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 calculates compensation expense based upon the fair value of the instruments at the time of grant and subsequently recognizes expense ratably over the respective vesting periods of the stock-based awards. The Company recognized stock-based compensation expense of $2.2$1.4 million and $2.6$2.7 million for the three months ended December 31, 2017September 30,2020 and 2016,2019, respectively. The Company recognized stock-based compensation expense of $7.6$2.1 million and $6.1$4.4 million for the ninesix months ended December 31, 2017September 30, 2020 and 2016,2019, respectively. The performance component of awards granted under the Company’s long-term incentive plan during the first quarter of fiscal 2018 is based upon both a target three-year average return on average capital employed and a target three-year average revenue growth at the end of the three-year performance period.
The Company accrues severance in accordance with its written plans, procedures, and relevant statutory requirements. Changes in accrued severance were as follows:
In May 2020, the Company executed amendments to its primary credit agreements in the U.S. Under the amended agreements, the leverage ratio covenants, the most restrictive of whichcovenant limit has been temporarily raised. The leverage ratio covenant requires the Company to limit the ratio of its consolidated indebtedness, less a portion of its cash balance, both as defined by the credit agreements, to no more than three and one-quarter timesits consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”). The leverage ratio covenant limit for the second quarter of fiscal 2021 was 4.75 to 1. The leverage ratio covenant limit for the remainder of fiscal 2021 is 5.25 to 1 and 5.75 to 1 for the 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 is also subject to an interest expense coverage ratio covenant, which requires the Company to maintain Adjusted EBITDA of at least three times consolidated interest expense. The Company was in compliance with its debt covenants as of December 31, 2017.September 30, 2020.
The Company estimates the fair value of long-term debt using discounted future cash flows at rates offered to the Company for similar debt instruments of comparable maturities. At December 31, 2017As of September 30, 2020 and March 31, 2017,2020, the carrying value of the Company’s long-term debt approximated fair value, with the exception of the Senior Notes, which had an aggregate fair value of approximately $159.0$136.6 million and $170.0$131.3 million, respectively. The fair value of the Company’s long-term debt is categorized as Level 2 within the fair value hierarchy. Refer to Note 3 for the definition of a Level 2 fair value measurement.
Note 15: | Contingencies and Litigation |
Note 17: Risks, Uncertainties, Contingencies and Litigation
Environmental
COVID-19
In March 2020, the World Health Organization declared the outbreak of the novel coronavirus, COVID-19, a pandemic. The United States Environmental Protection Agency has designatedspread of COVID-19 and the resulting work and travel restrictions, including international border closings, have disrupted, and may continue to disrupt, global supply chains and have negatively impacted the global economy. As a result of this pandemic, the Company as a potentially responsible party for remediationhas experienced significant impacts on its operations. Local government requirements or customer shutdowns caused the Company to suspend production at many of three sites. These sites are: Auburn Incinerator, Inc./Lake Calumet Cluster (Illinois), Cam-Or (Indiana)its manufacturing facilities in March and a scrap metal site known as Chemetco (Illinois).April 2020. All of the temporarily-closed facilities have reopened and have been trending back towards normal production levels. The Company is continuing to focus on protecting the health and wellbeing of its employees and the communities in which it operates, while also ensuring the continuity of its business operations and timely delivery of quality products and services to its customers. To mitigate the negative impacts of COVID-19, the Company has taken actions, including, but not limited to, production staffing adjustments, furloughs, shortened work weeks, and temporary salary reductions at all levels of the organization. In addition, Modinethe Company is voluntarily participatingfocused on reducing operating and administrative expenses. Based upon its current expectations, the Company believes that its sources of liquidity will generate sufficient cash flow to meet its obligations during the next twelve months from the date these financial statements are issued.
The Company’s consolidated financial statements reflect estimates and assumptions made by management, including assumptions regarding the future impacts of the COVID-19 pandemic, that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting periods presented. For example, assets particularly sensitive to assumptions that could be adversely impacted by the COVID-19 pandemic include goodwill and deferred tax assets. While the Company believes it used appropriate estimates and assumptions to prepare the consolidated financial statements, actual amounts could differ materially and future events or circumstances could have a potential negative effect on the assumptions used. If the Company, its suppliers, or its customers experience further shutdowns or other significant business disruptions associated with the COVID-19 pandemic, its ability to conduct business in the care of an inactive landfill owned bymanner and on the City of Trenton (Missouri). These sites are not Company-owned; however, they allegedly contain materials attributable to Modine from past operations. The percentage oftimelines presently planned could be materially and negatively impacted, which could have a material allegedly attributable to Modine is relatively low. Remediation of these sites is in various stages of administrative or judicial proceedings and includes recovery of past governmental costs and the costs of future investigations and remedial actions. The Company accrues for costs anticipated for the remedial settlement of the sites listed above if they are probable and can be reasonably determined. Costs anticipated for the remedial settlement of the sites listed above that are not probable or cannot be reasonably determined at this time have not been accrued; however, the Company does not believe any potential costs would be material toadverse effect on the Company’s business, financial position, due to its relatively small portionresults of contributed materials.operations and cash flows.
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
Environmental
The Company has recorded environmental accruals for obligations assumed as a result of its recent acquisition of Luvata HTS, the most significant of which relates to historical soil and groundwater contamination remediation and monitoring for a manufacturing site in the United States. In addition, the Company has recorded environmental investigation and remediation accruals related to subsurfacesoil and groundwater contamination at manufacturing facilities in the U.S., one of which the Company currently owns and operates, and at its former manufacturing facility in the Netherlands, investigative and remedial work related to a previously-owned manufacturing facility in the United States, and groundwater contamination at its manufacturing facility in Brazil, along with accruals for lesser environmental matters at certain other facilities in the United States.U.S. These accruals generally relate to facilities where past operations followed practices and procedures that were considered acceptable under then-existing regulations, or where the Company is a successor to the obligations of prior owners, and current laws and regulations require investigative and/or remedial work to ensure sufficient environmental compliance. The accruals for these environmental matters totaled $17.0$18.3 million and $16.8$18.2 million at December 31, 2017 as of September 30,2020 and March 31, 2017,2020, respectively. As additional information becomes available, the Company will re-assess the liabilities related to these matters and revise the estimated accruals, if necessary. Based upon currently available information, the Company believes the ultimate outcome of these matters, individually and in the aggregate, will not have a material adverse effect on its financial position. However, these matters are subject to inherent uncertainties, and unfavorable outcomes could occur, including significant monetary damages.
Brazil Antitrust Investigation
As of March 31, 2017, the Company accrued $4.7 million related to alleged violations of Brazil’s antitrust regulations. During the first quarter of fiscal 2018, the Company paid $4.7 million to Brazil’s Administrative Council for Economic Defense to settle this matter.
Other Litigation
In the normal course of business, the Company and its subsidiaries are named as defendants in various other lawsuits and enforcement proceedings by private parties, governmental agencies and/or others in which claims are asserted against Modine. The Company believes that any additional loss in excess of amounts already accrued would not have a material effect on the Company’s consolidated balance sheet, results of operations, and cash flows. In the opinion ofaddition, management expects that the liabilities if any, which may ultimately result from such lawsuits or proceedings, areif any, would not expected to have a material adverse effect on the Company’s financial position.
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
Note 16: | Note 18: Accumulated Other Comprehensive Loss |
Changes in accumulated other comprehensive loss were as follows:
| | Three months ended September 30, 2020 | | | Six months ended September 30, 2020 | |
| | Foreign Currency Translation | | | Defined Benefit Plans | | | Cash Flow Hedges | | | Total | | | Foreign Currency Translation | | | Defined Benefit Plans | | | Cash Flow Hedges | | | Total | |
Beginning balance | | $ | (56.1 | ) | | $ | (159.7 | ) | | $ | 0 | | | $ | (215.8 | ) | | $ | (61.4 | ) | | $ | (160.9 | ) | | $ | (1.0 | ) | | $ | (223.3 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other comprehensive income before reclassifications | | | 17.3 | | | | 0 | | | | 0.3 | | | | 17.6 | | | | 22.6 | | | | 0 | | | | 1.1 | | | | 23.7 | |
Reclassifications: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Amortization of unrecognized net loss (a) | | | 0 | | | | 1.7 | | | | 0 | | | | 1.7 | | | | 0 | | | | 3.3 | | | | 0 | | | | 3.3 | |
Realized losses - net (b) | | | 0 | | | | 0 | | | | 0.3 | | | | 0.3 | | | | 0 | | | | 0 | | | | 0.8 | | | | 0.8 | |
Income taxes | | | 0 | | | | (0.4 | ) | | | (0.2 | ) | | | (0.6 | ) | | | 0 | | | | (0.8 | ) | | | (0.5 | ) | | | (1.3 | ) |
Total other comprehensive income | | | 17.3 | | | | 1.3 | | | | 0.4 | | | | 19.0 | | | | 22.6 | | | | 2.5 | | | | 1.4 | | | | 26.5 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending balance | | $ | (38.8 | ) | | $ | (158.4 | ) | | $ | 0.4 | | | $ | (196.8 | ) | | $ | (38.8 | ) | | $ | (158.4 | ) | | $ | 0.4 | | | $ | (196.8 | ) |
| | Three months ended December 31, 2017 | | | Nine months ended December 31, 2017 | |
| | Foreign Currency Translation | | | Defined Benefit Plans | | | Cash Flow Hedges | | | Total | | | Foreign Currency Translation | | | Defined Benefit Plans | | | Cash Flow Hedges | | | Total | |
Beginning balance | | $ | (19.0 | ) | | $ | (133.3 | ) | | $ | - | | | $ | (152.3 | ) | | $ | (46.8 | ) | | $ | (135.0 | ) | | $ | - | | | $ | (181.8 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other comprehensive income before reclassifications | | | 4.6 | | | | - | | | | 0.6 | | | | 5.2 | | | | 32.4 | | | | - | | | | 0.6 | | | | 33.0 | |
Reclassifications for amortization of unrecognized net loss (a) | | | - | | | | 1.3 | | | | - | | | | 1.3 | | | | - | | | | 3.9 | | | | - | | | | 3.9 | |
Income taxes | | | - | | | | (0.4 | ) | | | (0.2 | ) | | | (0.6 | ) | | | - | | | | (1.3 | ) | | | (0.2 | ) | | | (1.5 | ) |
Total other comprehensive income | | | 4.6 | | | | 0.9 | | | | 0.4 | | | | 5.9 | | | | 32.4 | | | | 2.6 | | | | 0.4 | | | | 35.4 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending balance | | $ | (14.4 | ) | | $ | (132.4 | ) | | $ | 0.4 | | | $ | (146.4 | ) | | $ | (14.4 | ) | | $ | (132.4 | ) | | $ | 0.4 | | | $ | (146.4 | ) |
18
| | Three months ended September 30, 2019 | | | Six months ended September 30, 2019 | |
| | Foreign Currency Translation | | | Defined Benefit Plans | | | Cash Flow Hedges | | | Total | | | Foreign Currency Translation | | | Defined Benefit Plans | | | Cash Flow Hedges | | | Total | |
Beginning balance | | $ | (40.7 | ) | | $ | (135.2 | ) | | $ | (0.3 | ) | | $ | (176.2 | ) | | $ | (42.6 | ) | | $ | (136.3 | ) | | $ | 0.5 | | | $ | (178.4 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other comprehensive loss before reclassifications | | | (18.7 | ) | | | 0 | | | | (0.6 | ) | | | (19.3 | ) | | | (16.8 | ) | | | 0 | | | | (1.6 | ) | | | (18.4 | ) |
Reclassifications: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Amortization of unrecognized net loss (a) | | | 0 | | | | 1.4 | | | | 0 | | | | 1.4 | | | | 0 | | | | 2.8 | | | | 0 | | | | 2.8 | |
Realized losses - net (b) | | | 0 | | | | 0 | | | | 0.3 | | | | 0.3 | | | | 0 | | | | 0 | | | | 0.2 | | | | 0.2 | |
Foreign currency translation gains (c) | | | (0.6 | ) | | | 0 | | | | 0 | | | | (0.6 | ) | | | (0.6 | ) | | | 0 | | | | 0 | | | | (0.6 | ) |
Income taxes | | | 0 | | | | (0.3 | ) | | | 0.1 | | | | (0.2 | ) | | | 0 | | | | (0.6 | ) | | | 0.4 | | | | (0.2 | ) |
Total other comprehensive income (loss) | | | (19.3 | ) | | | 1.1 | | | | (0.2 | ) | | | (18.4 | ) | | | (17.4 | ) | | | 2.2 | | | | (1.0 | ) | | | (16.2 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending balance | | $ | (60.0 | ) | | $ | (134.1 | ) | | $ | (0.5 | ) | | $ | (194.6 | ) | | $ | (60.0 | ) | | $ | (134.1 | ) | | $ | (0.5 | ) | | $ | (194.6 | ) |
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
| | Three months ended December 31, 2016 | | | Nine months ended December 31, 2016 | |
| | Foreign Currency Translation | | | Defined Benefit Plans | | | Total | | | Foreign Currency Translation | | | Defined Benefit Plans | | | Total | |
Beginning balance | | $ | (39.0 | ) | | $ | (136.5 | ) | | $ | (175.5 | ) | | $ | (36.0 | ) | | $ | (138.2 | ) | | $ | (174.2 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Other comprehensive income (loss) before reclassifications | | | (14.2 | ) | | | - | | | | (14.2 | ) | | | (17.2 | ) | | | - | | | | (17.2 | ) |
Reclassifications for amortization of unrecognized net loss (a) | | | - | | | | 1.3 | | | | 1.3 | | | | - | | | | 3.9 | | | | 3.9 | |
Income taxes | | | - | | | | (0.4 | ) | | | (0.4 | ) | | | - | | | | (1.3 | ) | | | (1.3 | ) |
Total other comprehensive income (loss) | | | (14.2 | ) | | | 0.9 | | | | (13.3 | ) | | | (17.2 | ) | | | 2.6 | | | | (14.6 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Ending balance | | $ | (53.2 | ) | | $ | (135.6 | ) | | $ | (188.8 | ) | | $ | (53.2 | ) | | $ | (135.6 | ) | | $ | (188.8 | ) |
| (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. SeeRefer to Note 4 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. |
(c) | As a result of the sale of its investment in NEX during the second quarter of fiscal 2020, the Company wrote off $0.6 million of accumulated foreign currency translation gains. |
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
Note 17: | Note 19: Segment Information |
Effective April 1, 2020, the Company began managing its global automotive business separate from the other businesses within the previously-reported Vehicular Thermal Solutions (“VTS”) segment. The Company is managing the automotive business as the Automotive segment as it targets the sale or eventual exit of its underlying automotive business operations. The other businesses of the VTS segment, including the commercial vehicle and off-highway businesses, are being managed as the Heavy Duty Equipment segment. The segment realignment had no impact on the CIS and BHVAC segments or on the Company’s consolidated financial position, results of operations, and cash flows. Segment financial information for fiscal 2020 has been recast to conform to the fiscal 2021 presentation.
Each operating segment is managed by a vice president and has separate financial results reviewed by the Company’s chief operating decision maker. These results are used by management in evaluating the performance of each segment and in making decisions on the allocation of resources among the Company’s various businesses.
The following is a summary of net sales, gross profit, operating income, and total assets by segment. In fiscal 2018, the Company adopted new accounting guidance related to the income statement presentation of pension and postretirement costs. Accordingly, the Company recast the comparable fiscal 2017 segment financial results to conform to the current-period presentation. See Note 1 for additional information on this new accounting guidance.segment:
| | Three months ended December 31, | | | Nine months ended December 31, | |
Net sales: | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Americas | | $ | 140.5 | | | $ | 123.4 | | | $ | 430.7 | | | $ | 389.4 | |
Europe | | | 134.6 | | | | 119.8 | | | | 405.4 | | | | 389.7 | |
Asia | | | 42.8 | | | | 28.6 | | | | 117.7 | | | | 78.2 | |
Commercial and Industrial Solutions (a) | | | 144.9 | | | | 34.7 | | | | 451.6 | | | | 34.7 | |
Building HVAC | | | 56.1 | | | | 47.2 | | | | 147.9 | | | | 132.8 | |
Segment total | | | 518.9 | | | | 353.7 | | | | 1,553.3 | | | | 1,024.8 | |
Corporate and eliminations | | | (6.2 | ) | | | (3.9 | ) | | | (16.8 | ) | | | (10.1 | ) |
Net sales | | $ | 512.7 | | | $ | 349.8 | | | $ | 1,536.5 | | | $ | 1,014.7 | |
| | Three months ended September 30, | |
| | 2020 | | | 2019 | |
| | External Sales | | | Inter-segment Sales | | | Total | | | External Sales | | | Inter-segment Sales | | | Total | |
Net sales: | | | | | | | | | | | | | | | | | | |
CIS | | $ | 133.2 | | | $ | 0.9 | | | $ | 134.1 | | | $ | 155.7 | | | $ | 1.0 | | | $ | 156.7 | |
BHVAC | | | 61.9 | | | | 0 | | | | 61.9 | | | | 55.7 | | | | 0.3 | | | | 56.0 | |
HDE | | | 157.6 | | | | 8.0 | | | | 165.6 | | | | 173.9 | | | | 13.3 | | | | 187.2 | |
Automotive | | | 108.7 | | | | 1.2 | | | | 109.9 | | | | 114.9 | | | | 0.8 | | | | 115.7 | |
Segment total | | | 461.4 | | | | 10.1 | | | | 471.5 | | | | 500.2 | | | | 15.4 | | | | 515.6 | |
Corporate and eliminations | | | - | | | | (10.1 | ) | | | (10.1 | ) | | | - | | | | (15.4 | ) | | | (15.4 | ) |
Net sales | | $ | 461.4 | | | $ | - | | | $ | 461.4 | | | $ | 500.2 | | | $ | - | | | $ | 500.2 | |
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
| | Three months ended December 31, | | | Nine months ended December 31, | |
| | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Gross profit: | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | |
Americas | | $ | 21.7 | | | | 15.4 | % | | $ | 18.4 | | | | 14.9 | % | | $ | 69.7 | | | | 16.2 | % | | $ | 59.5 | | | | 15.3 | % |
Europe | | | 17.9 | | | | 13.3 | % | | | 18.6 | | | | 15.5 | % | | | 56.8 | | | | 14.0 | % | | | 60.3 | | | | 15.5 | % |
Asia | | | 8.2 | | | | 19.0 | % | | | 5.0 | | | | 17.6 | % | | | 21.9 | | | | 18.6 | % | | | 13.1 | | | | 16.7 | % |
Commercial and Industrial Solutions (a) | | | 18.6 | | | | 12.9 | % | | | 4.4 | | | | 12.7 | % | | | 66.4 | | | | 14.7 | % | | | 4.4 | | | | 12.7 | % |
Building HVAC | | | 19.0 | | | | 33.8 | % | | | 15.3 | | | | 32.4 | % | | | 45.0 | | | | 30.4 | % | | | 37.1 | | | | 28.0 | % |
Segment total | | | 85.4 | | | | 16.4 | % | | | 61.7 | | | | 17.5 | % | | | 259.8 | | | | 16.7 | % | | | 174.4 | | | | 17.0 | % |
Corporate and eliminations | | | - | | | | - | | | | (2.7 | ) | | | - | | | | 0.2 | | | | - | | | | (5.1 | ) | | | - | |
Gross profit | | $ | 85.4 | | | | 16.7 | % | | $ | 59.0 | | | | 16.9 | % | | $ | 260.0 | | | | 16.9 | % | | $ | 169.3 | | | | 16.7 | % |
| | Three months ended December 31, | | | Nine months ended December 31, | |
Operating income: | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Americas | | $ | 8.9 | | | $ | 5.7 | | | $ | 28.8 | | | $ | 14.2 | |
Europe | | | 6.3 | | | | 8.6 | | | | 22.8 | | | | 30.9 | |
Asia | | | 5.1 | | | | 2.6 | | | | 12.6 | | | | 4.9 | |
Commercial and Industrial Solutions (a) | | | (4.6 | ) | | | (0.3 | ) | | | 14.3 | | | | (0.3 | ) |
Building HVAC | | | 9.2 | | | | 6.7 | | | | 18.6 | | | | 10.4 | |
Segment total | | | 24.9 | | | | 23.3 | | | | 97.1 | | | | 60.1 | |
Corporate and eliminations | | | (11.0 | ) | | | (16.6 | ) | | | (32.1 | ) | | | (38.7 | ) |
Operating income | | $ | 13.9 | | | $ | 6.7 | | | $ | 65.0 | | | $ | 21.4 | |
| | December 31, 2017 | | | March 31, 2017 | |
Total assets: | | | | | | |
Americas | | $ | 275.9 | | | $ | 282.9 | |
Europe | | | 308.1 | | | | 269.4 | |
Asia | | | 132.5 | | | | 111.3 | |
Commercial and Industrial Solutions | | | 606.8 | | | | 576.0 | |
Building HVAC | | | 88.8 | | | | 85.2 | |
Corporate and eliminations (b) | | | 90.1 | | | | 124.7 | |
Total assets | | $ | 1,502.2 | | | $ | 1,449.5 | |
| (a) | The Company acquired Luvata HTS on November 30, 2016 and began operating the business as its CIS segment. As the Company has consolidated CIS financial results since the acquisition date, the three and nine months ended December 31, 2016 included one month of financial results from CIS operations. During the three months ended December 31, 2017, the Company recorded restructuring expenses and an impairment charge totaling $9.5 million within the CIS segment associated with the closure of a manufacturing facility in Austria. See Note 6 for additional information. |
| (b) | The decrease in total assets at Corporate was primarily due to a decrease in deferred tax assets resulting from the impact of tax reform in the U.S. See Note 8 for additional information regarding the reduction in the corporate tax rate in the U.S. |
20
| | Six months ended September 30, | |
| | 2020 | | | 2019 | |
| | External Sales | | | Inter-segment Sales | | | Total | | | External Sales | | | Inter-segment Sales | | | Total | |
Net sales: | | | | | | | | | | | | | | | | | | |
CIS | | $ | 254.5 | | | $ | 2.1 | | | $ | 256.6 | | | $ | 323.6 | | | $ | 1.9 | | | $ | 325.5 | |
BHVAC | | | 109.3 | | | | 0.2 | | | | 109.5 | | | | 104.2 | | | | 0.8 | | | | 105.0 | |
HDE | | | 275.9 | | | | 13.2 | | | | 289.1 | | | | 373.6 | | | | 30.0 | | | | 403.6 | |
Automotive | | | 169.5 | | | | 2.5 | | | | 172.0 | | | | 227.8 | | | | 1.5 | | | | 229.3 | |
Segment total | | | 809.2 | | | | 18.0 | | | | 827.2 | | | | 1,029.2 | | | | 34.2 | | | | 1,063.4 | |
Corporate and eliminations | | | - | | | | (18.0 | ) | | | (18.0 | ) | | | - | | | | (34.2 | ) | | | (34.2 | ) |
Net sales | | $ | 809.2 | | | $ | - | | | $ | 809.2 | | | $ | 1,029.2 | | | $ | - | | | $ | 1,029.2 | |
| | Three months ended September 30, | | | Six months ended September 30, | |
| | 2020 | | | 2019 | | | 2020 | | | 2019 | |
| | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | |
Gross profit: | | | | | | | | | | | | | | | | | | | | | | | | |
CIS | | $ | 19.3 | | | | 14.4 | % | | $ | 22.9 | | | | 14.6 | % | | $ | 34.8 | | | | 13.5 | % | | $ | 47.2 | | | | 14.5 | % |
BHVAC | | | 21.7 | | | | 35.1 | % | | | 17.7 | | | | 31.7 | % | | | 36.2 | | | | 33.1 | % | | | 31.4 | | | | 29.9 | % |
HDE | | | 23.6 | | | | 14.2 | % | | | 22.4 | | | | 12.0 | % | | | 34.9 | | | | 12.1 | % | | | 54.9 | | | | 13.6 | % |
Automotive | | | 16.6 | | | | 15.2 | % | | | 13.0 | | | | 11.2 | % | | | 21.4 | | | | 12.5 | % | | | 25.5 | | | | 11.1 | % |
Segment total | | | 81.2 | | | | 17.2 | % | | | 76.0 | | | | 14.7 | % | | | 127.3 | | | | 15.4 | % | | | 159.0 | | | | 15.0 | % |
Corporate and eliminations | | | (0.4 | ) | | | 0 | | | | (0.3 | ) | | | 0 | | | | (0.4 | ) | | | 0 | | | | 0.1 | | | | 0 | |
Gross profit | | $ | 80.8 | | | | 17.5 | % | | $ | 75.7 | | | | 15.1 | % | | $ | 126.9 | | | | 15.7 | % | | $ | 159.1 | | | | 15.5 | % |
| | Three months ended September 30, | | | Six months ended September 30, | |
| | 2020 | | | 2019 | | | 2020 | | | 2019 | |
Operating income: | | | | | | | | | | | | |
CIS | | $ | 5.6 | | | $ | 8.5 | | | $ | 5.6 | | | $ | 17.5 | |
BHVAC | | | 13.1 | | | | 8.8 | | | | 20.2 | | | | 14.1 | |
HDE | | | 13.3 | | | | 7.1 | | | | 10.8 | | | | 24.4 | |
Automotive | | | 8.0 | | | | 0.4 | | | | 4.2 | | | | 0.4 | |
Segment total | | | 40.0 | | | | 24.8 | | | | 40.8 | | | | 56.4 | |
Corporate and eliminations | | | (11.5 | ) | | | (18.8 | ) | | | (15.5 | ) | | | (32.3 | ) |
Operating income | | $ | 28.5 | | | $ | 6.0 | | | $ | 25.3 | | | $ | 24.1 | |
| | September 30, 2020 | | | March 31, 2020 | |
Total assets: | | | | | | |
CIS | | $ | 598.2 | | | $ | 617.7 | |
BHVAC | | | 105.4 | | | | 102.3 | |
HDE | | | 418.8 | | | | 417.4 | |
Automotive | | | 281.7 | | | | 272.5 | |
Corporate and eliminations | | | 106.8 | | | | 126.2 | |
Total assets | | $ | 1,510.9 | | | $ | 1,536.1 | |
Note 20: Subsequent Event
On November 2, 2020, the Company announced that it signed a definitive agreement to sell its liquid-cooled automotive business to Dana Incorporated. The Company expects this transaction to close during the first half of calendar 2021, subject to regulatory approvals and other customary closing conditions. The Company does not expect significant net cash proceeds from this transaction based upon the selling price and adjustments for cash, debt, and working capital, as defined within the definitive agreement. The Company reports financial results of the liquid-cooled automotive business within its Automotive segment. Net sales attributable to the liquid-cooled automotive business were approximately $130.0 million during the first six months of fiscal 2021 and approximately $310.0 million in fiscal 2020. Net assets of this business were approximately $140.0 million as of September 30, 2020. There is 0 goodwill or intangible assets recorded within the liquid-cooled automotive business.
In connection with the pending sale, the Company expects to classify the liquid-cooled automotive business (the “disposal group”) as held for sale beginning in the third quarter of fiscal 2021 and plans to report the assets and liabilities of this business as held for sale beginning with its December 31, 2020 consolidated balance sheet. As a result of the disposal group being classified as held for sale, the Company expects to record a non-cash impairment charge of approximately $120.0 million to $130.0 million during the third quarter of fiscal 2021 related to the disposal group’s long-lived assets, which consist of property, plant and equipment. When the transaction is completed, the Company expects to record an additional loss on sale related to other net assets and cumulative foreign currency translation adjustments attributable to the disposal group, net working capital adjustments, and costs to sell. As the Company has not yet finalized its analysis, the impairment charge recorded in the third quarter could differ materially from the Company’s preliminary estimate and, at this time, the Company cannot estimate the loss on sale to be recorded upon completion of this transaction.
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations. |
When we use the terms “Modine,” “we,” “us,” the “Company,” or “our” in this report, we are referring to Modine Manufacturing Company. Our fiscal year ends on March 31 and, accordingly, all references to quarters refer to our fiscal quarters. The quarter ended December 31, 2017September 30, 2020 was the thirdsecond quarter of fiscal 2018.2021.
On November 30, 2016,COVID-19
As the COVID-19 pandemic continues, both the health and overall well-being of our employees and delivering quality products and services to our customers remain our top priorities.
The COVID-19 pandemic has broadly impacted the global economy and our key end markets, which were most severely impacted during the first quarter of fiscal 2021. In response to lower market demand and in an effort to mitigate the negative impacts of COVID-19 on our financial results, we acquired Luvata Heat Transfer Solutions (“Luvata HTS”) for consideration totaling $415.6 implemented actions, including, but not limited to, production staffing adjustments, furloughs, shortened work weeks, and temporary salary reductions at all levels of our organization. In addition, we have reduced operating and administrative expenses, including travel and entertainment expenditures, and lowered the annual compensation paid to the Board of Directors. We have also focused on limiting capital expenditures and, where possible, have delayed certain projects and the purchase of some program-related equipment and tooling. Our swift cost-saving actions, coupled with a slow but steady recovery in most of our key end markets, favorably impacted our financial results during the second quarter of fiscal 2021. Looking ahead, while we are continuing to focus on cost-saving measures, we plan to reduce the level of furloughs, shortened work weeks and salary reductions. As a result, we expect the benefit of the cost-saving actions, primarily on SG&A expenses, to be less significant in the second half of fiscal 2021.
The full extent of the impacts of COVID-19, which will largely depend on the length and severity of the pandemic, could have a material adverse effect on our business, results of operations, and cash flows.
Second Quarter Highlights
Net sales in the second quarter of fiscal 2021 decreased $38.8million, ($388.2 million, netor 8percent, from the second quarter of cash acquired). Operating asfiscal 2020, primarily due to lower sales in our Commercial and Industrial Solutions (“CIS”) segment, this business is a leading global supplier, Heavy Duty Equipment (“HDE”) and Automotive segments. Sales in each of coils, coolers and coatings tothese segments were impacted by market-driven volume declines. Cost of sales decreased $43.9 million, or 10 percent, from the heating, ventilation, air conditioning, and refrigeration industry. As we have consolidated CIS financial results since the acquisition date, the thirdsecond quarter of fiscal 2017 included one month of financial results from CIS operations.
In December 2017, the Tax Cuts and Jobs Act (“U.S. tax reform”) was enacted and included numerous changes to existing U.S. tax regulations, including U.S. corporate tax rates, business deductions, and taxes on income in foreign jurisdictions. During the third quarter of fiscal 2018, we recorded provisional charges totaling $35.7 million for certain income tax effects of the U.S. tax reform. See Note 8 of the Notes to Condensed Consolidated Financial Statements for additional information.
Third Quarter Highlights
Net sales in the third quarter of fiscal 2018 increased $162.9 million, or 47 percent, from the third quarter of fiscal 2017,2020, primarily due to a $110.2 million increase inlower sales in our CIS segment, which we owned for one month in the third quarter of the prior year, and higher sales in all of our other operating segments.volume. Gross profit increased $26.4$5.1 million including $14.2 million of additional contribution from our CIS segment.and gross margin improved 240 basis points to 17.5 percent. Selling, general and administrative (“SG&A”) expenses increased $10.1decreased $16.6 million, primarily due to a $9.0lower project costs associated with our review of strategic alternatives for the automotive business and cost-reduction initiatives in response to the negative impacts of COVID-19. Operating income during the second quarter of fiscal 2021 increased $22.5 million increase of SG&A expenses in our CIS segment. Restructuring expenses increased $7.8to $28.5 million, primarily due to severancehigher earnings in our Automotive, HDE, and Building HVAC Systems (“BHVAC”) segments and lower SG&A expenses related to the recent closure of a manufacturing facility in Austria within the CIS segment. In addition, we recorded a $1.3 million asset impairment charge related to this CIS Austria facility. Operating income during the third quarter of fiscal 2018 increased $7.2 million to $13.9 million. Our net loss of $27.9 million represents a $29.8 million decline compared with the third quarter of the prior year, primarily due to $35.7 million of charges associated with U.S. tax reform, partially offset by the increase in operating income.at Corporate.
Year-to-DateYear-to-date Highlights
Net sales in the first ninesix months of fiscal 2018 increased $521.82021 decreased $220.0 million, or 5121 percent, from the same period last year, primarily due to $416.9 million of additional sales from our CIS segment and higherlower sales in allour HDE, CIS and Automotive segments. Cost of our other operating segments.sales decreased $187.8 million, or 22 percent, from the same period last year, primarily due to lower sales volume. Gross profit increased $90.7decreased $32.2 million including $62.0 million of additional contribution from our CIS segment.and gross margin improved 20 basis points to 15.7 percent. SG&A expenses increased $39.1decreased $35.4 million, primarily due to a $37.9 million increaselower project costs associated with our review of strategic alternatives for the automotive business and cost-reduction initiatives in SG&A expenses in our CIS segment.response to the negative impacts of COVID-19. Operating income during the first ninesix months of fiscal 20182021 increased $43.6$1.2 million to $65.0 million. Our net earnings of $5.8$25.3 million, decreased $1.0 million compared with the same period in the prior year, primarily due to $35.7 million of charges associated with U.S. tax reformhigher earnings in our BHVAC and higher interest expense,Automotive segments and lower SG&A expenses at Corporate, partially offset by the increaselower earnings in operating income.our HDE and CIS segments.
Recent Event
On November 2, 2020, we announced that we entered into a definitive agreement to sell our liquid-cooled automotive business to Dana Incorporated. We expect this transaction to close during the first half of calendar 2021, subject to regulatory approvals and other customary closing conditions. We do not expect significant net cash proceeds from this transaction based upon the selling price and adjustments for cash, debt, and working capital, as defined within the definitive agreement. We report financial results of this business within the Automotive segment. Net sales attributable to the liquid-cooled automotive business were approximately $130.0 million during the first six months of fiscal 2021 and approximately $310.0 million in fiscal 2020. Net assets of this business were approximately $140.0 million as of September 30, 2020.
In connection with this pending sale, we expect to record a non-cash impairment charge of approximately $120.0 million to $130.0 million during the third quarter of fiscal 2021 related to the long-lived assets of the liquid-cooled automotive business. When the transaction is completed, we expect to record an additional loss on sale related to other net assets and cumulative foreign currency translation adjustments attributable to the business, net working capital adjustments, and costs to sell. As we have not yet finalized our analysis, the impairment charge recorded in the third quarter could differ materially from our preliminary estimate and, at this time, we cannot estimate the loss on sale to be recorded upon completion of this transaction.
We are continuing to evaluate strategic alternatives for our other automotive businesses and are committed to exiting these businesses in a manner that is in the best interest of our shareholders.
CONSOLIDATED RESULTS OF OPERATIONS
The following table presents our consolidated financial results on a comparative basis for the three and ninesix months ended December 31, 2017September 30, 2020 and 2016:2019:
| | Three months ended September 30, | | | Six months ended September 30, | |
| | 2020 | | | 2019 | | | 2020 | | | 2019 | |
(in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | |
Net sales | | $ | 461.4 | | | | 100.0 | % | | $ | 500.2 | | | | 100.0 | % | | $ | 809.2 | | | | 100.0 | % | | $ | 1,029.2 | | | | 100.0 | % |
Cost of sales | | | 380.6 | | | | 82.5 | % | | | 424.5 | | | | 84.9 | % | | | 682.3 | | | | 84.3 | % | | | 870.1 | | | | 84.5 | % |
Gross profit | | | 80.8 | | | | 17.5 | % | | | 75.7 | | | | 15.1 | % | �� | | 126.9 | | | | 15.7 | % | | | 159.1 | | | | 15.5 | % |
Selling, general and administrative expenses | | | 50.8 | | | | 11.0 | % | | | 67.4 | | | | 13.5 | % | | | 95.5 | | | | 11.8 | % | | | 130.9 | | | | 12.7 | % |
Restructuring expenses | | | 1.5 | | | | 0.3 | % | | | 2.3 | | | | 0.4 | % | | | 6.1 | | | | 0.8 | % | | | 4.1 | | | | 0.4 | % |
Operating income | | | 28.5 | | | | 6.2 | % | | | 6.0 | | | | 1.2 | % | | | 25.3 | | | | 3.1 | % | | | 24.1 | | | | 2.3 | % |
Interest expense | | | (5.2 | ) | | | -1.1 | % | | | (5.8 | ) | | | -1.1 | % | | | (10.6 | ) | | | -1.3 | % | | | (11.7 | ) | | | -1.1 | % |
Other expense – net | | | (0.5 | ) | | | -0.1 | % | | | (1.3 | ) | | | -0.3 | % | | | (0.5 | ) | | | -0.1 | % | | | (2.4 | ) | | | -0.2 | % |
Earnings (loss) before income taxes | | | 22.8 | | | | 4.9 | % | | | (1.1 | ) | | | -0.2 | % | | | 14.2 | | | | 1.8 | % | | | 10.0 | | | | 1.0 | % |
Provision for income taxes | | | (13.9 | ) | | | -3.0 | % | | | (3.7 | ) | | | -0.7 | % | | | (13.7 | ) | | | -1.7 | % | | | (6.6 | ) | | | -0.6 | % |
Net earnings (loss) | | $ | 8.9 | | | | 1.9 | % | | $ | (4.8 | ) | | | -1.0 | % | | $ | 0.5 | | | | 0.1 | % | | $ | 3.4 | | | | 0.3 | % |
| | Three months ended December 31, | | | Nine months ended December 31, | |
| | 2017 | | | 2016 | | | 2017 | | | 2016 | |
(in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | |
Net sales | | $ | 512.7 | | | | 100.0 | % | | $ | 349.8 | | | | 100.0 | % | | $ | 1,536.5 | | | | 100.0 | % | | $ | 1,014.7 | | | | 100.0 | % |
Cost of sales | | | 427.3 | | | | 83.3 | % | | | 290.8 | | | | 83.1 | % | | | 1,276.5 | | | | 83.1 | % | | | 845.4 | | | | 83.3 | % |
Gross profit | | | 85.4 | | | | 16.7 | % | | | 59.0 | | | | 16.9 | % | | | 260.0 | | | | 16.9 | % | | | 169.3 | | | | 16.7 | % |
Selling, general and administrative expenses | | | 60.8 | | | | 11.9 | % | | | 50.7 | | | | 14.5 | % | | | 182.2 | | | | 11.9 | % | | | 143.1 | | | | 14.1 | % |
Restructuring expenses | | | 9.4 | | | | 1.8 | % | | | 1.6 | | | | 0.5 | % | | | 11.5 | | | | 0.7 | % | | | 6.0 | | | | 0.6 | % |
Impairment charge | | | 1.3 | | | | 0.3 | % | | | - | | | | - | | | | 1.3 | | | | 0.1 | % | | | - | | | | - | |
Gain on sale of facility | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1.2 | ) | | | -0.1 | % |
Operating income | | | 13.9 | | | | 2.7 | % | | | 6.7 | | | | 1.9 | % | | | 65.0 | | | | 4.2 | % | | | 21.4 | | | | 2.1 | % |
Interest expense | | | (6.3 | ) | | | -1.2 | % | | | (4.5 | ) | | | -1.3 | % | | | (19.5 | ) | | | -1.3 | % | | | (10.5 | ) | | | -1.0 | % |
Other expense – net | | | (0.3 | ) | | | -0.1 | % | | | (1.0 | ) | | | -0.3 | % | | | (2.3 | ) | | | -0.1 | % | | | (2.8 | ) | | | -0.3 | % |
Earnings before income taxes | | | 7.3 | | | | 1.4 | % | | | 1.2 | | | | 0.3 | % | | | 43.2 | | | | 2.8 | % | | | 8.1 | | | | 0.8 | % |
(Provision) benefit for income taxes | | | (35.2 | ) | | | -6.9 | % | | | 0.7 | | | | 0.2 | % | | | (37.4 | ) | | | -2.4 | % | | | (1.3 | ) | | | -0.1 | % |
Net (loss) earnings | | $ | (27.9 | ) | | | -5.5 | % | | $ | 1.9 | | | | 0.5 | % | | $ | 5.8 | | | | 0.4 | % | | $ | 6.8 | | | | 0.7 | % |
Comparison of Three Months Ended December 31, 2017ended September 30, 2020 and 20162019
ThirdSecond quarter net sales of $512.7$461.4 million were $162.9$38.8 million, or 478 percent, higherlower than the thirdsecond quarter of the prior year, primarily due to $110.2 million of additionallower sales fromvolume in our CIS, HDE, and Automotive segments. Sales in these segments decreased $22.6 million, $21.6 million, and $5.8 million, respectively, and were impacted by market-driven volume declines. BHVAC segment sales increased $5.9 million.
Second quarter cost of sales decreased $43.9 million, or 10 percent, primarily due to lower sales volume. As a percentage of sales, cost of sales decreased 240 basis points to 82.5 percent, primarily due to favorable impacts of cost-reduction initiatives, which we owned for one monthwere implemented earlier in the third quarterfiscal year in response to lower end market demand, and procurement initiatives.
As a result of the prior year, higherlower sales in alland lower cost of our other operating segments, andsales as a $15.9 million favorable impactpercentage of foreign currency exchange rate changes.
Thirdsales, second quarter gross profit increased $26.4$5.1 million and gross margin improved 240 basis points to 17.5 percent.
Second quarter SG&A expenses decreased $16.6 million. The decrease in SG&A expenses was primarily due to $14.2lower costs recorded at Corporate associated with our review of strategic alternatives for the Automotive segment’s business operations, which decreased approximately $12.0 million, and lower compensation-related expenses, which decreased approximately $8.0 million. The lower compensation-related expenses resulted primarily from our cost-reduction initiatives aimed to mitigate the negative impacts of COVID-19. These favorable drivers were partially offset by $5.5 million of additional contribution from our CIS segment and higher gross profit in our Building HVAC, Americas, and Asia segments. Third quarter gross profit was favorably impacted by $2.1 million from foreign currency exchange rate changes. Gross margin declined 20 basis points to 16.7 percent, as the benefits from higher sales volume and the absence of a $2.9 million inventory purchase accounting adjustment, which wascosts recorded at Corporate in connection with Thomas A. Burke stepping down from his position as President and Chief Executive Officer (“CEO.”) These costs primarily consisted of severance and benefit-related expenses and costs directly associated with the prior year, were offset by unfavorable sales mix, higher material costs, and the absence of favorable customer pricing settlements in Europe recordedsearch for Mr. Burke’s successor.
Restructuring expenses totaled $1.5 million in the prior year.
SG&A expenses increased $10.1 million from the thirdsecond quarter of fiscal 2017 to the third quarter2021 and primarily consisted of fiscal 2018, primarily due to a $9.0 million increase in SG&A expenses in our CIS segment, a $1.4 million unfavorable impact of foreign currency exchange rate changes, and higher compensation-related expenses, partially offset by lower costs incurred related to the acquisition of Luvata HTS. SG&A expenses, as a percentage of net sales, decreased 260 basis points compared with the third quarter of the prior year.
Restructuring expenses of $9.4 million in the third quarter of fiscal 2018 increased $7.8 million compared with the prior year, primarily due to severance-relatedseverance expenses in the CIS segment related to the closure of a manufacturing facility in Austria.plant consolidation activities.
During the third quarter of fiscal 2018, we recorded a $1.3 million impairment charge related to the closure of a CIS manufacturing facility in Austria.
Operating income of $13.9$28.5 million in the thirdsecond quarter of fiscal 2018 improved $7.22021 increased $22.5 million compared with the thirdsecond quarter of fiscal 2017,2020. The increase was primarily due to higher earnings in the Americas, Asiaour Automotive, HDE, and Building HVAC segments.BHVAC segments and lower SG&A expenses at Corporate.
Interest expense increased $1.8 million to $6.3 million in the third quarter of fiscal 2018, primarily due to the debt issued in November 2016 to finance a significant portion of our acquisition of Luvata HTS.
The provision for income taxes was $35.2$13.9 million and $3.7 million in the thirdsecond quarter of fiscal 2018, compared with a benefit for income taxes of $0.72021 and 2020, respectively. The $10.2 million in the third quarter of fiscal 2017. The $35.9 million changeincrease was primarily due to charges totaling $35.7a $6.6 million income tax charge for a valuation allowance on certain U.S. deferred tax assets and higher operating earnings in the thirdcurrent year. In addition, the prior year benefitted from the release of an uncertain tax position. These factors, which caused an increase in our tax provision during the second quarter of fiscal 2018 related to2021, were partially offset by a favorable impact of global intangible low taxed income compared with the recently-enacted U.S. tax reform. In addition, the tax provision in the third quarter of fiscal 2018 included a $2.2 million benefit from a development tax credit in Hungary.prior year.
Comparison of NineSix Months Ended December 31, 2017ended September 30, 2020 and 20162019
Fiscal 20182021 year-to-date net sales of $1,536.5$809.2 million were $521.8$220.0 million, or 5121 percent, higherlower than the same period last year, primarily due to $416.9 million of additional sales from our CIS segment, higherlower sales in allour HDE, CIS and Automotive segments. Sales in these segments decreased $114.5 million, $68.9 million, and $57.3 million, respectively, and were significantly impacted by market-driven volume declines and temporary plant closures due to the COVID-19 pandemic. BHVAC segment sales increased $4.5 million.
Fiscal 2021 year-to-date cost of our other segments, and an $18.7sales of $682.3 million favorabledecreased $187.8 million, or 22 percent, primarily due to lower sales volume. As a percentage of sales, cost of sales decreased 20 basis points to 84.3 percent. The unfavorable impact of foreign currency exchange rate changes.the lower sales volume was more than offset by the benefits of cost-reduction initiatives in response to lower end market demand and procurement initiatives.
Fiscal 2018As a result of lower sales and lower cost of sales as a percentage of sales, fiscal 2021 year-to-date gross profit of $260.0decreased $32.2 million increased $90.7 million from the same period last year, due primarily to $62.0 million of incrementaland gross profit in our recently-acquired CIS segment and higher gross profit in our Americas, Asia, and Building HVAC segments. Year-to-date gross profit was favorably impacted by $2.4 million from foreign currency exchange rate changes. Gross margin improved 20 basis points to 16.9 percent,15.7 percent.
Fiscal 2021 year-to-date SG&A expenses decreased $35.4 million. The decrease in SG&A expenses was primarily due to higher sales volumelower costs recorded at Corporate associated with our review of strategic alternatives for the Automotive segment’s business operations, which decreased approximately $20.0 million, and improved production efficiencies,lower compensation-related expenses, which decreased approximately $18.0 million. These favorable drivers were partially offset by unfavorable material$5.5 million of costs and incremental depreciation and amortization expense resulting from purchase accounting for Luvata HTS.recorded at Corporate in connection with Mr. Burke stepping down as our CEO.
Fiscal 2018 year-to-date SG&A expenses increased $39.1 million from the same period last year, primarily due to a $37.9 million increase in SG&A expenses in our CIS segment, higher compensation-related expenses, and a $1.5 million unfavorable impact of foreign currency exchange rate changes, partially offset by lower costs incurred related to the acquisition of Luvata HTS. SG&A expenses, as a percentage of net sales, decreased 220 basis points compared with the same period last year.
Restructuring expenses of $11.5$6.1 million during the first ninesix months of fiscal 20182021 increased $5.5$2.0 million compared with the same period last year and consisted primarily due to severance-relatedof severance expenses in the CIS segment related to the closure of a manufacturing facility in Austria.plant consolidation activities and targeted headcount reductions.
During fiscal 2018, we recorded a $1.3 million impairment charge related to the closure of the CIS manufacturing facility in Austria.
During fiscal 2017, we sold a manufacturing facility within our Europe segment for cash proceeds of $4.3 million and recognized a $1.2 million gain as a result.
Operating income of $65.0$25.3 million during the first ninesix months of fiscal 2018 represents a $43.62021 increased $1.2 million improvement compared with the same period last year,year. The increase was primarily due to $14.6 million of incremental operating income contributed by our CIS segmentlower SG&A expenses at Corporate and higher earnings in the Americas, Asiaour BHVAC and Building HVACAutomotive segments, partially offset by lower earnings in our HDE and CIS segments.
Interest expense increased $9.0 million to $19.5 million in the first nine months of fiscal 2018, primarily due to debt issued to finance a significant portion of our acquisition of Luvata HTS.
The provision for income taxes was $37.4$13.7 million and $1.3$6.6 million induring the first ninesix months of fiscal 20182021 and 2017,2020, respectively. The $36.1$7.1 million increase was primarily due to $35.7a $6.6 million of charges recorded in the third quarter of fiscal 2018 related toincome tax charge for a valuation allowance on certain U.S. deferred tax reformassets and increasedslightly higher operating earnings in the current year. In addition, the prior year benefitted from the release of an uncertain tax position. These factors, which caused an increase in our tax provision during the first six months of fiscal 2021, were partially offset by tax benefits of $7.9 million from a development tax credit in Hungary and a $1.8 million reduction of unrecognized tax benefits resulting from a lapse in statutes of limitations. We expect the full-year fiscal 2018 benefit for the Hungary development tax credit to total approximately $11.0 million. We do not expect thefavorable impact of this tax credit to be significant in fiscal 2019. It is possible thatglobal intangible low taxed income compared with the prior year.
SEGMENT RESULTS OF OPERATIONS
Effective April 1, 2020, we may releasebegan managing our global automotive business separate from the tax valuation allowance (approximately $3.0 million) in a foreign jurisdiction inother businesses within the fourth quarterpreviously-reported Vehicular Thermal Solutions (“VTS”) segment. We have been managing the automotive business as the Automotive segment as we target the sale or eventual exit of fiscal 2018 or in fiscal 2019. See Note 8its underlying automotive business operations. We are managing the other businesses of the Notes to Condensed Consolidated Financial Statements for additional information regarding U.S. tax reformVTS segment, including the commercial vehicle and income tax valuation allowances.off-highway businesses, as the Heavy Duty Equipment segment.
SEGMENT RESULTS OF OPERATIONS
Since the date we acquired Luvata HTS (November 30, 2016), we have included CIS segmentWe began reporting financial results withinfor our consolidated results of operations. Asnew segment structure beginning for fiscal 2021. Segment financial information for fiscal 2020 has been recast to conform to the fiscal 2021 presentation. The segment realignment had no impact on the CIS financial results were not included in our consolidated financial statements for the full period during the three and nine months ended December 31, 2016, we have not provided separate discussion of our CIS segment below. The contributions of our CIS segment are included within the discussion of our consolidated financial results above. BHVAC segments.
The following is a discussion of our segment results of operations for the three and ninesix months ended December 31, 2017September 30, 2020 and 2016:2019:
Americas | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended December 31, | | | Nine months ended December 31, | |
| | 2017 | | | 2016 | | | 2017 | | | 2016 | |
(in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | |
Net sales | | $ | 140.5 | | | | 100.0 | % | | $ | 123.4 | | | | 100.0 | % | | $ | 430.7 | | | | 100.0 | % | | $ | 389.4 | | | | 100.0 | % |
Cost of sales | | | 118.8 | | | | 84.6 | % | | | 105.0 | | | | 85.1 | % | | | 361.0 | | | | 83.8 | % | | | 329.9 | | | | 84.7 | % |
Gross profit | | | 21.7 | | �� | | 15.4 | % | | | 18.4 | | | | 14.9 | % | | | 69.7 | | | | 16.2 | % | | | 59.5 | | | | 15.3 | % |
Selling, general and administrative expenses | | | 12.7 | | | | 9.0 | % | | | 11.3 | | | | 9.2 | % | | | 39.3 | | | | 9.1 | % | | | 40.1 | | | | 10.3 | % |
Restructuring expenses | | | 0.1 | | | | 0.1 | % | | | 1.4 | | | | 1.1 | % | | | 1.6 | | | | 0.4 | % | | | 5.2 | | | | 1.3 | % |
Operating income | | $ | 8.9 | | | | 6.3 | % | | $ | 5.7 | | | | 4.6 | % | | $ | 28.8 | | | | 6.7 | % | | $ | 14.2 | | | | 3.6 | % |
Commercial and Industrial Solutions
| | Three months ended September 30, | | | Six months ended September 30, | |
| | 2020 | | | 2019 | | | 2020 | | | 2019 | |
(in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | |
Net sales | | $ | 134.1 | | | | 100.0 | % | | $ | 156.7 | | | | 100.0 | % | | $ | 256.6 | | | | 100.0 | % | | $ | 325.5 | | | | 100.0 | % |
Cost of sales | | | 114.8 | | | | 85.6 | % | | | 133.8 | | | | 85.4 | % | | | 221.8 | | | | 86.5 | % | | | 278.3 | | | | 85.5 | % |
Gross profit | | | 19.3 | | | | 14.4 | % | | | 22.9 | | | | 14.6 | % | | | 34.8 | | | | 13.5 | % | | | 47.2 | | | | 14.5 | % |
Selling, general and administrative expenses | | | 12.2 | | | | 9.1 | % | | | 14.0 | | | | 9.0 | % | | | 25.3 | | | | 9.8 | % | | | 29.1 | | | | 8.9 | % |
Restructuring expenses | | | 1.5 | | | | 1.2 | % | | | 0.4 | | | | 0.2 | % | | | 3.9 | | | | 1.5 | % | | | 0.6 | | | | 0.2 | % |
Operating income | | $ | 5.6 | | | | 4.2 | % | | $ | 8.5 | | | | 5.4 | % | | $ | 5.6 | | | | 2.2 | % | | $ | 17.5 | | | | 5.4 | % |
Comparison of Three Months Ended December 31, 2017ended September 30, 2020 and 20162019
AmericasCIS net sales increased $17.1decreased $22.6 million, or 14 percent, from the thirdsecond quarter of fiscal 20172020 to the thirdsecond quarter of fiscal 2018,2021, primarily due to higherlower sales volume. Sales to data center cooling and commercial HVAC&R customers decreased $12.3 million and $10.6 million, respectively.
CIS cost of sales decreased $19.0 million, or 14 percent, from the second quarter of fiscal 2020 to the second quarter of fiscal 2021, primarily due to lower sales volume. As a percentage of sales, cost of sales increased 20 basis points to 85.6 percent, primarily due to the unfavorable impact of lower sales volume, to commercial vehicle, off-highway,partially offset by cost-reduction and automotive customers. Grossprocurement initiatives.
As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit increased $3.3decreased $3.6 million and gross margin improved 50declined 20 basis points primarily due to higher sales volume and improved production efficiencies, partially offset by unfavorable material costs. 14.4 percent.
SG&A expenses increased $1.4decreased $1.8 million primarily due to a lower recovery of development costs and higher compensation-related expenses. Restructuring expenses decreased $1.3 million incompared with the thirdsecond quarter of fiscal 2018,the prior year. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $2.0 million.
Restructuring expenses during the second quarter of fiscal 2021 totaled $1.5 million and primarily consisted of severance expenses related to plant consolidation costs. activities in China.
Operating income increased $3.2of $5.6 million to $8.9decreased $2.9 million during the quarter, primarily due to lower gross profit and higher gross profit.restructuring expenses, partially offset by lower SG&A expenses.
Comparison of NineSix Months Ended December 31, 2017ended September 30, 2020 and 20162019
AmericasCIS year-to-date net sales increased $41.3decreased $68.9 million, or 1121 percent, from the same period last year, primarily due to lower sales volume largely associated with the impacts of the COVID-19 pandemic. Sales to commercial HVAC&R and data center cooling customers decreased $47.6 million and $22.7 million, respectively.
CIS year-to-date cost of sales decreased $56.5 million, or 20 percent, from the same period last year, primarily due to lower sales volume. As a percentage of sales, cost of sales increased 100 basis points to 86.5 percent, primarily due to the unfavorable impact of lower sales volume, partially offset by cost-reduction and procurement initiatives.
As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $12.4 million and gross margin declined 100 basis points to 13.5 percent.
CIS year-to-date SG&A expenses decreased $3.8 million compared with the prior year. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $4.0 million.
Restructuring expenses during the first six months of fiscal 2021 increased $3.3 million and primarily consisted of severance expenses related to plant consolidation activities in China and targeted headcount reductions in North America.
Operating income decreased $11.9 million to $5.6 million, primarily due to lower gross profit and higher restructuring expenses, partially offset by lower SG&A expenses.
Building HVAC Systems
| | Three months ended September 30, | | | Six months ended September 30, | |
| | 2020 | | | 2019 | | | 2020 | | | 2019 | |
(in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | |
Net sales | | $ | 61.9 | | | | 100.0 | % | | $ | 56.0 | | | | 100.0 | % | | $ | 109.5 | | | | 100.0 | % | | $ | 105.0 | | | | 100.0 | % |
Cost of sales | | | 40.2 | | | | 64.9 | % | | | 38.3 | | | | 68.3 | % | | | 73.3 | | | | 66.9 | % | | | 73.6 | | | | 70.1 | % |
Gross profit | | | 21.7 | | | | 35.1 | % | | | 17.7 | | | | 31.7 | % | | | 36.2 | | | | 33.1 | % | | | 31.4 | | | | 29.9 | % |
Selling, general and administrative expenses | | | 8.6 | | | | 14.0 | % | | | 8.9 | | | | 15.9 | % | | | 16.0 | | | | 14.7 | % | | | 17.3 | | | | 16.5 | % |
Operating income | | $ | 13.1 | | | | 21.1 | % | | $ | 8.8 | | | | 15.8 | % | | $ | 20.2 | | | | 18.4 | % | | $ | 14.1 | | | | 13.4 | % |
Comparison of Three Months ended September 30, 2020 and 2019
BHVAC net sales increased $5.9 million, or 11 percent, from the second quarter of fiscal 2020 to the second quarter of fiscal 2021, primarily due to higher sales volume to off-highwayin both the U.K. and commercial vehicle customers,the U.S., which increased aftermarket$5.5 million and $0.4 million, respectively. The higher sales in Brazil,the U.K. were primarily due to higher sales of data center products. The higher sales in the U.S. were primarily due to higher sales of heating products, partially offset by lower sales of ventilation products.
BHVAC cost of sales increased $1.9 million, or 5 percent, from the second quarter of fiscal 2020 to the second quarter of fiscal 2021, primarily due to higher sales volume. As a percentage of sales, cost of sales decreased 340 basis points to 64.9 percent and was positively impacted by favorable customer pricing and cost-reduction initiatives.
As a $2.0 million favorable impactresult of foreign currency exchange rate changes. Grossthe higher sales and lower cost of sales as a percentage of sales, gross profit increased $10.2$4.0 million and gross margin improved 90340 basis points primarily due to higher sales volume and improved production efficiencies, partially offset by unfavorable material costs. 35.1 percent.
SG&A expenses decreased $0.8$0.3 million, primarily due to the absenceor 190 basis points as a percentage of a $1.6 million charge recorded insales, from the prior year related to a legal matteryear. The decrease in Brazil, which has since been settled and paid, partially offset by legal costs incurred for an environmental matter associated with a previously-owned manufacturing facility. RestructuringSG&A expenses decreased $3.6 million,was primarily due to lower plant consolidation and severancetravel expenses.
Operating income of $13.1 million increased $14.6$4.3 million to $28.8 million,during the quarter, primarily due to higher gross profit and lower restructuringSG&A expenses.
Europe | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended December 31, | | | Nine months ended December 31, | |
| | 2017 | | | 2016 | | | 2017 | | | 2016 | |
(in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | |
Net sales | | $ | 134.6 | | | | 100.0 | % | | $ | 119.8 | | | | 100.0 | % | | $ | 405.4 | | | | 100.0 | % | | $ | 389.7 | | | | 100.0 | % |
Cost of sales | | | 116.7 | | | | 86.7 | % | | | 101.2 | | | | 84.5 | % | | | 348.6 | | | | 86.0 | % | | | 329.4 | | | | 84.5 | % |
Gross profit | | | 17.9 | | | | 13.3 | % | | | 18.6 | | | | 15.5 | % | | | 56.8 | | | | 14.0 | % | | | 60.3 | | | | 15.5 | % |
Selling, general and administrative expenses | | | 10.5 | | | | 7.8 | % | | | 9.9 | | | | 8.2 | % | | | 32.3 | | | | 8.0 | % | | | 30.8 | | | | 7.9 | % |
Restructuring expenses (income) | | | 1.1 | | | | 0.9 | % | | | 0.1 | | | | 0.1 | % | | | 1.7 | | | | 0.4 | % | | | (0.2 | ) | | | -0.1 | % |
Gain on sale of facility | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1.2 | ) | | | -0.3 | % |
Operating income | | $ | 6.3 | | | | 4.6 | % | | $ | 8.6 | | | | 7.2 | % | | $ | 22.8 | | | | 5.6 | % | | $ | 30.9 | | | | 7.9 | % |
Comparison of ThreeSix Months Ended December 31, 2017ended September 30, 2020 and 20162019
Europe net sales increased $14.8 million, or 12 percent, from the third quarter of fiscal 2017 to the third quarter of fiscal 2018, primarily due to an $11.1 million favorable impact of foreign currency exchange rate changes and higher sales volume to automotive and off-highway customers. Gross profit decreased $0.7 million and gross margin declined 220 basis points to 13.3 percent, primarily due to the absence of favorable customer pricing settlements recorded in the prior year. In addition, gross profit was favorably impacted by $1.4 million from foreign currency exchange rate changes. SG&A expenses increased $0.6 million, primarily due to a $0.9 million unfavorable impact of foreign currency exchange rate changes. Restructuring expenses increased $1.0 million in the third quarter of fiscal 2018, primarily due to higher severance expenses. Operating income of $6.3 million decreased $2.3 million, primarily due to higher restructuring expenses and lower gross profit.
Comparison of Nine Months Ended December 31, 2017 and 2016
EuropeBHVAC year-to-date net sales increased $15.7$4.5 million, or 4 percent, from the same period last year, primarily due to a $14.6 million favorable impact of foreign currency exchange rate changes and higher sales volumevolume. Compared with the first six months of the prior year, BHVAC sales increased $7.2 million in the U.K. and decreased $2.7 million in the U.S. The higher sales in the U.K. were primarily due to off-highway and automotive customers,higher sales of data center products, partially offset by lower sales of air conditioning products. The lower sales in the planned wind-downU.S. resulted from the negative impacts of certain commercial vehicle programs. Grossthe COVID-19 pandemic and decreased sales of ventilation products.
BHVAC year-to-date cost of sales decreased $0.3 million from the same period last year. As a percentage of sales, cost of sales decreased 320 basis points to 66.9 percent and was positively impacted by favorable customer pricing and cost-reduction initiatives.
As a result of higher sales and lower cost of sales as a percentage of sales, gross profit decreased $3.5increased $4.8 million and gross margin declined 150improved 320 basis points to 14.0 percent,33.1 percent.
BHVAC year-to-date SG&A expenses decreased $1.3 million, or 180 basis points as a percentage of sales, from the prior year. The decrease in SG&A expenses was primary due to lower compensation-related expenses and lower travel expenses.
Operating income of $20.2 million increased $6.1 million, primarily due to unfavorable material costshigher gross profit and lower SG&A expenses.
Heavy Duty Equipment
| | Three months ended September 30, | | | Six months ended September 30, | |
| | 2020 | | | 2019 | | | 2020 | | | 2019 | |
(in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | |
Net sales | | $ | 165.6 | | | | 100.0 | % | | $ | 187.2 | | | | 100.0 | % | | $ | 289.1 | | | | 100.0 | % | | $ | 403.6 | | | | 100.0 | % |
Cost of sales | | | 142.0 | | | | 85.8 | % | | | 164.8 | | | | 88.0 | % | | | 254.2 | | | | 87.9 | % | | | 348.7 | | | | 86.4 | % |
Gross profit | | | 23.6 | | | | 14.2 | % | | | 22.4 | | | | 12.0 | % | | | 34.9 | | | | 12.1 | % | | | 54.9 | | | | 13.6 | % |
Selling, general and administrative expenses | | | 10.3 | | | | 6.2 | % | | | 14.9 | | | | 8.0 | % | | | 22.2 | | | | 7.7 | % | | | 29.7 | | | | 7.4 | % |
Restructuring expenses | | | - | | | | - | | | | 0.4 | | | | 0.2 | % | | | 1.9 | | | | 0.6 | % | | | 0.8 | | | | 0.2 | % |
Operating income | | $ | 13.3 | | | | 8.1 | % | | $ | 7.1 | | | | 3.8 | % | | $ | 10.8 | | | | 3.8 | % | | $ | 24.4 | | | | 6.0 | % |
Comparison of Three Months ended September 30, 2020 and 2019
HDE net sales decreased $21.6 million, or 12 percent, from the absencesecond quarter of fiscal 2020 to the favorable customer pricing settlements recorded insecond quarter of fiscal 2021, primarily due to lower sales volume. Sales to commercial vehicle customers decreased $14.6 million, primarily within the prior year, partially offset by improved production efficiencies.Americas. In addition, gross profit was favorablysales were unfavorably impacted by $2.0$2.6 million from foreign currency exchange rate changes. SG&A expenses increased $1.5 million, primarily due to a $1.1 million unfavorable impact
HDE cost of foreign currency exchange rate changes and higher compensation-related expenses. Restructuring expenses increased $1.9 million, primarily due to higher severance expenses and equipment transfer costs. During fiscal 2017, we sold a manufacturing facility for cash proceeds of $4.3 million and recorded a $1.2 million gain as a result. Operating income ofsales decreased $22.8 million, decreased $8.1 million,or 14 percent, from the second quarter of fiscal 2020 to the second quarter of fiscal 2021, primarily due to lower sales volume. As a percentage of sales, cost of sales improved 220 basis points to 85.8 percent and was favorably impacted by improved operating efficiencies and cost savings from procurement and other cost-reduction initiatives, partially offset by the unfavorable impact of the lower sales volume.
As a result of the lower sales and lower cost of sales as a percentage of sales, gross profit and higher restructuring and SG&A expenses.
Asia | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended December 31, | | | Nine months ended December 31, | |
| | 2017 | | | 2016 | | | 2017 | | | 2016 | |
(in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | |
Net sales | | $ | 42.8 | | | | 100.0 | % | | $ | 28.6 | | | | 100.0 | % | | $ | 117.7 | | | | 100.0 | % | | $ | 78.2 | | | | 100.0 | % |
Cost of sales | | | 34.6 | | | | 81.0 | % | | | 23.6 | | | | 82.4 | % | | | 95.8 | | | | 81.4 | % | | | 65.1 | | | | 83.3 | % |
Gross profit | | | 8.2 | | | | 19.0 | % | | | 5.0 | | | | 17.6 | % | | | 21.9 | | | | 18.6 | % | | | 13.1 | | | | 16.7 | % |
Selling, general and administrative expenses | | | 3.1 | | | | 7.3 | % | | | 2.4 | | | | 8.4 | % | | | 9.3 | | | | 7.9 | % | | | 8.2 | | | | 10.4 | % |
Operating income | | $ | 5.1 | | | | 11.7 | % | | $ | 2.6 | | | | 9.2 | % | | $ | 12.6 | | | | 10.7 | % | | $ | 4.9 | | | | 6.3 | % |
Comparison of Three Months Ended December 31, 2017 and 2016
Asia net sales increased $14.2 million, or 50 percent, from the third quarter of fiscal 2017 to the third quarter of fiscal 2018, primarily due to higher sales volume to off-highway customers in all geographic markets and automotive customers in China and India. Foreign currency exchange rate changes favorably impacted third quarter net sales by $1.5 million. Gross profit increased $3.2$1.2 million and gross margin improved 140220 basis points to 19.0 percent, primarily due to higher sales volume. 14.2 percent.
SG&A expenses increased by $0.7decreased $4.6 million compared with the second quarter of the prior year, yet decreased 110 basis points as a percentage of sales.year. The increasedecrease in SG&A expenses was primarily due to higherlower compensation-related expenses, incurred in support of the recent business growth. which decreased approximately $2.0 million, and cost-reduction initiatives.
Operating income of $5.1$13.3 million increased $2.5$6.2 million during the quarter, primarily due to higher gross profit.profit and lower SG&A expenses.
Comparison of NineSix Months Ended December 31, 2017ended September 30, 2020 and 20162019
AsiaHDE year-to-date net sales increased $39.5decreased $114.5 million, or 5128 percent, from the same period last year, primarily due to higherlower sales volume resulting from the impacts of the COVID-19 pandemic. Sales to commercial vehicle, automotive and light vehicle, and off-highway customers decreased $61.0 million, $16.2 million, and $15.4 million, respectively. These sales declines, which were most significant in all geographic marketsthe Americas and automotive customersEurope, largely results from weakness in Chinathe global vehicular markets. In addition, the planned wind-downs of certain programs contributed, to a lesser extent, to the lower sales to commercial vehicle customers.
HDE year-to-date cost of sales decreased $94.5 million, or 27 percent, primarily due to lower sales volume. As a percentage of sales, cost of sales increased 150 basis points to 87.9 percent. The significant unfavorable impact of the lower sales volume was partially offset by improved operating efficiencies and India. Grosscost savings from procurement and other cost-reduction initiatives.
As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit increased $8.8decreased $20.0 million and gross margin improved 190declined 150 basis points to 18.6 percent, primarily due to higher sales volume.12.1 percent.
HDE year-to-date SG&A expenses increased by $1.1decreased $7.5 million compared withfrom the prior year, yet decreased 250 basis points as a percentage of sales.year. The increasedecrease in SG&A expenses was primarily due to higherlower compensation-related expenses, which decreased approximately $5.0 million, and cost-reduction initiatives, including lower travel expenses.
Restructuring expense during the first six months of fiscal 2021 totaled $1.9 million and primarily consisted of severance expenses resulting from targeted headcount reductions in North America.
Operating income of $12.6$10.8 million increased $7.7decreased $13.6 million, primarily due to higherlower gross profit.profit, partially offset by lower SG&A expenses.
Building HVAC | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended December 31, | | | Nine months ended December 31, | |
| | 2017 | | | 2016 | | | 2017 | | | 2016 | |
(in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | |
Net sales | | $ | 56.1 | | | | 100.0 | % | | $ | 47.2 | | | | 100.0 | % | | $ | 147.9 | | | | 100.0 | % | | $ | 132.8 | | | | 100.0 | % |
Cost of sales | | | 37.1 | | | | 66.2 | % | | | 31.9 | | | | 67.6 | % | | | 102.9 | | | | 69.6 | % | | | 95.7 | | | | 72.0 | % |
Gross profit | | | 19.0 | | | | 33.8 | % | | | 15.3 | | | | 32.4 | % | | | 45.0 | | | | 30.4 | % | | | 37.1 | | | | 28.0 | % |
Selling, general and administrative expenses | | | 9.8 | | | | 17.4 | % | | | 8.5 | | | | 18.0 | % | | | 26.4 | | | | 17.8 | % | | | 26.0 | | | | 19.6 | % |
Restructuring expenses | | | - | | | | - | | | | 0.1 | | | | 0.2 | % | | | - | | | | - | | | | 0.7 | | | | 0.5 | % |
Operating income | | $ | 9.2 | | | | 16.5 | % | | $ | 6.7 | | | | 14.2 | % | | $ | 18.6 | | | | 12.6 | % | | $ | 10.4 | | | | 7.8 | % |
Automotive
| | Three months ended September 30, | | | Six months ended September 30, | |
| | 2020 | | | 2019 | | | 2020 | | | 2019 | |
(in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | |
Net sales | | $ | 109.9 | | | | 100.0 | % | | $ | 115.7 | | | | 100.0 | % | | $ | 172.0 | | | | 100.0 | % | | $ | 229.3 | | | | 100.0 | % |
Cost of sales | | | 93.3 | | | | 84.8 | % | | | 102.7 | | | | 88.8 | % | | | 150.6 | | | | 87.5 | % | | | 203.8 | | | | 88.9 | % |
Gross profit | | | 16.6 | | | | 15.2 | % | | | 13.0 | | | | 11.2 | % | | | 21.4 | | | | 12.5 | % | | | 25.5 | | | | 11.1 | % |
Selling, general and administrative expenses | | | 8.6 | | | | 7.9 | % | | | 11.1 | | | | 9.6 | % | | | 17.0 | | | | 9.9 | % | | | 22.4 | | | | 9.8 | % |
Restructuring expenses | | | - | | | | - | | | | 1.5 | | | | 1.3 | % | | | 0.2 | | | | 0.1 | % | | | 2.7 | | | | 1.2 | % |
Operating income | | $ | 8.0 | | | | 7.3 | % | | $ | 0.4 | | | | 0.3 | % | | $ | 4.2 | | | | 2.4 | % | | $ | 0.4 | | | | 0.2 | % |
Comparison of Three Months Ended December 31, 2017ended September 30, 2020 and 20162019
Building HVACAutomotive net sales increased $8.9decreased $5.8 million, or 195 percent, from the thirdsecond quarter of fiscal 20172020 to the thirdsecond quarter of fiscal 2018,2021, primarily due to higher ventilationlower sales volume. Compared with the prior year, sales decreased $7.2 million in Europe and heating productincreased $2.1 million in Asia.
Automotive cost of sales in North America, higher ventilation productdecreased $9.4 million, or 9 percent, from the second quarter of fiscal 2020 to the second quarter of fiscal 2021, primarily due to lower sales involume. As a percentage of sales, cost of sales decreased 400 basis points to 84.8 percent and was favorably impacted by improved operating efficiencies and cost savings from procurement initiatives.
As a result of the U.K.,lower sales and lower cost of sales as a $1.3 million favorable impactpercentage of foreign currency exchange rate changes. Grosssales, gross profit increased $3.7$3.6 million and gross margin improved 140400 basis points to 33.8 percent,15.2 percent.
SG&A expenses decreased $2.5 million compared with the second quarter of the prior year. The decrease in SG&A expenses was primarily due to higher sales volume, favorable sales mix, and improved production efficiencies in the U.K. SG&A expenses increased $1.3 million, yet decreased 60 basis points as a percentage of sales, primarily due to higherlower compensation-related expenses, including commission expenses resulting from the increased sales. which decreased approximately $3.0 million.
Operating income of $9.2$8.0 million increased $2.5$7.6 million during the quarter, primarily due to higher gross profit partially offset by higherand lower SG&A expenses and restructuring expenses.
Comparison of NineSix Months Ended December 31, 2017ended September 30, 2020 and 20162019
Building HVACAutomotive year-to-date net sales increased $15.1decreased $57.3 million, or 1125 percent, from the same period last year, primarily due to higher ventilationlower sales volume largely resulting from the impacts of the COVID-19 pandemic. Sales in Europe and heating productNorth America decreased $50.6 million and $10.6 million, respectively. Sales in Asia increased $3.9 million.
Automotive year-to-date cost of sales in North America,decreased $53.2 million, or 26 percent, from the prior year, primarily due to lower sales volume. As a percentage of sales, cost of sales decreased 140 basis points to 87.5 percent and was favorably impacted by improved operating efficiencies and cost savings from procurement initiatives, partially offset by a $0.9 millionthe unfavorable impact of foreign currency exchange rate changes. Gross profit increased $7.9 millionthe lower sales volume.
As a result of the lower sales and gross margin improved 240 basis points to 30.4 percent, primarily due to higherlower cost of sales volume. SG&A expenses increased $0.4 million, yet decreased 180 basis points as a percentage of sales. sales, gross profit decreased $4.1 million yet gross margin improved 140 basis points to 12.5 percent.
Automotive year-to-date SG&A expenses decreased $5.4 million compared with the prior year. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $6.0 million.
Restructuring expenses decreased $0.7during the first six months of fiscal 2021 totaled $0.2 million, due toa decrease of $2.5 million compared with the absencesame period in the prior year, and primarily consisted of severance expenses incurred in the prior year. resulting from targeted headcount reductions.
Operating income of $18.6$4.2 million increased $8.2$3.8 million, primarily due to higherlower SG&A and restructuring expenses, partially offset by lower gross profit.
Liquidity and Capital Resources
Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents at December 31, 2017as of $47.8September 30, 2020 of $62.5 million, and an available borrowing capacity of $168.8$191.4 million under lines ofour revolving credit provided by banks in the United States and abroad.facility. Given our extensive international operations, approximately $46.0$42.0 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 the COVID-19 pandemic, we have taken actions to reduce operating and administrative expenses, conserve cash and maximize liquidity. In addition, as described below, we have focused on reducing our capital expenditures and executed amendments to our primary credit agreements to help ensure liquidity through financial covenant flexibility during fiscal 2021 and 2022. We have not encountered,believe our sources of liquidity, including cash flow from operations, our cash and do not expectcash equivalents, and access to encounter, any difficulty meetingboth committed and uncommitted credit facilities, will provide sufficient cash flow to meet our obligations during the liquidity requirementsnext twelve months and beyond. However, we are continuing to monitor the impacts of COVID-19 on our global operations.business and the credit and financial markets.
Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2017September 30, 2020 was $105.6$87.3 million, which wasrepresents a $70.6$69.8 million increase compared with the same period in the prior year. This increase in operating cash flow was primarily resulted from an increase in operating earnings, including contributions from our CIS segment, lower payments for restructuring expenses and costs associated with the acquisition and integration of Luvata HTS in the current year, anddue to favorable net changes in working capital.capital and lower payments for separation and project costs associated with our review of strategic alternatives for the automotive business. The favorable changes in working capital during the first six months of fiscal 2021, compared with the same period in the prior year, included lower inventory levels and lower payments for incentive compensation, employee benefits, income taxes and payroll taxes. In addition, we have deferred payments of U.S. payroll taxes, as permitted by the Coronavirus Aid, Relief and Economic Security Act. We plan to resume payment of these payroll taxes during the fourth quarter of fiscal 2021.
Capital Expenditures
In response to the economic impacts of the COVID-19 pandemic, we are taking steps to preserve our financial liquidity. As part of this initiative, we are focused on reducing our capital expenditures and, where possible, have delayed certain projects and the purchase of certain program-related equipment and tooling in our vehicular businesses. Capital expenditures of $55.0$14.6 million during the first ninesix months of fiscal 2018 increased $9.02021 decreased $26.8 million compared with the same period in the prior year, primarily due to capital expenditures by our recently-acquired CIS segment, equipment purchases to expand our manufacturing capacity in China, and tooling and equipment purchases to support new product launches.year.
Debt
Our debtcredit agreements require us to maintain compliance with various covenants. The term loans require prepayments,covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below. Also, as definedspecified in the credit agreement, in the event our annual excess cash flow exceeds defined levels orterm loans may require prepayments in the event of certain asset sales. In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.
In May 2020, we executed amendments to our primary debtcredit agreements in the U.S., we are subject to provide additional covenant flexibility in light of the risks and uncertainties associated with the COVID-19 pandemic. Under the amended agreements, the leverage ratio covenant limit has been temporarily raised. We believe this additional flexibility will enable us to be compliant with our debt covenants, even if the most restrictiveadverse 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.
The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreement,agreements, in relation to no more than three and one-quarter timesour consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”). For the remainder of fiscal 2021, the leverage ratio covenant limit is 5.25 to 1 and 5.75 to 1 for the 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. 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. At December 31, 2017,
As of September 30, 2020, we were in compliance with our debt covenants; our leverage ratio and interest coverage ratio was 2.5were 2.2 and 7.9,8.0, respectively. We wereexpect to remain in compliance with our debt covenants as of December 31, 2017 and expect to remain in compliance during the balance of fiscal 20182021 and beyond.
Shelf Registration StatementRecent Announcement - Share Repurchase Program
We filedOn November 5, 2020, we announced our Board of Directors approved a shelf registration statement with the Securities and Exchange Commission,two-year, $50.0 million share repurchase program, which was declared effective as of June 26, 2017. The shelf registration statement allows us to offer and sell, from time to time,repurchase shares of our common stock through solicited and certainunsolicited transactions in the open market or in privately-negotiated or other equity or debt securities in one or more offerings in amounts,transactions, at such times and prices and upon such other terms as we deem appropriate. Our decision whether and to what extent to repurchase shares under this program will depend on terms that we determine at the timea number of any such offering, with an aggregate initial offering price of up to $200.0 million.factors, including business conditions, other cash priorities, and stock price.
Contractual Obligations
Other than the transition tax liability recorded as a result of U.S. tax reform, as discussed in Note 8 of the Notes to Condensed Consolidated Financial Statements, there have not been any material changes in the Company’s contractual obligations since March 31, 2017, as reported in Item 7. in Part II. of the Company’s Annual Report on Form 10-K.
Forward-Looking Statements
This report, including, but not limited to, the discussion under Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains statements, including information about future financial performance, accompanied by phrases such as “believes,” “estimates,” “expects,” “plans,” “anticipates,” “intends,” and other similar “forward-looking” statements, as defined in the Private Securities Litigation Reform Act of 1995. Modine’s actual results, performance or achievements may differ materially from those expressed or implied in these statements, because of certain risks and uncertainties, including, but not limited to, those described under “Risk Factors” in Item 1A. in Part I. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2017.2020. Other risks and uncertainties include, but are not limited to, the following:
Market Risks:
· | Economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including, in particular, foreign currency exchange rate fluctuations, tariffs, inflation, changes in interest rates, recession and recovery therefrom, restrictions and uncertainty associated with cross-border trade, and, in particular, the continuing recovery and/or instability of certain markets in which we operate in China and North America, and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade, that have been or may be implemented in the United States, as well as continuing uncertainty regarding the longer-term implications of “Brexit”; |
· | The impact of potential increases in commodity prices, including our ability to successfully manage our exposure and/or pass increasing prices of aluminum, copper, steel and stainless steel (nickel) on to customers, as well as the inherent lag in timing of such pass-through arrangements; and |
· | The impact of 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:
· | Our ability to integrate the former Luvata HTS operations into Modine, realize cost and revenue synergies in accordance with our expectations, and effectively manage any unanticipated risks that arise, while also maintaining stability within the acquired business and appropriate focus on the rest of Modine’s business; |
· | The overall health and continually increasing price-down focus of our vehicular customers in light of economic and market-specific factors, and the potential impact on us from any deterioration in the stability or performance of any of our major customers; |
· | Our ability to maintain current customer programs and compete effectively for new business, including our ability to offset or otherwise address increasing pricing pressures from competitors and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability; |
· | Unanticipated product or manufacturing difficulties or inefficiencies, including unanticipated program launch and product transfer challenges and warranty claims; |
· | Unanticipated delays or modifications initiated by major customers with respect to product launches, product applications or requirements; |
· | Unanticipated problems with suppliers meeting our time, quantity, quality and price demands, and the overall health of our suppliers, particularly in light of continuing economic challenges in some areas of the world in which we and our suppliers operate; |
· | 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; |
· | Costs and other effects of the investigation and remediation of environmental contamination; particularly when related to the actions or inactions of others and/or facilities over which we have no control; |
· | 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. |
StrategicMarket Risks:
· | Our ability to successfully take advantage of our increased presence in the “industrial” markets, with our Commercial and Industrial Solutions and Building HVAC businesses, while maintaining appropriate focus on the market opportunities presented by our vehicular business; and |
The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers, customers, and employees;
· | Our ability to identify and execute additional growth and diversification opportunities in order to position us for long-term success. |
Economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including, in particular, foreign currency exchange rate fluctuations; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); inflation; changes in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade, public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade, the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the short- and long-term implications of “Brexit”;
FinancialThe impact of potential price increases associated with raw materials, including aluminum, copper, steel and stainless steel (nickel), and other purchased components including, but not limited to, increases in the underlying material cost based upon the London Metal Exchange and related premiums or fabrication costs. These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand. This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whether through our quotation process or through contract provisions for prospective price adjustments, as well as the inherent lag in timing of such contract provisions; and
The impact of current and future environmental laws and regulations on our business and the businesses of our customers, including our ability to take advantage of opportunities to supply alternative new technologies to meet environmental and/or energy standards and objectives.
Operational Risks:
· | Our ability to fund our global liquidity requirements efficiently for Modine’s current operations, particularly those in our Asia business segment, and meet our long-term commitments in the event of an unexpected disruption in or tightening of the credit markets or extended recessionary conditions in the global economy; |
The overall health and continually increasing price-down focus of our vehicular customers in light of economic and market-specific factors, the concentration of sales within our CIS segment attributable to one customer, and the potential impact on us from any deterioration in the stability or performance of any of our major customers;
· | The impact of potential increases in interest rates, particularly in LIBOR and EURIBOR in relation to our variable-rate debt obligations; |
The impact of any problems with suppliers meeting our time, quantity, quality and price demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;
· | Our ability to maintain our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) in our target range of 1.5 to 2.5 in an efficient manner; |
Our ability to maintain current customer programs and compete effectively for new business, including our ability to offset or otherwise address increasing pricing pressures from competitors and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;
· | Costs arising from the integration of Luvata HTS; |
· | The impact of foreign currency exchange rate fluctuations, particularly the value of the euro, Brazilian real, and British pound, relative to the U.S. dollar; |
· | The effects of the recently-enacted U.S. tax reform legislation on our business, some of which are uncertain and may be material; and |
The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims and delays or inefficiencies resulting from restrictions imposed in response to the COVID-19 pandemic;
The impact of any delays or modifications initiated by major customers with respect to program launches, product applications or requirements;
Our ability to consistently structure our operations in order to develop and maintain a competitive cost base with appropriately skilled and stable labor, while also positioning ourselves geographically, so that we can continue to support our customers with the technical expertise and market-leading products they demand and expect from Modine;
Our ability to effectively and efficiently reduce our cost structure in response to sales volume declines and to complete restructuring activities and realize the anticipated benefits of those activities;
Costs and other effects of the investigation and remediation of environmental contamination; particularly when related to the actions or inactions of others and/or facilities over which we have no control;
Our ability to recruit and maintain talent, including personnel in managerial, leadership and administrative functions, in light of tight global labor markets;
Our ability to protect our proprietary information and intellectual property from theft or attack by internal or external sources;
The impact of any substantial disruption or material breach of our information technology systems, and any related delays, problems or costs;
Increasingly complex and restrictive laws and regulations, including those associated with being a U.S. public company and others present in various jurisdictions in which we operate, and the costs associated with compliance therewith;
Work stoppages or interference at our facilities or those of our major customers and/or suppliers;
The constant and increasing pressures associated with healthcare and associated insurance costs; and
Costs and other effects of litigation, claims, or other obligations.
Strategic Risks:
· | • | Our ability to effectively realizesuccessfully complete the benefitspending sale of tax assetsour liquid-cooled automotive business, including the receipt of governmental and third-party approvals and satisfaction of other closing conditions, and our ability to successfully exit our other automotive businesses in various jurisdictionsa manner that is in which we operate.the best interest of our shareholders; |
Our ability to successfully realize anticipated benefits from our increased “industrial” market presence, with our CIS and BHVAC businesses, while maintaining appropriate focus on the market opportunities presented by our HDE and Automotive businesses;
In addition
Our ability to identify and execute growth and diversification opportunities in order to position us for long-term success; and
The potential impacts from any actions by activist shareholders, including disruption of our business and related costs.
Financial Risks:
Our ability to fund our global liquidity requirements efficiently for Modine’s current operations and meet our long-term commitments, particularly in light of the risks set forth above, we are subjectvolatility 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 other risksour variable-rate debt obligations, and uncertaintiesof the continued uncertainty around the utilization of LIBOR or alternative reference rates;
Our ability to comply with the financial covenants, as identifiedamended, in our public filings withcredit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);
The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and
Our ability to effectively realize the U.S. Securities and Exchange Commission. Webenefits of deferred tax assets in various jurisdictions in which we operate.
Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2017.2020. The Company’s market risks have not materially changed since the fiscal 20172020 Form 10-K was filed.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.