.0 | | | Hungary | | | 142.4 | | | | 165.6 | | | | 153.9 | | | Germany | | | 97.5 | | | | 123.1 | | | | 132.6 | | | Austria | | | 93.0 | | | | 116.2 | | | | 151.7 | | | Other | | | 344.8 | | | | 386.1 | | | | 386.0 | | | Net sales | | $ | 1,975.5 | | | $ | 2,212.7 | | | $ | 2,103.1 | |
The following is a summary of property, plant and equipment by geographical area:
| | March 31, | | | | | 2020 | | | 2019 | | | United States | | $ | 114.6 | | | $ | 117.7 | | | China | | | 56.8 | | | | 57.6 | | | Hungary | | | 55.4 | | | | 55.3 | | | Mexico | | | 50.0 | | | | 56.3 | | | Italy | | | 49.8 | | | | 52.4 | | | Germany | | | 27.0 | | | | 32.8 | | | Austria | | | 26.0 | | | | 36.9 | | | Other | | | 68.4 | | | | 75.7 | | | Total property, plant and equipment | | $ | 448.0 | | | $ | 484.7 | |
The following is a summary of net sales by end market:
| | Years ended March 31, | | | | | 2020 | | | 2019 | | | 2018 | | | Commercial HVAC&R | | $ | 639.7 | | | $ | 674.0 | | | $ | 648.3 | | | Automotive | | | 508.8 | | | | 542.8 | | | | 526.0 | | | Commercial vehicle | | | 323.7 | | | | 387.6 | | | | 381.7 | | | Off-highway | | | 253.9 | | | | 314.1 | | | | 271.2 | | | Data center cooling | | | 150.2 | | | | 187.0 | | | | 137.6 | | | Industrial cooling | | | 43.5 | | | | 47.8 | | | | 67.6 | | | Other | | | 55.7 | | | | 59.4 | | | | 70.7 | | | Net sales | | $ | 1,975.5 | | | $ | 2,212.7 | | | $ | 2,103.1 | |
| | 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 | |
Note 23: Quarterly Financial Data (Unaudited)
The following is a summary of quarterly financial data:property, plant and equipment by geographic area:
| | Fiscal 2020 quarters ended | | | | | | | | June | | | Sept. | | | Dec. | | | March | | | Fiscal 2020 | | | | | | | | | | | | | | | | | | | | Net sales | | $ | 529.0 | | | $ | 500.2 | | | $ | 473.4 | | | $ | 472.9 | | | $ | 1,975.5 | | | Gross profit | | | 83.4 | | | | 75.7 | | | | 73.5 | | | | 74.9 | | | | 307.5 | | | Net earnings (loss) (a) | | | 8.2 | | | | (4.8 | ) | | | 1.0 | | | | (6.4 | ) | | | (2.0 | ) | | Net earnings (loss) attributable to Modine (a) | | | 8.0 | | | | (4.7 | ) | | | 1.2 | | | | (6.7 | ) | | | (2.2 | ) | | Net earnings (loss) per share attributable to Modine shareholders: | | | | | | | | | | | | | | | | | | | | | | Basic | | $ | 0.16 | | | $ | (0.09 | ) | | $ | 0.02 | | | $ | (0.13 | ) | | $ | (0.04 | ) | | Diluted | | | 0.16 | | | | (0.09 | ) | | | 0.02 | | | | (0.13 | ) | | | (0.04 | ) |
| | 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 | |
| | Fiscal 2019 quarters ended | | | | | | | | June | | | Sept. | | | Dec. | | | March | | | Fiscal 2019 | | | | | | | | | | | | | | | | | | | | Net sales | | $ | 566.1 | | | $ | 548.9 | | | $ | 541.0 | | | $ | 556.7 | | | $ | 2,212.7 | | | Gross profit | | | 94.3 | | | | 87.9 | | | | 91.7 | | | | 91.6 | | | | 365.5 | | | Net earnings (b) | | | 22.5 | | | | 38.7 | | | | 18.3 | | | | 6.4 | | | | 85.9 | | | Net earnings attributable to Modine (b) | | | 22.0 | | | | 38.5 | | | | 18.0 | | | | 6.3 | | | | 84.8 | | | Net earnings per share attributable to Modine shareholders: | | | | | | | | | | | | | | | | | | | | | | Basic | | $ | 0.43 | | | $ | 0.76 | | | $ | 0.36 | | | $ | 0.12 | | | $ | 1.67 | | | Diluted | | | 0.43 | | | | 0.75 | | | | 0.35 | | | | 0.12 | | | | 1.65 | |
| (a) | During fiscal 2020, restructuring expenses totaled $1.8 million, $2.3 million, $2.6 million, and $5.5 million for the quarters ended June 30, 2019, September 30, 2019, December 31, 2019, and March 31, 2020, respectively (see Note 5). During the third quarter of fiscal 2020, the Company sold a previously-closed manufacturing facility in Germany and, as a result, recorded a gain of $0.8 million (see Note 1). During the fourth quarter of fiscal 2020, the Company recorded asset impairment charges totaling $8.6 million related to long-lived assets and goodwill (see Note 5 and Note 14). During fiscal 2020, costs associated with the Company’s review of strategic alternatives for the VTS segment’s automotive business totaled $8.3 million, $11.9 million, $14.0 million, and $5.0 million for the quarters ended June 30, 2019, September 30, 2019, December 31, 2019, and March 31, 2020, respectively. During fiscal 2020, the Company adjusted its valuation allowances on deferred tax assets in the U.S and in Brazil. As a result, the Company recorded net income tax charges totaling $3.0 million and $4.1 million in the third and fourth quarters, respectively. Also during fiscal 2020, the Company recorded a net income tax charge totaling $2.9 million, $2.7 million of which was recorded in the third quarter, as a result of legal entity restructuring completed in preparation of a potential sale of the automotive business (see Note 7).
|
| (b) | During fiscal 2019, restructuring expenses totaled $0.2 million, $0.5 million, and $8.9 million for the quarters ended June 30, 2018, December 31, 2018, and March 31, 2019, respectively (see Note 5). During the second quarter of fiscal 2019, the Company sold its South African business within the BHVAC segment and, as a result, recorded a loss of $1.7 million (see Note 1). During the third quarter of fiscal 2019, the Company recorded a $0.4 million impairment charge related to a manufacturing facility in Austria (see Note 5). During the third and fourth quarter of fiscal 2019, the Company incurred $1.2 million and $5.9 million of costs associated with its review of strategic alternatives for the VTS segment’s automotive business. The Company’s income tax benefit for fiscal 2019 includes net benefits of $24.4 million and net charges of $2.2 million in the second and third quarters, respectively, related to the Tax Act and the recognition of foreign tax credits (see Note 7). During fiscal 2019, the Company adjusted its valuation allowances on deferred tax assets related to two separate subsidiaries in China and, as a result, recorded a $2.0 million income tax benefit and a $1.0 million income tax charge in the first and second quarters, respectively (see Note 7). |
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors and Shareholders of
Modine Manufacturing CompanyCompany:
Opinions on the Consolidated Financial Statements and Internal Control overOver Financial Reporting
We have audited the accompanying consolidated financial statements, including the related notes, as listed in the index appearing under Item 15(a)(1), and the financial statement schedule listed in the index appearing under Item 15(a)(2),balance sheet of Modine Manufacturing Company and its subsidiaries (the “Company”)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, referred to as the “consolidatedconsolidated financial statements”)statements). We also have audited the Company'sCompany’s internal control over financial reporting as of March 31, 2020,2023, based on criteria established in Internal Control -– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 31, 2020 and 2019,2023, and the results of its operations and its cash flows for each of the three years in the periodyear ended March 31, 20202023, in conformity with accounting principlesU.S. generally accepted in the United States of America.accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2020,2023 based on criteria established in Internal Control -– Integrated Framework (2013) issued by the COSO.
Changes in Accounting Principles
As discussed in Note 1 toCommittee of Sponsoring Organizations of the consolidated financial statements, the Company changed the manner in which it accounts for leases in fiscal 2020 and the manner in which it accounts for intra-entity transfers of assets other than inventory in fiscal 2019.Treadway Commission.
Basis for Opinions
The Company'sCompany’s management is responsible for these consolidated financial statements, 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 Over Financial Reporting appearing under Item 9A.Reporting. Our responsibility is to express opinionsan opinion on the Company’s consolidated financial statements and an opinion on the Company'sCompany’s internal control over financial reporting 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 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 regarding the amounts and disclosures in the consolidated financial statements. Our auditsaudit 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. 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.
Definition and Limitations of Internal Control overOver 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 MattersMatter
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 (i)that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (ii)(2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit mattersmatter 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.
Goodwill Impairment Assessment – CIS Reporting UnitsRealizability of certain domestic deferred tax assets
As describeddiscussed in Notes 1 and 148 to the consolidated financial statements, the Company’s consolidated goodwill balance was $166.1 millionCompany 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, 2020, and2023 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 goodwill associated with the CIS reporting units was $152.6 million. Management assesses goodwill for impairment annually as ofyear ended March 31, of each year, 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. Management determines the fair value of a reporting unit based upon the present value of estimated future cash flows. Determining the fair value of a reporting unit involves judgment and the use of significant estimates and assumptions by management, which include assumptions regarding the revenue growth rates and operating profit margins used to calculate estimated future cash flows, the risk-adjusted discount rates, business trends and market conditions.2023.
The principal considerations for our determination that performing procedures relating toWe identified the goodwill impairment assessmentevaluation of the CIS reporting units isrealizability of certain domestic deferred tax assets, specifically certain federal carryforward assets, as a critical audit mattermatter. 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 there was significant judgment by management when determining the fair valueprimary 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 reporting units. This in turn ledrealizability of the federal carryforward assets, including controls related to a high degreethe projections of auditor judgment, subjectivity, and effort in performing procedures and evaluating evidence relating to management’s estimated future cash flows and significant assumptions, including revenue growth rates, operating profit margins,taxable income and the risk-adjusted discount rates. In addition,application of tax laws to utilize the audit effort involvedfederal carryforward assets. We evaluated the usereasonableness of professionals with specialized skillmanagement’s projections of future taxable income, including positive and knowledge to assist in performing these procedures and evaluatingnegative evidence used, by comparing the audit evidence obtained.projections to:
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidatedrecent financial statements. These procedures included testing the effectiveness of controls relating to the goodwill impairment assessment, including controls over the estimated fair valueprofitability trends of the CIS reporting units. These procedures also included, among others, testing management’s process for developing the fair value estimates; evaluating the appropriateness of the discounted cash flow model; testing the completeness, accuracy, and relevance of underlying data used in the model; and evaluating the significant assumptions used by management including revenue growth rates, operating profit margins, and risk-adjusted discount rates. Evaluating management’s assumptions related to revenue growth rates and operating profit margins involved evaluating whether the assumptions used were reasonable considering (i) the current and past performance of the reporting units, (ii) the consistency with external market and Company industry data and (iii) whether these assumptions were consistent with economic trends, and evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used
We assessed the Company’s ability to assist in the evaluationproject future earnings based on comparisons of the Company’s discounted cash flow modelprevious annual projections to actual results. We performed a sensitivity analysis over the amount and certain significant assumptions, includingtiming of future taxable income to assess the risk-adjusted discount rates.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/ PricewaterhouseCoopersKPMG LLP Milwaukee, Wisconsin
May 29, 2020
We have served as the Company’s auditor since 1935.2022. Milwaukee, Wisconsin May 25, 2023
Report of Independent Registered Public Accounting Firm
77To 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 Company'sCompany’s disclosure controls and procedures were effective, at a reasonable assurance level, as of March 31, 2020.2023.
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, assessed the effectiveness of the Company’s internal control over financial reporting as of March 31, 2020.2023. In making its assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in “Internal Control—Integrated Framework (2013).” Based upon this assessment, management concluded that, as of March 31, 2020,2023, 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, 20202023 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 20202023 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 20202023 Annual Meeting of Shareholders to be held on July 23, 2020August 17, 2023 (the “2020“2023 Annual Meeting Proxy Statement”) under the caption “Election of Directors.”
Executive Officers. The information in response to this Item appears under the caption "Information“Information about our Executive Officers"Officers” in this Form 10-K.
Code of Conduct. The Company incorporates by reference the information appearing in the 20202023 Annual Meeting Proxy Statement under the caption “Corporate Governance – Code of Conduct.” The Company'sCompany’s Code of 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 20202023 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 20202023 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 20202023 Annual Meeting Proxy Statement under the caption “Shareholder Nominations and Recommendations of Director Candidates.”
Delinquent Section 16(a) Reports. Reports The Company incorporates by reference the information appearing in the 20202023 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 20202023 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 20202023 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 20202023 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 20202023 Annual Meeting Proxy Statement under the caption “Independent Auditor’sAuditors’ Fees for Fiscal 20202023 and 2019.2022.”
PART IV
| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. |
(a) | (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, 2020, 20192023, 2022 and 20182021 | 42 | Consolidated Statements of Comprehensive Income for the years ended March 31, 2020, 20192023, 2022 and 20182021 | 43 | Consolidated Balance Sheets at March 31, 20202023 and 20192022 | 44 | Consolidated Statements of Cash Flows for the years ended March 31, 2020, 20192023, 2022 and 20182021 | 45 | Consolidated Statements of Shareholders'Shareholders’ Equity for the years ended March 31, 2020, 20192023, 2022 and 20182021 | 46 | | Notes to Consolidated Financial Statements | 47-7547-81 | Report of Independent Registered Public Accounting Firm (KPMG PCAOB ID 185) | 76-7782
| 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, 2020, 20192023, 2022 and 20182021 | 8187 | | | | 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. | 82-8588-91 | | | | 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)
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS For the years ended March 31, 2020, 20192023, 2022 and 20182021 (In millions)
| | | | | Additions | | | | | | Description | | Balance at Beginning of Period | | | Charged (Benefit) to Costs and Expenses | | | Charged to Other Accounts | | | Balance at End of Period | | | | | | | | | | | | | | | | | 2020: Valuation Allowance for Deferred Tax Assets | | $ | 43.4 | | | $ | 4.5 | | | $ | (1.0 | )(a) | | $ | 46.9 | | | | | | | | | | | | | | | | | | | | | 2019: Valuation Allowance for Deferred Tax Assets | | $ | 48.9 | | | $ | (1.6 | ) | | $ | (3.9 | )(a) | | $ | 43.4 | | | | | | | | | | | | | | | | | | | | | 2018: Valuation Allowance for Deferred Tax Assets | | $ | 49.6 | | | $ | (6.7 | ) | | $ | 6.0 | (a) | | $ | 48.9 | |
| | | | | 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. The fiscal 2018 amounts also included increases associated with the Company’s acquisition of Luvata HTS. |
MODINE MANUFACTURING COMPANY (THE “REGISTRANT”) (COMMISSION FILE NO. 1-1373)
TO 20202023 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 October 24, 2019January 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.hereto | | | | | | | | | | | | | 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 (“August 12, 2010 8-K”) | | | | | | | | | | | | 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 8-K | | | | | | | | | | | | | 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 | | | | | | | | | | | | 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 | | | | | | | | | | | | 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 | | |
| | 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”) | | | | | | | | | | | | 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 | | | | | | | | | | | | 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”) | | | | | | | | | | | | | Credit FacilitySecond Amendment to Second Amended and Restated Note Purchase and Private Shelf Agreement among Modine Holding GmbH, Modine Europe GmbH and Deutsche Bank AG dated as of April 27, 2012.May 19, 2020. | | Exhibit 4.104.2 to Registrant’s Form 10-K for the fiscal year ended March 31, 2012May 19, 2020 8-K | | | | | | | | | |
| | ThirdAmendment No. 2 to Fourth Amended and Restated Credit Agreement dated as of November 15, 2016.May 18, 2021. | | Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated November 15, 2016May 18, 2021 (“November 15, 2016May 18, 2021 8-K”) | | | | | | | | | | | | | Third Amendment to Second Amended and Restated Note Purchase and Private Shelf Agreement dated as of November 15, 2016.May 18, 2021. | | Exhibit 4.2 to November 15, 2016 May 18, 2021 8-K | | | | | | | | | | | | | DescriptionFifth Amended and Restated Credit Agreement dated as of October 12, 2022. | | Exhibit 4.1 to Registrant’s securitiesCurrent Report on Form 8-K dated October 12, 2022 | | | | X | | | | | | | | | | | Fourth Amendment to Second Amended and Restated CreditNote Purchase and Private Shelf Agreement dated as of June 28, 2019.November 21, 2022. | | Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated June 28, 201910-Q for the third quarter ended December 31, 2022 | | | | | | | | | | | | | Second Amended and Restated Note Purchase and Private Shelf Agreement datedDirector Emeritus Retirement Plan effective April 1, 1992 (and frozen as of August 6, 2019July 1, 2000). | | Exhibit 4.110(a) to Registrant’s Form 10-Q10-K for the third quarterfiscal year ended DecemberMarch 31, 20192002 | | | | | | | | | | | | | First Amendment to Second AmendedForm of Change in Control and Restated Note PurchaseTermination Agreement (amended and Private Shelf Agreement dated as of January 31, 2020restated) between the Registrant and officers other than Neil Brinker. | | Exhibit 4.210(f) to Registrant’s Form 10-Q10-K for the third quarterfiscal year ended DecemberMarch 31, 20192004 | | | | | | | | | | | | | Amendment No. 1 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”) | | | | | | | | | | 4.19Executive Supplemental Retirement Plan (as amended). | | 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 | | | | | | | | | | | | Director Emeritus Retirement Plan effective April 1, 1992 (and frozen as of July 1, 2000). | | Exhibit 10(a)10(f) to Registrant’s Form 10-K for the fiscal year ended March 31, 2002 | | | | | | | | | | | | 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 | | |
| | 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 | | | | | | | | | | | | | Form of Change in Control and Termination Agreement (amended and restated) between the Registrant and officers other than Thomas A. Burke.Deferred Compensation Plan (as amended). | | Exhibit 10(f)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 10-K for the year ended March 31, 20048-K dated July 17, 2014 | | | | | | | | | | | | | Executive Supplemental Retirement Plan (as amended).Form of Fiscal 2023 Performance Cash Award Agreement. | | Exhibit 10(f)10.1 to Registrant'sthe Registrant’s Form 10-K10-Q for the fiscal yearfirst quarter ended March 31, 2000June 30, 2022 (“June 30, 2022 10-Q”) | | | | | | | | | | | | | Deferred Compensation Plan (as amended).Form of Fiscal 2023 Incentive Stock Option Award Agreement. | | Exhibit 10(y)10.2 to 2003 10-KJune 30, 2022 10-Q | | | | | | | | | | | | | 2008 Incentive Compensation Plan
(Amended and Restated effective May 7, 2014).Form of Fiscal 2023 Non-Qualified Stock Option Award Agreement..
| | Exhibit 10.110.3 to Registrant's Current Report on Form 8-K dated July 17, 2014June 30, 2022 10-Q | | | | | | | | | | | | | Form of Fiscal 2020 Performance2023 Restricted Stock Unit Award Agreement.Agreement.. | | Exhibit 10.110.4 to Registrant’s Form 10-Q for the quarter ended June 30, 20192022 10-Q | | | | | | | | | | | | | Form of Fiscal 2020 Incentive2023 Modine Non-Employee Director Restricted Stock OptionUnit Award Agreement.Agreement with Deferral. | | Exhibit 10.210.6 to Registrant’s Form 10-Q for the quarter ended June 30, 20192022 10-Q | | | | | | | | | | | | | Form of Fiscal 20202023 Modine Non-Employee Director Restricted Stock Unit Award Agreement.Agreement without Deferral. | | Exhibit 10.310.7 to Registrant’s Form 10-Q for the quarter ended June 30, 20192022 10-Q | | | | | | | | | | | | | FormChange in Control Agreement dated as of Fiscal 2020 Non-Qualified Stock Option Award Agreement.June 4, 2021, by and between Modine Manufacturing Company and Neil D. Brinker. | | Exhibit 10.410.1 to Registrant’s Current Report on Form 10-Q for the quarter ended8-K dated June 30, 20194, 2021 | | | | | | | | | | | | | 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.Neil Brinker. | | Exhibit 10.17 to Registrant'sRegistrant’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 | | | | | | | | | | | | | FormTransition and Separation Agreement between Thomas A. Burke and Modine Manufacturing Company effective as of Fiscal 2020 Non-Employee Director Restricted Stock Unit Award.August 4, 2020. | | Exhibit 10.110.6 to the Registrant’s Form 10-Q for the second quarter ended September 30, 20192020 | | | | | | | | | | | | | Separation[Corrected] Offer Letter for Dennis P. Appel dated as of September 26, 2019.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, 20192020 | | | | | | | | | | | | | Release Agreement executed as of October 17, 2019, between Modine Manufacturing Company2020 Incentive Compensation Plan (Amended and Dennis P. Appel.Restated effective July 21, 2022). | | Exhibit 10.210.1 to the Registrant’s Current Report on Form 10-Q for the quarter ended December 31, 2019 8-K dated July 21, 2022 | | | | | | | | | | | | | EmploymentForm of Retention Agreement forLetter, effective August 31, 2020, between the Company and each of Michael B. Lucareli, Scott Wollenberg, dated as of July 26, 2019.L. Bowser and Sylvia A. Stein. | | Exhibit 10.510.1 to the Registrant’s Current Report on Form 10-Q for the quarter ended June 30, 20198-K dated August 31, 2020 | | | | | | | | | | |
| | ListOffer Letter dated as of subsidiaries ofJuly 2, 2021, by and between the Registrant.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”) | | | | X | | | | | | | | | | | ConsentOffer Letter dated as of independent registered public accounting firm.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 Thomas A. Burke,Neil D. Brinker, President and Chief Executive Officer. | | | | X | | | | | | | | | | | Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Finance and Chief Financial Officer. | | | | X | | | | | | | | | | | Section 1350 Certification of Thomas A. Burke,Neil D. Brinker, President and Chief Executive Officer. | | | | X | | | | | | | | | | | Section 1350 Certification of Michael B. Lucareli, Executive Vice President, Finance and Chief Financial Officer. | | | | X | | | | | | | | | 101.INS | | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). | | | | X | | | | | | | | | 101.SCH | | Inline XBRL Taxonomy Extension Schema Document.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.LAB101.PRE | | Inline XBRL Taxonomy Extension LabelPresentation Linkbase Document. | | | | X | | | | | | | | | 101.PRE104 | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | | | | X | | | | | | | | 104 | | Cover Page Interactive Data Filepage interactive data file (formatted as inline XBRL and contained in ExhibitExhibits 101). | | | | 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. |
** | 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 29, 202025, 2023 | Modine Manufacturing Company | | | | | | By: | /s/ Thomas A. BurkeNeil D. Brinker | | | | Thomas A. Burke, Neil D. Brinker, President
| | | and Chief Executive Officer | | | | (Principal (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 | | Thomas A. BurkeNeil D. Brinker | May 29, 202025, 2023 | President, Chief Executive Officer and Director | | (Principal Executive Officer) | | | | | | /s/ Michael B. Lucareli | | Michael B. Lucareli | May 29, 202025, 2023 | Executive Vice President, Finance and Chief Financial Officer | | (Principal Financial and Accounting Officer) | | | | | | /s/ Marsha C. Williams | | Marsha C. Williams | May 29, 202025, 2023 | Director | | | | /s/ David J. Anderson | | David J. Anderson | May 29, 2020 | DirectorChairperson, Board of Directors | | | | | | /s/ Eric D. Ashleman | | Eric D. Ashleman | May 29, 202025, 2023 | Director | |
| | | /s/ Suresh V. Garimella |
| Suresh V. Garimella | May 25, 2023 | Director | | | | | /s/ David G. BillsKatherine C. Harper | | David G. BillsKatherine C. Harper | | Director | | | | /s/ Charles P. Cooley | | Charles P. Cooley | May 29, 2020 | Director | | | | /s/ Suresh V. Garimella | | Suresh V. Garimella | May 29, 2020 | Director | | | | | | /s/ Larry O. Moore |
| Larry O. Moore | May 29, 202025, 2023 | Director | | | | | | /s/ Christopher W. Patterson |
| Christopher W. Patterson | May 29, 202025, 2023 | Director | | | | | /s/ David J. Wilson | | David J. Wilson | May 25, 2023 | Director | | | | | /s/ William A. Wulfsohn |
| William A. Wulfsohn | May 25, 2023 | Director | | | | | | /s/ Christine Y. Yan |
| Christine Y. Yan | May 29, 202025, 2023 | Director | |
s | | | % of sales | | | $’s | | % of sales | | $’s | | % of sales | | $’s | | % of sales | |
