| (in millions) | |
Comparison of Three Months ended December 31, 20202021 and 20192020
Third quarter net sales of $484.3$502.2 million were $10.9$17.9 million, or 24 percent, higher than the third quarter of the prior year, primarily due to higher sales volume and favorable pricing adjustments in response to raw material price increases in our CIS, BHVAC, and HDE segments, partially offset by lower sales volume in our Automotive segment. Sales in the CIS, BHVAC, and HDE segments increased $23.7 million, $16.9 million, and $15.2 million, respectively. Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.
Third quarter cost of sales increased $26.0 million, or 6 percent, primarily due to higher raw material prices, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, segments and an $11.2 million favorable impactHDE segments. These drivers, which increased cost of foreign currency exchange rate changes,sales, were partially offset by lower sales volume in the CISAutomotive segment and Automotive segments. Sales in the HDE, BHVAC, and Automotive segments increased $20.7 million, $3.8 million, and $3.4 million, respectively. CIS segment sales decreased $18.5 million.
Third quarter cost of sales increased $1.7 million.improved operating efficiencies. As a percentage of sales, cost of sales decreased 160increased 220 basis points to 82.985.1 percent. The increase in cost of sales was primarily due to a $9.7 million unfavorable impact of foreign currency exchange rate changes, partially offset by the favorable impacts of procurement and other cost-reduction initiatives and a $3.0 million decrease in depreciation expense in the Automotive segment. In addition, program and equipment transfer costs to prepare the liquid-cooled automotive business for sale decreased approximately $1.0 million compared with the prior year.
As a result of higher sales and lowerhigher cost of sales as a percentage of sales, third quarter gross profit increased $9.2decreased $8.1 million and gross margin improved 160declined 220 basis points to 17.114.9 percent.
Third quarter SG&A expenses decreased $7.4 million. The decrease in SG&A expenses was primarily due to$5.8 million, primary driven by $2.6 million of lower costs recorded at Corporate associated withrelated to our review of strategic alternatives for the Automotive segment’s business operations,segment businesses and lower compensation-related expenses, which decreased approximately $10.0$2.0 million. This favorable driver was partially offset by a $1.0 million unfavorable impact of foreign currency exchange rate changes and higher environmental chargesThe lower compensation-related expenses were primarily due to lower incentive compensation expenses at Corporate in the HDE segment.current year.
Restructuring expenses of $0.9 million during the third quarter of fiscal 2021 decreased $1.7 million, primarily due to lower restructuring expenses in the HDE segment.
Impairment charges of $134.4$2.1 million in the third quarter of fiscal 2021 primarily related to the write-down of the long-lived assets in the Automotive segment’s liquid-cooled automotive business in connection2022 increased $1.2 million compared with the pending sale of that business.
The operating loss of $108.7 million represents a $116.9 million decline from the prior-year operating income of $8.2 million. The decline was primarily due to the $134.4 million of impairment charges recorded in the Automotive segment and lower earnings in the CIS segment. These negative drivers were partially offset by higher earnings in our HDE and BHVAC segments.
Interest expense decreased $1.0 million, or 18 percent, during the third quarter of fiscal 2021, primarily due to higher severance expenses in the CIS segment.
During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower outstanding long-term debtof their carrying or fair value. During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale, we recorded $134.4 million of impairment charges and reduced the carrying value of the disposal group’s long-lived assets to zero.
Operating income of $79.4 million in the third quarter of fiscal 2022 represents a lesser extent,$188.1 million improvement from the prior-year operating loss of $108.7 million. The operating income and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment. In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.
Interest expense in the third quarter of fiscal 2022 decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorable changes in interest rates.
The provision for income taxes was $81.6$0.1 million and $1.7$81.6 million in the third quarter of fiscal 20212022 and 2020,2021, respectively. The $79.9$81.5 million increasedecrease was primarily due to the absence of $109.9 million of income tax charges totaling $116.5 million recorded in the third quarter of fiscal 2021prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions. These drivers, which decreased the provision for income taxes, were partially offset by the absence of $37.7 million of income tax benefits totaling $37.7 millionrecorded during the prior year related to the Automotive segment impairment charges recorded earlier in the third quarter of fiscal 2021.charges.
Comparison of Nine Months ended December 31, 20202021 and 20192020
Fiscal 20212022 year-to-date net sales of $1,293.5$1,475.7 million were $209.1$182.2 million, or 14 percent, lowerhigher than the same period last year, primarily due to lowerhigher sales volumes and favorable pricing adjustments in response to raw material price increases in our HDE, CIS, and AutomotiveBHVAC segments. Sales in these segments decreased $93.8increased $123.7 million, $87.4$86.6 million, and $53.9$38.4 million, respectively, and were significantly impacted by market-driven volume declines and temporary plant closures earlier in the fiscal year due to the COVID-19 pandemic. BHVACrespectively. Automotive segment sales increased $8.3decreased $61.9 million.
Fiscal 20212022 year-to-date cost of sales of $1,083.9$1,261.6 million decreased $186.1increased $177.7 million, or 1516 percent, primarily due to lowerhigher raw material prices, which increased approximately $117.0 million, and higher sales volume. In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic. These factors, which caused an increase in cost of sales compared with the same period in the prior year, were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies. As a percentage of sales, cost of sales improved 70increased 170 basis points to 83.885.5 percent. The unfavorable impact of lower sales volume was more than offset by the benefits of cost-reduction initiatives implemented earlier in the fiscal year in response to lower end market demand and procurement initiatives.
As a result of lowerhigher sales and lowerhigher cost of sales as a percentage of sales, fiscal 2021 year-to-date gross profit decreased $23.0increased $4.5 million and gross margin improved 70declined 170 basis points to 16.214.5 percent.
Fiscal 20212022 year-to-date SG&A expenses decreased $42.8increased $10.0 million. The decreaseincrease in SG&A expenses was primarily due to higher compensation-related expenses, as the prior year was favorably impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19. In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million. These increases were partially offset by lower strategic reorganization costs and lower costs recorded at Corporate associated withrelated to our review of strategic alternatives for the Automotive segment’s business operations,segment businesses, which decreased approximately $29.0$2.8 million and $1.3 million, respectively. The lower compensation-relatedstrategic reorganization costs primarily resulted from lower severance expenses which decreased approximately $18.0 million. These favorable drivers were partially offset by $5.9 million of costs recorded at Corporate in connection with Mr. Burke stepping down from his position as President and CEO and the search for his successor.executive management positions.
Restructuring expenses of $7.0$3.0 million duringin the first nine months of fiscal 2021 increased $0.32022 decreased $4.0 million compared with the same period last year, primarily due to higher restructuringlower severance expenses in the CIS segment, partially offset by lower restructuring expenses in the Automotive segment.and HDE segments.
The fiscal 2021 year-to-date operating lossnet impairment reversals of $83.4$55.7 million represents a $115.7 million decline from the prior-year operating income of $32.3 million. The decline was primarily due to the $134.4 million of impairment charges recorded in the Automotive segment and lower earnings in our CIS and HDE segments. These negative drivers were partially offset by lower SG&A expenses at Corporate and higher earnings in our BHVAC segment.
Interest expense decreased $2.1 million, or 12 percent, during the first nine months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment. In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale. In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.
We sold our air-cooled automotive business on April 30, 2021. As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.
Operating income of $98.6 million during the first nine months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million. The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business. In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses. Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.
Interest expense during the first nine months of fiscal 2022 decreased $3.4 million compared with the same period last year, primarily due to lower outstanding long-term debt and favorable changes in interest rates.rates and lower debt outstanding during the current-year.
The provision for income taxes was $95.3$7.4 million and $8.3$95.3 million during the first nine months of fiscal 20212022 and 2020,2021, respectively. The $87.0$87.9 million increasedecrease was primarily due to the absence of $116.5 million of income tax charges totaling $123.1 million recorded duringin the first nine months of fiscal 2021prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions. These drivers, which decreased the provision for income taxes, were partially offset by the absence of $37.7 million of income tax benefits totaling $37.7 millionrecorded during the prior year related to the Automotive segment impairment charges recorded during fiscal 2021.charges.
SEGMENT RESULTS OF OPERATIONS
Effective AprilJuly 1, 2020,2021, we began managingaligned the data center businesses previously managed by and reported within the CIS segment under the BHVAC segment. The BHVAC segment assumed management of our global automotive business separate fromin Guadalajara, Spain and a portion of our business in Grenada, Mississippi. Through this segment change, we have aligned our data center businesses under the otherBHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies. As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the previously-reported Vehicular Thermal Solutions (“VTS”)BHVAC segment. We have been managing the automotive business as the Automotive segment as we target the sale or eventual exit of its underlying automotive business operations. We are managing the other businesses of the VTS segment, including the commercial vehicle and off-highway businesses, as the Heavy Duty Equipment segment. We began reporting financial results for our new segment structure beginning for fiscal 2021. Segment financial information for fiscal 2020 has been recast to conform to the fiscal 2021 presentation. The segment realignment had no impact on the CISHDE and BHVAC segments.Automotive segments or on our consolidated financial position, results of operations, and cash flows. Segment financial information for the prior periods has been recast to conform to the current presentation.
As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment. While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment. See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.
The following is a discussion of our segment results of operations for the three months and nine months ended December 31, 20202021 and 2019:2020:
Commercial and Industrial SolutionsBuilding HVAC Systems
| | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2020 | | | 2019 | | | 2020 | | | 2019 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 129.0 | | | | 100.0 | % | | $ | 147.5 | | | | 100.0 | % | | $ | 385.6 | | | | 100.0 | % | | $ | 473.0 | | | | 100.0 | % | | Cost of sales | | | 116.4 | | | | 90.2 | % | | | 124.8 | | | | 84.6 | % | | | 338.2 | | | | 87.7 | % | | | 403.1 | | | | 85.2 | % | | Gross profit | | | 12.6 | | | | 9.8 | % | | | 22.7 | | | | 15.4 | % | | | 47.4 | | | | 12.3 | % | | | 69.9 | | | | 14.8 | % | | Selling, general and administrative expenses | | | 13.8 | | | | 10.7 | % | | | 13.7 | | | | 9.3 | % | | | 39.1 | | | | 10.2 | % | | | 42.8 | | | | 9.1 | % | | Restructuring expenses | | | 0.5 | | | | 0.4 | % | | | 0.7 | | | | 0.5 | % | | | 4.4 | | | | 1.1 | % | | | 1.3 | | | | 0.3 | % | | Operating (loss) income | | $ | (1.7 | ) | | | -1.3 | % | | $ | 8.3 | | | | 5.6 | % | | $ | 3.9 | | | | 1.0 | % | | $ | 25.8 | | | | 5.4 | % |
| | | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2021 | | | 2020 | | | 2021 | | | 2020 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 90.6 | | | | 100.0 | % | | $ | 73.7 | | | | 100.0 | % | | $ | 234.7 | | | | 100.0 | % | | $ | 196.3 | | | | 100.0 | % | | Cost of sales | | | 63.2 | | | | 69.7 | % | | | 48.3 | | | | 65.5 | % | | | 169.5 | | | | 72.2 | % | | | 131.8 | | | | 67.1 | % | | Gross profit | | | 27.4 | | | | 30.3 | % | | | 25.4 | | | | 34.5 | % | | | 65.2 | | | | 27.8 | % | | | 64.5 | | | | 32.9 | % | | Selling, general and administrative expenses | | | 13.0 | | | | 14.4 | % | | | 10.5 | | | | 14.3 | % | | | 35.1 | | | | 15.0 | % | | | 28.9 | | | | 14.8 | % | | Operating income | | $ | 14.4 | | | | 15.9 | % | | $ | 14.9 | | | | 20.1 | % | | $ | 30.1 | | | | 12.8 | % | | $ | 35.6 | | | | 18.1 | % |
Comparison of Three Months ended December 31, 20202021 and 20192020
CISBHVAC net sales decreased $18.5increased $16.9 million, or 1323 percent, from the third quarter of fiscal 20202021 to the third quarter of fiscal 2021,2022, primarily due to lowerhigher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases. Compared with the third quarter of the prior year, BHVAC sales to data center coolingcustomers increased $11.6 million. In addition, sales to commercial HVAC customers increased $5.2 million, primarily due to higher sales of ventilation and heating products in North America.
BHVAC cost of sales increased $14.9 million, or 31 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs. As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.
As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent. While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.
SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.
Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.
Comparison of Nine Months ended December 31, 2021 and 2020
BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a $4.5lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7 million favorable impact of foreign currency exchange rate changes.rates. Sales to data center coolingcommercial HVAC customers decreased $18.4increased $24.5 million, primarily due to lowerhigher sales of heating and air conditioning products. In addition, sales to one individual customer.data center customers increased $13.0 million.
CISBHVAC year-to-date cost of sales decreased $8.4increased $37.7 million, or 729 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021,same period last year, primarily due to lowerhigher sales volume partially offsetand higher raw material prices, which increased by a $4.2approximately $12.0 million. In addition, cost of sales was unfavorably impacted by $4.8 million unfavorable impact offrom foreign currency exchange rate changes. As a percentage of sales, cost of sales increased 560510 basis points to 90.272.2 percent, primarily due to the impacthigher material costs.
As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.
BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.
Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.
Commercial and Industrial Solutions
| | | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2021 | | | 2020 | | | 2021 | | | 2020 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 148.6 | | | | 100.0 | % | | $ | 124.9 | | | | 100.0 | % | | $ | 456.2 | | | | 100.0 | % | | $ | 369.6 | | | | 100.0 | % | | Cost of sales | | | 130.9 | | | | 88.1 | % | | | 112.0 | | | | 89.7 | % | | | 399.4 | | | | 87.5 | % | | | 324.8 | | | | 87.9 | % | | Gross profit | | | 17.7 | | | | 11.9 | % | | | 12.9 | | | | 10.3 | % | | | 56.8 | | | | 12.5 | % | | | 44.8 | | | | 12.1 | % | | Selling, general and administrative expenses | | | 12.4 | | | | 8.4 | % | | | 13.1 | | | | 10.4 | % | | | 37.7 | | | | 8.3 | % | | | 36.0 | | | | 9.7 | % | | Restructuring expenses | | | 1.9 | | | | 1.3 | % | | | 0.5 | | | | 0.4 | % | | | 2.1 | | | | 0.5 | % | | | 4.4 | | | | 1.2 | % | | Impairment charge | | | - | | | | - | | | | - | | | | - | | | | 0.3 | | | | 0.1 | % | | | - | | | | - | | | Operating income (loss) | | $ | 3.4 | | | | 2.2 | % | | $ | (0.7 | ) | | | -0.5 | % | | $ | 16.7 | | | | 3.6 | % | | $ | 4.4 | | | | 1.2 | % |
Comparison of Three Months ended December 31, 2021 and 2020
CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume unfavorableand favorable product pricing adjustments in response to raw material price increases. Compared with the third quarter of the prior year, sales mix,to commercial HVAC&R customers increased $24.5 million.
CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million. As a percentage of sales, cost of sales decreased 160 basis points to 88.1 percent, primarily due to the favorable impacts of the higher sales volume and improved operating efficiencies, partially offset by higher material costs.
As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8 million and gross margin improved 160 basis points to 11.9 percent.
SG&A expenses decreased $0.7 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.
Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses. The severance expenses in the third quarter of fiscal 2022 primarily related to targeted headcount reductions in Europe and China.
Operating income of $3.4 million represents a $4.1 million improvement from the prior-year operating loss of $0.7 million and was primarily due to higher gross profit.
Comparison of Nine Months ended December 31, 2021 and 2020
CIS year-to-date net sales increased $86.6 million, or 23 percent, from the same period last year, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases. In addition, sales were favorably impacted by $5.7 million from foreign currency exchange rates. The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year. Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, compared with the same period in the prior year.
CIS year-to-date cost of sales increased $74.6 million, or 23 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0 million. In addition, cost of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes. As a percentage of sales, cost of sales decreased 40 basis points to 87.5 percent, primarily due to the favorable impacts of the higher sales volume and improved operating efficiencies, partially offset by higher material costs.
As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0 million and gross margin improved 40 basis points to 12.5 percent.
CIS year-to-date SG&A expenses increased $1.7 million, yet decreased 140 basis points as a percentage of sales, from the same period last year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.
Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3 million from the same period last year, primarily due to lower severance expenses. The severance expenses during the first nine months of fiscal 2022 primarily related to targeted headcount reductions in Europe and China. The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.
During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write down a previously-closed manufacturing facility in the U.S to fair value less costs to sell. We sold the facility and received net cash proceeds of $0.7 million during July 2021.
Operating income during the first nine months of fiscal 2022 increased $12.3 million from the same period last year, primarily due to higher gross profit and lower restructuring expenses, partially offset by higher SG&A expenses.
Heavy Duty Equipment
| | | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2021 | | | 2020 | | | 2021 | | | 2020 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 200.8 | | | | 100.0 | % | | $ | 185.6 | | | | 100.0 | % | | $ | 598.4 | | | | 100.0 | % | | $ | 474.7 | | | | 100.0 | % | | Cost of sales | | | 178.6 | | | | 88.9 | % | | | 159.6 | | | | 86.0 | % | | | 535.3 | | | | 89.5 | % | | | 413.8 | | | | 87.2 | % | | Gross profit | | | 22.2 | | | | 11.1 | % | | | 26.0 | | | | 14.0 | % | | | 63.1 | | | | 10.5 | % | | | 60.9 | | | | 12.8 | % | | Selling, general and administrative expenses | | | 11.7 | | | | 5.9 | % | | | 13.2 | | | | 7.1 | % | | | 37.4 | | | | 6.2 | % | | | 35.4 | | | | 7.4 | % | | Restructuring expenses | | | 0.2 | | | | 0.1 | % | | | - | | | | - | | | | 0.7 | | | | 0.1 | % | | | 1.9 | | | | 0.4 | % | | Operating income | | $ | 10.3 | | | | 5.1 | % | | $ | 12.8 | | | | 6.8 | % | | $ | 25.0 | | | | 4.2 | % | | $ | 23.6 | | | | 5.0 | % |
Comparison of Three Months ended December 31, 2021 and 2020
HDE net sales increased $15.2 million, or 8 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to pricing adjustments associated with raw material price increases and higher sales volume. Sales to off-highway and commercial vehicle customers increased $12.3 million and $10.7 million, respectively. Sales to automotive and light vehicle customers decreased $7.7 million.
HDE cost of sales increased $19.0 million, or 12 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher raw material prices, which increased approximately $19.0 million, and to a lesser extent, temporary operating inefficiencies associated with plant consolidation activities in China.higher sales volume. These negative impactsdrivers, which increased cost of sales, were partially offset by benefitsimproved operating efficiencies. While we have provisions within many of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs. As a percentage of sales, cost of sales increased 290 basis points to 88.9 percent, primarily due to the higher material prices.
As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit decreased $3.8 million and gross margin declined 290 basis points to 11.1 percent.
SG&A expenses decreased $1.5 million, or 120 basis points as a percentage of sales, compared with the third quarter of the prior year. The decrease in SG&A expenses was primarily due to lower development costs and environmental charges. These decreases were partially offset by higher compensation-related expenses, which increased approximately $1.0 million.
Restructuring expenses during the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.
Operating income decreased $2.5 million from procurementthe third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower gross profit, partially offset by lower SG&A expenses.
Comparison of Nine Months ended December 31, 2021 and 2020
HDE year-to-date net sales increased $123.7 million, or 26 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, pricing adjustments associated with raw material price increases. HDE sales in fiscal 2021, primarily in the first quarter, were negatively impacted by the COVID-19 pandemic. Sales to commercial vehicle and off-highway customers increased $59.0 million and $57.7 million, respectively.
HDE year-to-date cost of sales increased $121.5 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased approximately $53.0 million. As a percentage of sales, cost of sales increased 230 basis points to 89.5 percent, primarily due to the higher material prices.
As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2 million and gross margin declined 230 basis points to 10.5 percent.
HDE year-to-date SG&A expenses increased $2.0 million, but decreased 120 basis points as a percentage of sales, compared with the same period in the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other cost-reduction initiatives.administrative costs.
Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.
Operating income during the first nine months of fiscal 2022 increased $1.4 million from the same period last year, primarily due to higher gross profit and lower restructuring expenses, partially offset by higher SG&A expenses.
Automotive
| | | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2021 | | | 2020 | | | 2021 | | | 2020 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 72.4 | | | | 100.0 | % | | $ | 113.9 | | | | 100.0 | % | | $ | 224.0 | | | | 100.0 | % | | $ | 285.9 | | | | 100.0 | % | | Cost of sales | | | 64.9 | | | | 89.6 | % | | | 95.5 | | | | 83.9 | % | | | 196.1 | | | | 87.6 | % | | | 246.1 | | | | 86.1 | % | | Gross profit | | | 7.5 | | | | 10.4 | % | | | 18.4 | | | | 16.1 | % | | | 27.9 | | | | 12.4 | % | | | 39.8 | | | | 13.9 | % | | Selling, general and administrative expenses | | | 9.7 | | | | 13.4 | % | | | 8.5 | | | | 7.4 | % | | | 30.1 | | | | 13.4 | % | | | 25.5 | | | | 8.9 | % | | Restructuring expenses | | | - | | | | - | | | | 0.4 | | | | 0.4 | % | | | 0.2 | | | | 0.1 | % | | | 0.6 | | | | 0.2 | % | | Impairment charges (reversals) – net | | | (57.2 | ) | | | -79.0 | % | | | 134.4 | | | | 118.0 | % | | | (56.0 | ) | | | -25.0 | % | | | 134.4 | | | | 47.0 | % | | Operating income (loss) | | $ | 55.0 | | | | 76.0 | % | | $ | (124.9 | ) | | | -109.7 | % | | $ | 53.6 | | | | 24.0 | % | | $ | (120.7 | ) | | | -42.2 | % |
Comparison of Three Months ended December 31, 2021 and 2020
Automotive net sales decreased $41.5 million, or 36 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to the disposition of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market. The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021. Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.
Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume. This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million. As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.
As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.1$10.9 million and gross margin declined 560570 basis points to 9.810.4 percent.
SG&A expenses increased $0.1$1.2 million or 140 basis points as a percentage of sales, compared with the third quarter of the prior year. The increase in SG&A expenses was primarily due to a $0.5higher compensation-related expenses.
During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million unfavorable impact of foreign currency exchange rate changes, partially offset bypreviously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower compensation-related expenses.
Restructuring expensesof their carrying or fair value. The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.
Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million. The operating income and operating loss during the third quarters of fiscal 2022 and 2021 totaled $0.5 million, a decrease of $0.2 millionwere driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business. In addition, as compared with the third quarter of fiscal 2020, and primarily consisted of equipment transfer and plant consolidation costs in China.
The CIS operating loss of $1.7 million represents a $10.0 million decline from the prior-year2021, operating income of $8.3 million and was primarily due tounfavorably impacted by lower gross profit.profit and higher SG&A expenses.
Comparison of Nine Months ended December 31, 20202021 and 20192020
CISAutomotive year-to-date net sales decreased $87.4$61.9 million, or 1822 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes. The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year. Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market. Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.
Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume associated withand lower depreciation expenses, which decreased $9.9 million. We ceased depreciating the impactsproperty, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021. Upon reverting back to held and used classification during the COVID-19 pandemic. In addition, salesthird quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in fiscal 2021 have been negatively impactedthe liquid-cooled automotive business. These decreases were partially offset by lower sales to a significant data center customer. Sales to commercial HVAC&R and data center cooling customers decreased $48.1higher raw material prices, which increased approximately $9.0 million, and $41.1a $5.3 million respectively.
CIS year-to-date cost of sales decreased $64.9 million, or 16 percent, from the same period last year, primarily due to lower sales volume.foreign currency exchange rate changes. As a percentage of sales, cost of sales increased 250150 basis points to 87.7 percent, primarily due to the impact of lower sales volume and unfavorable sales mix, partially offset by cost-reduction and procurement initiatives.87.6 percent.
As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $22.5$11.9 million and gross margin declined 250150 basis points to 12.312.4 percent.
CISAutomotive year-to-date SG&A expenses decreased $3.7increased $4.6 million compared with the priorsame period last year. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $5.0 million, partially offset by a $0.6 million unfavorable impact of foreign currency exchange rate changes.
Restructuring expenses during the first nine months of fiscal 2021 increased $3.1 million compared with the prior year and primarily consisted of severance expenses and equipment transfer costs related to plant consolidation activities in China and targeted headcount reductions in North America.
Operating income decreased $21.9 million to $3.9 million, primarily due to lower gross profit and higher restructuring expenses, partially offset by lower SG&A expenses.
Building HVAC Systems
| | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2020 | | | 2019 | | | 2020 | | | 2019 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 68.7 | | | | 100.0 | % | | $ | 64.9 | | | | 100.0 | % | | $ | 178.2 | | | | 100.0 | % | | $ | 169.9 | | | | 100.0 | % | | Cost of sales | | | 43.0 | | | | 62.7 | % | | | 41.8 | | | | 64.5 | % | | | 116.3 | | | | 65.3 | % | | | 115.4 | | | | 67.9 | % | | Gross profit | | | 25.7 | | | | 37.3 | % | | | 23.1 | | | | 35.5 | % | | | 61.9 | | | | 34.7 | % | | | 54.5 | | | | 32.1 | % | | Selling, general and administrative expenses | | | 9.9 | | | | 14.3 | % | | | 9.6 | | | | 14.7 | % | | | 25.9 | | | | 14.5 | % | | | 26.9 | | | | 15.8 | % | | Operating income | | $ | 15.8 | | | | 23.1 | % | | $ | 13.5 | | | | 20.8 | % | | $ | 36.0 | | | | 20.2 | % | | $ | 27.6 | | | | 16.2 | % |
Comparison of Three Months ended December 31, 2020 and 2019
BHVAC net sales increased $3.8 million, or 6 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021, primarily due to higher sales in the U.S. and the U.K., which both increased approximately $2.0 million. The higher sales in the U.S. were primarily due to higher sales of heating products, partially offset by lower sales of ventilation products. The higher sales in the U.K. were primarily due to higher sales of air conditioning and data center cooling products.
BHVAC cost of sales increased $1.2 million, or 3 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021, primarily due to higher sales volume. As a percentage of sales, cost of sales decreased 180 basis points to 62.7 percent and was positively impacted by favorable customer pricing and sales mix.
As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $2.6 million and gross margin improved 180 basis points to 37.3 percent.
SG&A expenses increased $0.3 million from the prior year, yet decreased 40 basis points as a percentage of sales. The increase in SG&A expenses was primarily due to higher compensation-related expenses, including commission expenses.
Operating income of $15.8 millionwhich increased $2.3 million during the quarter, primarily due to higher gross profit.
Comparison of Nine Months ended December 31, 2020 and 2019
BHVAC year-to-date net sales increased $8.3 million, or 5 percent, from the same period last year, primarily due to higher sales volume. Compared with the first nine months of the prior year, sales increased $9.2 million in the U.K. and decreased $0.9 million in the U.S. The higher sales in the U.K. were primarily due to higher sales of data center products. The lower sales in the U.S. resulted primarily from the negative impacts of the COVID-19 pandemic and decreased sales of ventilation products, partially offset by higher sales of heating products.
BHVAC year-to-date cost of sales increased $0.9 million from the same period last year. As a percentage of sales, cost of sales decreased 260 basis points to 65.3 percent and was positively impacted by favorable customer pricing, sales mix and cost-reduction initiatives.
As a result of higher sales and lower cost of sales as a percentage of sales, gross profit increased $7.4approximately $2.0 million, and gross margin improved 260 basis points to 34.7 percent.
BHVAC year-to-date SG&A expenses decreased $1.0 million, or 130 basis points as a percentage of sales, from the prior year. The decrease in SG&A expenses was primary due to lower travel expenses.
Operating income of $36.0 million increased $8.4 million compared with the same period last year, primarily due to higher gross profit and lower SG&A expenses.
Heavy Duty Equipment
| | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2020 | | | 2019 | | | 2020 | | | 2019 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 185.6 | | | | 100.0 | % | | $ | 164.9 | | | | 100.0 | % | | $ | 474.7 | | | | 100.0 | % | | $ | 568.5 | | | | 100.0 | % | | Cost of sales | | | 159.6 | | | | 86.0 | % | | | 148.1 | | | | 89.8 | % | | | 413.8 | | | | 87.2 | % | | | 496.8 | | | | 87.4 | % | | Gross profit | | | 26.0 | | | | 14.0 | % | | | 16.8 | | | | 10.2 | % | | | 60.9 | | | | 12.8 | % | | | 71.7 | | | | 12.6 | % | | Selling, general and administrative expenses | | | 13.2 | | | | 7.1 | % | | | 12.6 | | | | 7.7 | % | | | 35.4 | | | | 7.4 | % | | | 42.3 | | | | 7.4 | % | | Restructuring expenses | | | - | | | | - | | | | 1.4 | | | | 0.8 | % | | | 1.9 | | | | 0.4 | % | | | 2.2 | | | | 0.4 | % | | Operating income | | $ | 12.8 | | | | 6.8 | % | | $ | 2.8 | | | | 1.7 | % | | $ | 23.6 | | | | 5.0 | % | | $ | 27.2 | | | | 4.8 | % |
Comparison of Three Months ended December 31, 2020 and 2019
HDE net sales increased $20.7 million, or 13 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021, primarily due to higher sales volume to global off-highway customers. Sales to off-highway and commercial vehicle customers increased $16.7 million and $3.8 million, respectively. Geographically, sales increased most significantly in Asia.
HDE cost of sales increased $11.5 million, or 8 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021, primarily due to higher sales volume. As a percentage of sales, cost of sales decreased 380 basis points to 86.0 percent and was favorably impacted by the higher sales volume, cost savings from procurement and other cost-reduction initiatives, and, to a lesser extent, improved operating efficiencies.
As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $9.2 million and gross margin improved 380 basis points to 14.0 percent.
SG&A expenses increased $0.6 million, yet decreased 60 basis points as a percentage of sales, compared with the third quarter of the prior year. The increase in SG&A expenses was primarily due to environmental charges related to a previously-owned U.S. manufacturing facility, which increased $0.4 million.
Restructuring expenses decreased $1.4 million compared with the third quarter of fiscal 2020, primarily due to lower severance expenses related to targeted headcount reductions.
Operating income of $12.8 million increased $10.0 million during the quarter, primarily due to higher gross profit and lower restructuring expenses.
Comparison of Nine Months ended September 30, 2020 and 2019
HDE year-to-date net sales decreased $93.8 million, or 16 percent, from the same period last year, primarily due to lower sales volume resulting from the impacts of the COVID-19 pandemic, which were most severe in the Americas and Europe during the first half of the fiscal year. Sales to commercial vehicle and automotive and light vehicle customers decreased $57.2 million and $15.2 million, respectively.
HDE year-to-date cost of sales decreased $83.0 million, or 17 percent, primarily due to lower sales volume. As a percentage of sales, cost of sales decreased 20 basis points to 87.2 percent. The significant unfavorable impact of the lower sales volume was more than offset by favorable impacts from improved operating efficiencies and cost savings from procurement and other cost-reduction initiatives.
As a result of the lower sales and lower cost of sales as a percentage of sales, gross profit decreased $10.8 million and gross margin improved 20 basis points to 12.8 percent.
HDE year-to-date SG&A expenses decreased $6.9 million from the prior year. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $6.0 million, and cost-reduction initiatives, including lower travel expenses.
Restructuring expenses during the first nine months of fiscal 2021 totaled $1.9 million, a decrease of $0.3 million compared with the same period last year, and primarily consisted of severance expenses resulting from targeted headcount reductions in North America.
Operating income of $23.6 million decreased $3.6 million compared with the same period last year, primarily due to lower gross profit, partially offset by lower SG&A expenses.
Automotive
| | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2020 | | | 2019 | | | 2020 | | | 2019 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 113.9 | | | | 100.0 | % | | $ | 110.5 | | | | 100.0 | % | | $ | 285.9 | | | | 100.0 | % | | $ | 339.8 | | | | 100.0 | % | | Cost of sales | | | 95.5 | | | | 83.9 | % | | | 98.3 | | | | 89.0 | % | | | 246.1 | | | | 86.1 | % | | | 302.1 | | | | 88.9 | % | | Gross profit | | | 18.4 | | | | 16.1 | % | | | 12.2 | | | | 11.0 | % | | | 39.8 | | | | 13.9 | % | | | 37.7 | | | | 11.1 | % | | Selling, general and administrative expenses | | | 8.5 | | | | 7.4 | % | | | 11.2 | | | | 10.2 | % | | | 25.5 | | | | 8.9 | % | | | 33.6 | | | | 9.9 | % | | Restructuring expenses | | | 0.4 | | | | 0.4 | % | | | 0.2 | | | | 0.2 | % | | | 0.6 | | | | 0.2 | % | | | 2.9 | | | | 0.8 | % | | Impairment charges | | | 134.4 | | | | 118.0 | % | | | - | | | | - | | | | 134.4 | | | | 47.0 | % | | | - | | | | - | | | Gain on sale of assets | | | - | | | | - | | | | (0.8 | ) | | | -0.8 | % | | | - | | | | - | | | | (0.8 | ) | | | -0.2 | % | | Operating (loss) income | | $ | (124.9 | ) | | | -109.7 | % | | $ | 1.6 | | | | 1.4 | % | | $ | (120.7 | ) | | | -42.2 | % | | $ | 2.0 | | | | 0.6 | % |
Comparison of Three Months ended December 31, 2020 and 2019
Automotive net sales increased $3.4 million, or 3 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021, primarily due to a $6.7 million favorable impact of foreign currency exchange rate changes, partially offset by lower sales volume. Compared with the prior year, sales increased $3.8 million and $2.0 million in Europe and Asia, respectively, and decreased $2.4 million in the Americas.
Automotive cost of sales decreased $2.8 million, or 3 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021. As a percentage of sales, cost of sales decreased 510 basis points to 83.9 percent. Compared with the prior year, cost of sales was favorably impacted by lower depreciation expenses, which decreased approximately $3.0 million, cost savings from procurement and other cost-reduction initiatives, and improved operating efficiencies. The lower depreciation expenses resulted from the Company ceasing depreciation of the long-lived assets within the liquid-cooled automotive business when it was classified as held for sale in November 2020. Foreign currency exchange rate changes negatively impacted cost of sales by $5.7 million.
As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $6.2 million and gross margin improved 510 basis points to 16.1 percent.
SG&A expenses decreased $2.7 million compared with the third quarter of the prior year. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $2.0 million.
Restructuring expenses during the third quarter of fiscal 2021 totaled $0.4 million and primarily consisted of severance expenses resulting from targeted headcount reductions in Europe.
Impairment charges during the third quarter of fiscal 2021 totaled $134.4 million and primarily related to assets in the liquid-cooled automotive business. Upon classifying this business as held for sale during the third quarter, we identified an implied loss in excess of the carrying value of its long-lived assets. Accordingly, we reduced the liquid-cooled automotive business’s long-lived assets, primarily property, plant and equipment, to zero.
During the third quarter of fiscal 2020, we completed the sale of a previously-closed manufacturing facility in Germany and, as a result, recorded a gain of $0.8 million.
The Automotive operating loss of $124.9 million in the third quarter of fiscal 2021, as compared with operating income of $1.6 million in the third quarter of the prior year, was significantly impacted by the large impairment charges associated with the liquid-cooled automotive business and, to a much lesser extent, higher gross profit and lower SG&A expenses.
Comparison of Nine Months ended December 31, 2020 and 2019
Automotive year-to-date net sales decreased $53.9 million, or 16 percent, from the same period last year, primarily due to lower sales volume largely resulting from the impacts of the COVID-19 pandemic, partially offset by a $9.7 million favorable impact of foreign currency exchange rate changes. Sales in Europe and North America decreased $46.8 million and $13.0 million, respectively. Sales in Asia increased $5.9 million.
Automotive year-to-date cost of sales decreased $56.0 million, or 19 percent, from the prior year, primarily due to lower sales volume, partially offset by an $8.2$0.7 million unfavorable impact of foreign currency exchange rate changes. As a percentage
The year-to-date net impairment reversal of sales, cost$56.0 million primarily related to assets in our liquid-cooled automotive business. The $57.2 million impairment reversal during the third quarter of sales decreased 280 basis points to 86.1 percent andfiscal 2022 was favorably impacted by improved operating efficiencies, cost savings from procurement initiatives, and lower depreciation expenses of approximately $4.0 million, partially offset by the unfavorable impact$1.2 million of lower sales volume.
As a result of the lower sales and lower cost of sales as a percentage of sales, gross profit increased $2.1 million and gross margin improved 280 basis points to 13.9 percent.
Automotive year-to-date SG&A expenses decreased $8.1 million compared with the prior year. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $8.0 million.
Restructuring expensesnet impairment charges recorded during the first ninesix months of fiscal 2021 totaled $0.62022. During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’s held for sale assets. These impairment charges were partially offset by a decrease of $2.3$7.4 million compared withimpairment reversal related to certain manufacturing operations that no longer met the same periodrequirements to be classified as held for sale due to a modification in the prior year. The decrease was primarily driven by lower severance expenses in Europe resulting from fewer targeted headcount reductions.
sale perimeter during the first quarter of fiscal 2022.
The Automotive operating loss37
Operating income of $53.6 million during the first nine months of fiscal 2021, as compared with2022 represents a $174.3 million improvement from the operating incomeloss of $2.0$120.7 million duringin the same period last year, was significantly impactedyear. The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the largesignificant impairment reversal and impairment charges, associated withrespectively, related to the liquid-cooled automotive business duringbusiness. In addition, as compared with the third quarterfirst nine months of fiscal 2021, and, to a much lesser extent, higheryear-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profit and lowerhigher SG&A expenses and restructuring charges.expenses.
Liquidity and Capital Resources
Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $72.9$61.1 million as of December 31, 2020,2021 and an available borrowing capacity of $213.6$163.1 million under our revolving credit facility. Given our extensive international operations, approximately $59.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries. Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.
In response to the COVID-19 pandemic, we have taken actions to reduce operating and administrative expenses, conserve cash and maximize liquidity. In addition, as described below, we have focused on reducing our capital expenditures and executed amendments to our primary credit agreements to provide financial covenant flexibility during fiscal 2021 and 2022. We believe our sources of liquidity including cash flow from operations, our cash and cash equivalents, and access to both committed and uncommitted credit facilities, will provide sufficient cash flow to meetadequately cover our obligations during the next twelve monthsfunding needs on both a short-term and beyond. However, we are continuing to monitor the impacts of COVID-19 on our business and the credit and financial markets.long-term basis.
Net Cash Provided by Operating Activities Net cash provided by operating activities for the nine months ended December 31, 20202021 was $146.5$7.4 million, which represents a $100.6$139.1 million increasedecrease compared with the same period in the prior year. This increasedecrease in operating cash flow was primarily due to favorableunfavorable net changes in working capital, including higher inventory levels and lowerhigher payments for separationincentive compensation and project costs associated with our review of strategic alternatives for the automotive businesses. The favorable changes in working capital during the first nine months of fiscal 2021,employee benefits as compared with the same period in the prior year, included loweryear. Inventory, including amounts held for sale, increased $57.8 million from March 31, 2021 to December 31, 2021. The higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and lower payments for incentive compensation, employee benefits, income taxesstrategic safety stock builds in connection with global supply chain constraints 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.challenges.
Capital Expenditures Capital expenditures of $30.7 million during the first nine months of fiscal 2022 increased $7.0 million compared with the same period in the prior year. In response to the economic impacts of the COVID-19 pandemic,fiscal 2021, we have been focused on reducing our capital expenditures and, where possible, have delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in our vehicular businesses. Capital expenditures of $23.7 million duringresponse to the first nine months of fiscal 2021 decreased $34.5 million compared with the same period in the prior year.COVID-19 pandemic.
Debt Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below. Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales. In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.
In May 2020, we executed amendments to our primary credit agreements in the U.S. to provide additional covenant flexibility in light of the risks and uncertainties associated with the COVID-19 pandemic. Under the amended agreements, the leverage ratio covenant limit has been temporarily raised. The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, in relation to ourno more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”). The leverage ratio covenant limit is 5.75 to 1 for the fourth quarter of fiscal 2021. In fiscal 2022, the leverage ratio covenant limit is 4.75 to 1, 3.75 to 1, and 3.50 to 1 for the first, second and third quarters, respectively, and subsequently returns to 3.25 to 1 for the fourth quarter of fiscal 2022. We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.
As of December 31, 2020, we were in compliance with our debt covenants;2021, our leverage ratio and interest coverage ratio were 1.92.5 and 8.7,10.0, respectively. We expect to remain in compliance with our debt covenants during fiscal 2021,the remainder of fiscal 2022 and beyond.
Share Repurchase Program
On November 5, 2020, we announced our Board of Directors approved a two-year, $50.0 million share repurchase program, which allows us to repurchase shares of our common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as we deem appropriate. To date, we have not repurchased shares under this program. Our decision whether and to what extent to repurchase shares under this program will depend on a number of factors, including business conditions, other cash priorities, and stock price.
Forward-Looking Statements
This report, including, but not limited to, the discussion under Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains statements, including information about future financial performance, accompanied by phrases such as “believes,” “estimates,” “expects,” “plans,” “anticipates,” “intends,” and other similar “forward-looking” statements, as defined in the Private Securities Litigation Reform Act of 1995. Modine’s actual results, performance or achievements may differ materially from those expressed or implied in these statements, because of certain risks and uncertainties, including, but not limited to, those described under “Risk Factors” in Item 1A. in Part I. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2020.2021. Other risks and uncertainties include, but are not limited to, the following:
Market Risks:
The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees;
Economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including, in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; 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 or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade, the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the short- and long-term implications of “Brexit”;
The impact of potential price increases associated with raw materials, including aluminum, copper, steel and stainless steel (nickel), and other purchased componentscomponent inventory including, but not limited to, increases in the underlying material cost based upon the London Metal Exchange and related premiums, fabrication, or fabricationfreight costs. These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand. This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whether through our quotation process or through contract provisions for prospective price adjustments, as well as the inherent lag in timing of such contract provisions; and
The impact of current and future environmental laws and regulations on our business and the businesses of our customers, including our ability to take advantage of opportunities to supply alternative new technologies to meet environmental and/or energy standards and objectives.
Operational Risks:
The overall health and continually increasing price-down focus of our vehicular customers in light of economic and market-specific factors, the concentration of sales within our CIS segment attributable to one customer, and the potential impact on us from any deterioration in the stability or performance of any of our major customers;
The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our time, quantity, quality, price and pricetiming demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;
Our ability to maintain current customer programsrelationships and compete effectively for new business, including our ability to offset or otherwise address increasing pricing pressures from competitors and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;
The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims and delays or inefficiencies resulting from restrictions imposed in response to the COVID-19 pandemic;
The impact of any delays or modifications initiated by major customers with respect to program launches, product applications or requirements;
| • | The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages; |
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 reducemodify our cost structure in response to sales volume declinesincreases or decreases and to complete restructuring activities and realize the anticipated benefits of those activities;
Costs and other effects of the investigation and remediation of environmental contamination,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, operational and administrative functions, in light of tight global labor markets;
Our ability to protect our proprietary information and intellectual property from theft or attack by internal or external sources;
The impact of any substantial disruption or material breach of our information technology systems, and any related delays, problems or costs;
Increasingly complex and restrictive laws and regulations, including those associated with being a U.S. public company and others present in various jurisdictions in which we operate, and the costs associated with compliance therewith;
Work stoppages or interference at our facilities or those of our major customers and/or suppliers;
The constant and increasing pressures associated with healthcare and associated insurance costs; and
Costs and other effects of litigation, claims, or other obligations.
Strategic Risks:
Our ability to successfully complete the pending sale of our liquid-cooled automotive business, including the receipt of governmental and third-party approvals and satisfaction of other closing conditions, and our ability to successfully exit our other automotive businesses in a manner that is in the best interest of our shareholders;
| • | Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers; |
Our ability to successfully realize anticipated benefits fromidentify and execute strategies in our increased “industrial” market presence, with our CISautomotive businesses to reduce costs and BHVAC businesses, while maintaining appropriate focus on the market opportunities presented by our HDE and Automotive businesses;improve operating margins;
Our ability to identify and execute growth and diversification opportunities in order to position us for long-term success; and
The potential impacts from any actions by activist shareholders, including disruption of our business and related costs.
Financial Risks:
Our ability to fund our global liquidity requirements efficiently for Modine’s current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;
The impact of potential increases in interest rates, particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations, andobligations;
The impact of changes in federal, state or local tax regulations that could have the continued uncertainty around the utilizationeffect of LIBOR or alternative reference rates;increasing our income tax expense;
Our ability to comply with the financial covenants as amended, in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);
The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and
Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.
Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2020.2021. The Company’s market risks have not materially changed since the fiscal 20202021 Form 10-K was filed.
| Item 4. | Controls and Procedures. |
Evaluation Regarding Disclosure Controls and Procedures
As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Finance and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Finance and Chief Financial Officer have concluded that the design and operation of the Company’sCompany’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2020.2021.
Changes in Internal Control Over Financial Reporting
There have been no changes in internal control over financial reporting during the third quarter of fiscal 20212022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
ISSUER PURCHASES OF EQUITY SECURITIES
The following describes the Company’s purchases of common stock during the third quarter of fiscal 2022: Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (a) | | October 1 – October 31, 2021 | 36,644 (b)
| $11.94 | _______
| $50,000,000 | | | | | | | | November 1 – November 30, 2021 | _______
| _______
| _______
| 50,000,000 | | | | | | | | December 1 – December 31, 2021 | 4,189 (b)
| $10.20 | _______
| 50,000,000 | | | | | | | | Total | 40,833 (b)
| $11.76 | _______
| |
| (a) | Effective November 5, 2020, the Board of Directors approved a two-year, $50.0 million share repurchase program, which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate. |
| (b) | Consists of shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards. The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions. These shares are held as treasury shares. |
| Item 5. | Other Information. |
The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.
| Exhibit No. | Description | | Incorporated Herein By Reference To | Filed Herewith | | | | | | | | Securities and Asset PurchaseTermination Agreement dated as of November 2, 2020, by and between the Company and Dana Incorporated, dated as of October 25, 2021. | | Exhibit 2.1 to Registrant’s Current Report on Form 8-K dated November 2, 2020October 25, 2021 | | | | | | | | | [Corrected] OfferSeparation Letter dated as of November 10, 2020, by andAgreement between the Company and Mr. BrinkerJoel T. Casterton, dated as of October 25, 2021. | | | X | | | | | | | | FormSeparation Letter Agreement between the Company and Matthew J. McBurney, dated as of Make-Whole RSU Award Agreement with Neil Brinker | | | X | | | | | | | Form of Make-Whole Performance Cash Award Agreement with Neil BrinkerOctober 30, 2021. | | | X | | | | | | | | Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer. | | | X | | | | | | | | Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Finance and Chief Financial Officer. | | | X | | | | | | | | Section 1350 Certification of Neil D. Brinker, President and Chief Executive Officer. | | | X | | | | | | | | Section 1350 Certification of Michael B. Lucareli, Executive Vice President, Finance and Chief Financial Officer. | | | X | | | | | | | | 101.INS | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). | | | X | | | | | | | | 101.SCH | Inline XBRL Taxonomy Extension SchemaSchema. | | | X | | | | | | | | 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase DocumentDocument. | | | X | | | | | | | | 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase DocumentDocument. | | | X | | | | | | | 101.LAB10.1.LAB | Inline XBRL Taxonomy Extension Label Linkbase DocumentDocument. | | | X | | | | | | | 101.PRE10.1.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase DocumentDocument. | | | X | | | | | | | | 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101). | | | X |
* Schedules and similar attachments have been omitted pursuant to Item 601(b)(2) of Regulation S-K because they are not material and would likely cause competitive harm to the Company if publicly disclosed.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
MODINE MANUFACTURING COMPANY (Registrant)
By: /s/ Michael B. Lucareli Michael B. Lucareli, Executive Vice President, Finance and Chief Financial Officer*
Date: February 5, 20213, 2022
* Executing as both the principal financial officer and a duly authorized officer of the Company
s | | | % of sales | | |
Comparison of Three Months ended December 31, 20202021 and 20192020
Third quarter net sales of $484.3$502.2 million were $10.9$17.9 million, or 24 percent, higher than the third quarter of the prior year, primarily due to higher sales volume and favorable pricing adjustments in response to raw material price increases in our CIS, BHVAC, and HDE segments, partially offset by lower sales volume in our Automotive segment. Sales in the CIS, BHVAC, and HDE segments increased $23.7 million, $16.9 million, and $15.2 million, respectively. Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.
Third quarter cost of sales increased $26.0 million, or 6 percent, primarily due to higher raw material prices, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, segments and an $11.2 million favorable impactHDE segments. These drivers, which increased cost of foreign currency exchange rate changes,sales, were partially offset by lower sales volume in the CISAutomotive segment and Automotive segments. Sales in the HDE, BHVAC, and Automotive segments increased $20.7 million, $3.8 million, and $3.4 million, respectively. CIS segment sales decreased $18.5 million.
Third quarter cost of sales increased $1.7 million.improved operating efficiencies. As a percentage of sales, cost of sales decreased 160increased 220 basis points to 82.985.1 percent. The increase in cost of sales was primarily due to a $9.7 million unfavorable impact of foreign currency exchange rate changes, partially offset by the favorable impacts of procurement and other cost-reduction initiatives and a $3.0 million decrease in depreciation expense in the Automotive segment. In addition, program and equipment transfer costs to prepare the liquid-cooled automotive business for sale decreased approximately $1.0 million compared with the prior year.
As a result of higher sales and lowerhigher cost of sales as a percentage of sales, third quarter gross profit increased $9.2decreased $8.1 million and gross margin improved 160declined 220 basis points to 17.114.9 percent.
Third quarter SG&A expenses decreased $7.4 million. The decrease in SG&A expenses was primarily due to$5.8 million, primary driven by $2.6 million of lower costs recorded at Corporate associated withrelated to our review of strategic alternatives for the Automotive segment’s business operations,segment businesses and lower compensation-related expenses, which decreased approximately $10.0$2.0 million. This favorable driver was partially offset by a $1.0 million unfavorable impact of foreign currency exchange rate changes and higher environmental chargesThe lower compensation-related expenses were primarily due to lower incentive compensation expenses at Corporate in the HDE segment.current year.
Restructuring expenses of $0.9 million during the third quarter of fiscal 2021 decreased $1.7 million, primarily due to lower restructuring expenses in the HDE segment.
Impairment charges of $134.4$2.1 million in the third quarter of fiscal 2021 primarily related to the write-down of the long-lived assets in the Automotive segment’s liquid-cooled automotive business in connection2022 increased $1.2 million compared with the pending sale of that business.
The operating loss of $108.7 million represents a $116.9 million decline from the prior-year operating income of $8.2 million. The decline was primarily due to the $134.4 million of impairment charges recorded in the Automotive segment and lower earnings in the CIS segment. These negative drivers were partially offset by higher earnings in our HDE and BHVAC segments.
Interest expense decreased $1.0 million, or 18 percent, during the third quarter of fiscal 2021, primarily due to higher severance expenses in the CIS segment.
During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower outstanding long-term debtof their carrying or fair value. During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale, we recorded $134.4 million of impairment charges and reduced the carrying value of the disposal group’s long-lived assets to zero.
Operating income of $79.4 million in the third quarter of fiscal 2022 represents a lesser extent,$188.1 million improvement from the prior-year operating loss of $108.7 million. The operating income and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment. In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.
Interest expense in the third quarter of fiscal 2022 decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorable changes in interest rates.
The provision for income taxes was $81.6$0.1 million and $1.7$81.6 million in the third quarter of fiscal 20212022 and 2020,2021, respectively. The $79.9$81.5 million increasedecrease was primarily due to the absence of $109.9 million of income tax charges totaling $116.5 million recorded in the third quarter of fiscal 2021prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions. These drivers, which decreased the provision for income taxes, were partially offset by the absence of $37.7 million of income tax benefits totaling $37.7 millionrecorded during the prior year related to the Automotive segment impairment charges recorded earlier in the third quarter of fiscal 2021.charges.
Comparison of Nine Months ended December 31, 20202021 and 20192020
Fiscal 20212022 year-to-date net sales of $1,293.5$1,475.7 million were $209.1$182.2 million, or 14 percent, lowerhigher than the same period last year, primarily due to lowerhigher sales volumes and favorable pricing adjustments in response to raw material price increases in our HDE, CIS, and AutomotiveBHVAC segments. Sales in these segments decreased $93.8increased $123.7 million, $87.4$86.6 million, and $53.9$38.4 million, respectively, and were significantly impacted by market-driven volume declines and temporary plant closures earlier in the fiscal year due to the COVID-19 pandemic. BHVACrespectively. Automotive segment sales increased $8.3decreased $61.9 million.
Fiscal 20212022 year-to-date cost of sales of $1,083.9$1,261.6 million decreased $186.1increased $177.7 million, or 1516 percent, primarily due to lowerhigher raw material prices, which increased approximately $117.0 million, and higher sales volume. In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic. These factors, which caused an increase in cost of sales compared with the same period in the prior year, were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies. As a percentage of sales, cost of sales improved 70increased 170 basis points to 83.885.5 percent. The unfavorable impact of lower sales volume was more than offset by the benefits of cost-reduction initiatives implemented earlier in the fiscal year in response to lower end market demand and procurement initiatives.
As a result of lowerhigher sales and lowerhigher cost of sales as a percentage of sales, fiscal 2021 year-to-date gross profit decreased $23.0increased $4.5 million and gross margin improved 70declined 170 basis points to 16.214.5 percent.
Fiscal 20212022 year-to-date SG&A expenses decreased $42.8increased $10.0 million. The decreaseincrease in SG&A expenses was primarily due to higher compensation-related expenses, as the prior year was favorably impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19. In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million. These increases were partially offset by lower strategic reorganization costs and lower costs recorded at Corporate associated withrelated to our review of strategic alternatives for the Automotive segment’s business operations,segment businesses, which decreased approximately $29.0$2.8 million and $1.3 million, respectively. The lower compensation-relatedstrategic reorganization costs primarily resulted from lower severance expenses which decreased approximately $18.0 million. These favorable drivers were partially offset by $5.9 million of costs recorded at Corporate in connection with Mr. Burke stepping down from his position as President and CEO and the search for his successor.executive management positions.
Restructuring expenses of $7.0$3.0 million duringin the first nine months of fiscal 2021 increased $0.32022 decreased $4.0 million compared with the same period last year, primarily due to higher restructuringlower severance expenses in the CIS segment, partially offset by lower restructuring expenses in the Automotive segment.and HDE segments.
The fiscal 2021 year-to-date operating lossnet impairment reversals of $83.4$55.7 million represents a $115.7 million decline from the prior-year operating income of $32.3 million. The decline was primarily due to the $134.4 million of impairment charges recorded in the Automotive segment and lower earnings in our CIS and HDE segments. These negative drivers were partially offset by lower SG&A expenses at Corporate and higher earnings in our BHVAC segment.
Interest expense decreased $2.1 million, or 12 percent, during the first nine months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment. In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale. In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.
We sold our air-cooled automotive business on April 30, 2021. As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.
Operating income of $98.6 million during the first nine months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million. The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business. In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses. Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.
Interest expense during the first nine months of fiscal 2022 decreased $3.4 million compared with the same period last year, primarily due to lower outstanding long-term debt and favorable changes in interest rates.rates and lower debt outstanding during the current-year.
The provision for income taxes was $95.3$7.4 million and $8.3$95.3 million during the first nine months of fiscal 20212022 and 2020,2021, respectively. The $87.0$87.9 million increasedecrease was primarily due to the absence of $116.5 million of income tax charges totaling $123.1 million recorded duringin the first nine months of fiscal 2021prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions. These drivers, which decreased the provision for income taxes, were partially offset by the absence of $37.7 million of income tax benefits totaling $37.7 millionrecorded during the prior year related to the Automotive segment impairment charges recorded during fiscal 2021.charges.
SEGMENT RESULTS OF OPERATIONS
Effective AprilJuly 1, 2020,2021, we began managingaligned the data center businesses previously managed by and reported within the CIS segment under the BHVAC segment. The BHVAC segment assumed management of our global automotive business separate fromin Guadalajara, Spain and a portion of our business in Grenada, Mississippi. Through this segment change, we have aligned our data center businesses under the otherBHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies. As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the previously-reported Vehicular Thermal Solutions (“VTS”)BHVAC segment. We have been managing the automotive business as the Automotive segment as we target the sale or eventual exit of its underlying automotive business operations. We are managing the other businesses of the VTS segment, including the commercial vehicle and off-highway businesses, as the Heavy Duty Equipment segment. We began reporting financial results for our new segment structure beginning for fiscal 2021. Segment financial information for fiscal 2020 has been recast to conform to the fiscal 2021 presentation. The segment realignment had no impact on the CISHDE and BHVAC segments.Automotive segments or on our consolidated financial position, results of operations, and cash flows. Segment financial information for the prior periods has been recast to conform to the current presentation.
As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment. While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment. See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.
The following is a discussion of our segment results of operations for the three months and nine months ended December 31, 20202021 and 2019:2020:
Commercial and Industrial SolutionsBuilding HVAC Systems
| | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2020 | | | 2019 | | | 2020 | | | 2019 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 129.0 | | | | 100.0 | % | | $ | 147.5 | | | | 100.0 | % | | $ | 385.6 | | | | 100.0 | % | | $ | 473.0 | | | | 100.0 | % | | Cost of sales | | | 116.4 | | | | 90.2 | % | | | 124.8 | | | | 84.6 | % | | | 338.2 | | | | 87.7 | % | | | 403.1 | | | | 85.2 | % | | Gross profit | | | 12.6 | | | | 9.8 | % | | | 22.7 | | | | 15.4 | % | | | 47.4 | | | | 12.3 | % | | | 69.9 | | | | 14.8 | % | | Selling, general and administrative expenses | | | 13.8 | | | | 10.7 | % | | | 13.7 | | | | 9.3 | % | | | 39.1 | | | | 10.2 | % | | | 42.8 | | | | 9.1 | % | | Restructuring expenses | | | 0.5 | | | | 0.4 | % | | | 0.7 | | | | 0.5 | % | | | 4.4 | | | | 1.1 | % | | | 1.3 | | | | 0.3 | % | | Operating (loss) income | | $ | (1.7 | ) | | | -1.3 | % | | $ | 8.3 | | | | 5.6 | % | | $ | 3.9 | | | | 1.0 | % | | $ | 25.8 | | | | 5.4 | % |
| | | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2021 | | | 2020 | | | 2021 | | | 2020 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 90.6 | | | | 100.0 | % | | $ | 73.7 | | | | 100.0 | % | | $ | 234.7 | | | | 100.0 | % | | $ | 196.3 | | | | 100.0 | % | | Cost of sales | | | 63.2 | | | | 69.7 | % | | | 48.3 | | | | 65.5 | % | | | 169.5 | | | | 72.2 | % | | | 131.8 | | | | 67.1 | % | | Gross profit | | | 27.4 | | | | 30.3 | % | | | 25.4 | | | | 34.5 | % | | | 65.2 | | | | 27.8 | % | | | 64.5 | | | | 32.9 | % | | Selling, general and administrative expenses | | | 13.0 | | | | 14.4 | % | | | 10.5 | | | | 14.3 | % | | | 35.1 | | | | 15.0 | % | | | 28.9 | | | | 14.8 | % | | Operating income | | $ | 14.4 | | | | 15.9 | % | | $ | 14.9 | | | | 20.1 | % | | $ | 30.1 | | | | 12.8 | % | | $ | 35.6 | | | | 18.1 | % |
Comparison of Three Months ended December 31, 20202021 and 20192020
CISBHVAC net sales decreased $18.5increased $16.9 million, or 1323 percent, from the third quarter of fiscal 20202021 to the third quarter of fiscal 2021,2022, primarily due to lowerhigher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases. Compared with the third quarter of the prior year, BHVAC sales to data center coolingcustomers increased $11.6 million. In addition, sales to commercial HVAC customers increased $5.2 million, primarily due to higher sales of ventilation and heating products in North America.
BHVAC cost of sales increased $14.9 million, or 31 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs. As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.
As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent. While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.
SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.
Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.
Comparison of Nine Months ended December 31, 2021 and 2020
BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a $4.5lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7 million favorable impact of foreign currency exchange rate changes.rates. Sales to data center coolingcommercial HVAC customers decreased $18.4increased $24.5 million, primarily due to lowerhigher sales of heating and air conditioning products. In addition, sales to one individual customer.data center customers increased $13.0 million.
CISBHVAC year-to-date cost of sales decreased $8.4increased $37.7 million, or 729 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021,same period last year, primarily due to lowerhigher sales volume partially offsetand higher raw material prices, which increased by a $4.2approximately $12.0 million. In addition, cost of sales was unfavorably impacted by $4.8 million unfavorable impact offrom foreign currency exchange rate changes. As a percentage of sales, cost of sales increased 560510 basis points to 90.272.2 percent, primarily due to the impacthigher material costs.
As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.
BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.
Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.
Commercial and Industrial Solutions
| | | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2021 | | | 2020 | | | 2021 | | | 2020 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 148.6 | | | | 100.0 | % | | $ | 124.9 | | | | 100.0 | % | | $ | 456.2 | | | | 100.0 | % | | $ | 369.6 | | | | 100.0 | % | | Cost of sales | | | 130.9 | | | | 88.1 | % | | | 112.0 | | | | 89.7 | % | | | 399.4 | | | | 87.5 | % | | | 324.8 | | | | 87.9 | % | | Gross profit | | | 17.7 | | | | 11.9 | % | | | 12.9 | | | | 10.3 | % | | | 56.8 | | | | 12.5 | % | | | 44.8 | | | | 12.1 | % | | Selling, general and administrative expenses | | | 12.4 | | | | 8.4 | % | | | 13.1 | | | | 10.4 | % | | | 37.7 | | | | 8.3 | % | | | 36.0 | | | | 9.7 | % | | Restructuring expenses | | | 1.9 | | | | 1.3 | % | | | 0.5 | | | | 0.4 | % | | | 2.1 | | | | 0.5 | % | | | 4.4 | | | | 1.2 | % | | Impairment charge | | | - | | | | - | | | | - | | | | - | | | | 0.3 | | | | 0.1 | % | | | - | | | | - | | | Operating income (loss) | | $ | 3.4 | | | | 2.2 | % | | $ | (0.7 | ) | | | -0.5 | % | | $ | 16.7 | | | | 3.6 | % | | $ | 4.4 | | | | 1.2 | % |
Comparison of Three Months ended December 31, 2021 and 2020
CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume unfavorableand favorable product pricing adjustments in response to raw material price increases. Compared with the third quarter of the prior year, sales mix,to commercial HVAC&R customers increased $24.5 million.
CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million. As a percentage of sales, cost of sales decreased 160 basis points to 88.1 percent, primarily due to the favorable impacts of the higher sales volume and improved operating efficiencies, partially offset by higher material costs.
As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8 million and gross margin improved 160 basis points to 11.9 percent.
SG&A expenses decreased $0.7 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.
Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses. The severance expenses in the third quarter of fiscal 2022 primarily related to targeted headcount reductions in Europe and China.
Operating income of $3.4 million represents a $4.1 million improvement from the prior-year operating loss of $0.7 million and was primarily due to higher gross profit.
Comparison of Nine Months ended December 31, 2021 and 2020
CIS year-to-date net sales increased $86.6 million, or 23 percent, from the same period last year, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases. In addition, sales were favorably impacted by $5.7 million from foreign currency exchange rates. The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year. Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, compared with the same period in the prior year.
CIS year-to-date cost of sales increased $74.6 million, or 23 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0 million. In addition, cost of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes. As a percentage of sales, cost of sales decreased 40 basis points to 87.5 percent, primarily due to the favorable impacts of the higher sales volume and improved operating efficiencies, partially offset by higher material costs.
As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0 million and gross margin improved 40 basis points to 12.5 percent.
CIS year-to-date SG&A expenses increased $1.7 million, yet decreased 140 basis points as a percentage of sales, from the same period last year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.
Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3 million from the same period last year, primarily due to lower severance expenses. The severance expenses during the first nine months of fiscal 2022 primarily related to targeted headcount reductions in Europe and China. The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.
During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write down a previously-closed manufacturing facility in the U.S to fair value less costs to sell. We sold the facility and received net cash proceeds of $0.7 million during July 2021.
Operating income during the first nine months of fiscal 2022 increased $12.3 million from the same period last year, primarily due to higher gross profit and lower restructuring expenses, partially offset by higher SG&A expenses.
Heavy Duty Equipment
| | | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2021 | | | 2020 | | | 2021 | | | 2020 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 200.8 | | | | 100.0 | % | | $ | 185.6 | | | | 100.0 | % | | $ | 598.4 | | | | 100.0 | % | | $ | 474.7 | | | | 100.0 | % | | Cost of sales | | | 178.6 | | | | 88.9 | % | | | 159.6 | | | | 86.0 | % | | | 535.3 | | | | 89.5 | % | | | 413.8 | | | | 87.2 | % | | Gross profit | | | 22.2 | | | | 11.1 | % | | | 26.0 | | | | 14.0 | % | | | 63.1 | | | | 10.5 | % | | | 60.9 | | | | 12.8 | % | | Selling, general and administrative expenses | | | 11.7 | | | | 5.9 | % | | | 13.2 | | | | 7.1 | % | | | 37.4 | | | | 6.2 | % | | | 35.4 | | | | 7.4 | % | | Restructuring expenses | | | 0.2 | | | | 0.1 | % | | | - | | | | - | | | | 0.7 | | | | 0.1 | % | | | 1.9 | | | | 0.4 | % | | Operating income | | $ | 10.3 | | | | 5.1 | % | | $ | 12.8 | | | | 6.8 | % | | $ | 25.0 | | | | 4.2 | % | | $ | 23.6 | | | | 5.0 | % |
Comparison of Three Months ended December 31, 2021 and 2020
HDE net sales increased $15.2 million, or 8 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to pricing adjustments associated with raw material price increases and higher sales volume. Sales to off-highway and commercial vehicle customers increased $12.3 million and $10.7 million, respectively. Sales to automotive and light vehicle customers decreased $7.7 million.
HDE cost of sales increased $19.0 million, or 12 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher raw material prices, which increased approximately $19.0 million, and to a lesser extent, temporary operating inefficiencies associated with plant consolidation activities in China.higher sales volume. These negative impactsdrivers, which increased cost of sales, were partially offset by benefitsimproved operating efficiencies. While we have provisions within many of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs. As a percentage of sales, cost of sales increased 290 basis points to 88.9 percent, primarily due to the higher material prices.
As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit decreased $3.8 million and gross margin declined 290 basis points to 11.1 percent.
SG&A expenses decreased $1.5 million, or 120 basis points as a percentage of sales, compared with the third quarter of the prior year. The decrease in SG&A expenses was primarily due to lower development costs and environmental charges. These decreases were partially offset by higher compensation-related expenses, which increased approximately $1.0 million.
Restructuring expenses during the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.
Operating income decreased $2.5 million from procurementthe third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower gross profit, partially offset by lower SG&A expenses.
Comparison of Nine Months ended December 31, 2021 and 2020
HDE year-to-date net sales increased $123.7 million, or 26 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, pricing adjustments associated with raw material price increases. HDE sales in fiscal 2021, primarily in the first quarter, were negatively impacted by the COVID-19 pandemic. Sales to commercial vehicle and off-highway customers increased $59.0 million and $57.7 million, respectively.
HDE year-to-date cost of sales increased $121.5 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased approximately $53.0 million. As a percentage of sales, cost of sales increased 230 basis points to 89.5 percent, primarily due to the higher material prices.
As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2 million and gross margin declined 230 basis points to 10.5 percent.
HDE year-to-date SG&A expenses increased $2.0 million, but decreased 120 basis points as a percentage of sales, compared with the same period in the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other cost-reduction initiatives.administrative costs.
Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.
Operating income during the first nine months of fiscal 2022 increased $1.4 million from the same period last year, primarily due to higher gross profit and lower restructuring expenses, partially offset by higher SG&A expenses.
Automotive
| | | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2021 | | | 2020 | | | 2021 | | | 2020 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 72.4 | | | | 100.0 | % | | $ | 113.9 | | | | 100.0 | % | | $ | 224.0 | | | | 100.0 | % | | $ | 285.9 | | | | 100.0 | % | | Cost of sales | | | 64.9 | | | | 89.6 | % | | | 95.5 | | | | 83.9 | % | | | 196.1 | | | | 87.6 | % | | | 246.1 | | | | 86.1 | % | | Gross profit | | | 7.5 | | | | 10.4 | % | | | 18.4 | | | | 16.1 | % | | | 27.9 | | | | 12.4 | % | | | 39.8 | | | | 13.9 | % | | Selling, general and administrative expenses | | | 9.7 | | | | 13.4 | % | | | 8.5 | | | | 7.4 | % | | | 30.1 | | | | 13.4 | % | | | 25.5 | | | | 8.9 | % | | Restructuring expenses | | | - | | | | - | | | | 0.4 | | | | 0.4 | % | | | 0.2 | | | | 0.1 | % | | | 0.6 | | | | 0.2 | % | | Impairment charges (reversals) – net | | | (57.2 | ) | | | -79.0 | % | | | 134.4 | | | | 118.0 | % | | | (56.0 | ) | | | -25.0 | % | | | 134.4 | | | | 47.0 | % | | Operating income (loss) | | $ | 55.0 | | | | 76.0 | % | | $ | (124.9 | ) | | | -109.7 | % | | $ | 53.6 | | | | 24.0 | % | | $ | (120.7 | ) | | | -42.2 | % |
Comparison of Three Months ended December 31, 2021 and 2020
Automotive net sales decreased $41.5 million, or 36 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to the disposition of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market. The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021. Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.
Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume. This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million. As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.
As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.1$10.9 million and gross margin declined 560570 basis points to 9.810.4 percent.
SG&A expenses increased $0.1$1.2 million or 140 basis points as a percentage of sales, compared with the third quarter of the prior year. The increase in SG&A expenses was primarily due to a $0.5higher compensation-related expenses.
During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million unfavorable impact of foreign currency exchange rate changes, partially offset bypreviously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower compensation-related expenses.
Restructuring expensesof their carrying or fair value. The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.
Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million. The operating income and operating loss during the third quarters of fiscal 2022 and 2021 totaled $0.5 million, a decrease of $0.2 millionwere driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business. In addition, as compared with the third quarter of fiscal 2020, and primarily consisted of equipment transfer and plant consolidation costs in China.
The CIS operating loss of $1.7 million represents a $10.0 million decline from the prior-year2021, operating income of $8.3 million and was primarily due tounfavorably impacted by lower gross profit.profit and higher SG&A expenses.
Comparison of Nine Months ended December 31, 20202021 and 20192020
CISAutomotive year-to-date net sales decreased $87.4$61.9 million, or 1822 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes. The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year. Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market. Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.
Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume associated withand lower depreciation expenses, which decreased $9.9 million. We ceased depreciating the impactsproperty, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021. Upon reverting back to held and used classification during the COVID-19 pandemic. In addition, salesthird quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in fiscal 2021 have been negatively impactedthe liquid-cooled automotive business. These decreases were partially offset by lower sales to a significant data center customer. Sales to commercial HVAC&R and data center cooling customers decreased $48.1higher raw material prices, which increased approximately $9.0 million, and $41.1a $5.3 million respectively.
CIS year-to-date cost of sales decreased $64.9 million, or 16 percent, from the same period last year, primarily due to lower sales volume.foreign currency exchange rate changes. As a percentage of sales, cost of sales increased 250150 basis points to 87.7 percent, primarily due to the impact of lower sales volume and unfavorable sales mix, partially offset by cost-reduction and procurement initiatives.87.6 percent.
As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $22.5$11.9 million and gross margin declined 250150 basis points to 12.312.4 percent.
CISAutomotive year-to-date SG&A expenses decreased $3.7increased $4.6 million compared with the priorsame period last year. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $5.0 million, partially offset by a $0.6 million unfavorable impact of foreign currency exchange rate changes.
Restructuring expenses during the first nine months of fiscal 2021 increased $3.1 million compared with the prior year and primarily consisted of severance expenses and equipment transfer costs related to plant consolidation activities in China and targeted headcount reductions in North America.
Operating income decreased $21.9 million to $3.9 million, primarily due to lower gross profit and higher restructuring expenses, partially offset by lower SG&A expenses.
Building HVAC Systems
| | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2020 | | | 2019 | | | 2020 | | | 2019 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 68.7 | | | | 100.0 | % | | $ | 64.9 | | | | 100.0 | % | | $ | 178.2 | | | | 100.0 | % | | $ | 169.9 | | | | 100.0 | % | | Cost of sales | | | 43.0 | | | | 62.7 | % | | | 41.8 | | | | 64.5 | % | | | 116.3 | | | | 65.3 | % | | | 115.4 | | | | 67.9 | % | | Gross profit | | | 25.7 | | | | 37.3 | % | | | 23.1 | | | | 35.5 | % | | | 61.9 | | | | 34.7 | % | | | 54.5 | | | | 32.1 | % | | Selling, general and administrative expenses | | | 9.9 | | | | 14.3 | % | | | 9.6 | | | | 14.7 | % | | | 25.9 | | | | 14.5 | % | | | 26.9 | | | | 15.8 | % | | Operating income | | $ | 15.8 | | | | 23.1 | % | | $ | 13.5 | | | | 20.8 | % | | $ | 36.0 | | | | 20.2 | % | | $ | 27.6 | | | | 16.2 | % |
Comparison of Three Months ended December 31, 2020 and 2019
BHVAC net sales increased $3.8 million, or 6 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021, primarily due to higher sales in the U.S. and the U.K., which both increased approximately $2.0 million. The higher sales in the U.S. were primarily due to higher sales of heating products, partially offset by lower sales of ventilation products. The higher sales in the U.K. were primarily due to higher sales of air conditioning and data center cooling products.
BHVAC cost of sales increased $1.2 million, or 3 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021, primarily due to higher sales volume. As a percentage of sales, cost of sales decreased 180 basis points to 62.7 percent and was positively impacted by favorable customer pricing and sales mix.
As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $2.6 million and gross margin improved 180 basis points to 37.3 percent.
SG&A expenses increased $0.3 million from the prior year, yet decreased 40 basis points as a percentage of sales. The increase in SG&A expenses was primarily due to higher compensation-related expenses, including commission expenses.
Operating income of $15.8 millionwhich increased $2.3 million during the quarter, primarily due to higher gross profit.
Comparison of Nine Months ended December 31, 2020 and 2019
BHVAC year-to-date net sales increased $8.3 million, or 5 percent, from the same period last year, primarily due to higher sales volume. Compared with the first nine months of the prior year, sales increased $9.2 million in the U.K. and decreased $0.9 million in the U.S. The higher sales in the U.K. were primarily due to higher sales of data center products. The lower sales in the U.S. resulted primarily from the negative impacts of the COVID-19 pandemic and decreased sales of ventilation products, partially offset by higher sales of heating products.
BHVAC year-to-date cost of sales increased $0.9 million from the same period last year. As a percentage of sales, cost of sales decreased 260 basis points to 65.3 percent and was positively impacted by favorable customer pricing, sales mix and cost-reduction initiatives.
As a result of higher sales and lower cost of sales as a percentage of sales, gross profit increased $7.4approximately $2.0 million, and gross margin improved 260 basis points to 34.7 percent.
BHVAC year-to-date SG&A expenses decreased $1.0 million, or 130 basis points as a percentage of sales, from the prior year. The decrease in SG&A expenses was primary due to lower travel expenses.
Operating income of $36.0 million increased $8.4 million compared with the same period last year, primarily due to higher gross profit and lower SG&A expenses.
Heavy Duty Equipment
| | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2020 | | | 2019 | | | 2020 | | | 2019 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 185.6 | | | | 100.0 | % | | $ | 164.9 | | | | 100.0 | % | | $ | 474.7 | | | | 100.0 | % | | $ | 568.5 | | | | 100.0 | % | | Cost of sales | | | 159.6 | | | | 86.0 | % | | | 148.1 | | | | 89.8 | % | | | 413.8 | | | | 87.2 | % | | | 496.8 | | | | 87.4 | % | | Gross profit | | | 26.0 | | | | 14.0 | % | | | 16.8 | | | | 10.2 | % | | | 60.9 | | | | 12.8 | % | | | 71.7 | | | | 12.6 | % | | Selling, general and administrative expenses | | | 13.2 | | | | 7.1 | % | | | 12.6 | | | | 7.7 | % | | | 35.4 | | | | 7.4 | % | | | 42.3 | | | | 7.4 | % | | Restructuring expenses | | | - | | | | - | | | | 1.4 | | | | 0.8 | % | | | 1.9 | | | | 0.4 | % | | | 2.2 | | | | 0.4 | % | | Operating income | | $ | 12.8 | | | | 6.8 | % | | $ | 2.8 | | | | 1.7 | % | | $ | 23.6 | | | | 5.0 | % | | $ | 27.2 | | | | 4.8 | % |
Comparison of Three Months ended December 31, 2020 and 2019
HDE net sales increased $20.7 million, or 13 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021, primarily due to higher sales volume to global off-highway customers. Sales to off-highway and commercial vehicle customers increased $16.7 million and $3.8 million, respectively. Geographically, sales increased most significantly in Asia.
HDE cost of sales increased $11.5 million, or 8 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021, primarily due to higher sales volume. As a percentage of sales, cost of sales decreased 380 basis points to 86.0 percent and was favorably impacted by the higher sales volume, cost savings from procurement and other cost-reduction initiatives, and, to a lesser extent, improved operating efficiencies.
As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $9.2 million and gross margin improved 380 basis points to 14.0 percent.
SG&A expenses increased $0.6 million, yet decreased 60 basis points as a percentage of sales, compared with the third quarter of the prior year. The increase in SG&A expenses was primarily due to environmental charges related to a previously-owned U.S. manufacturing facility, which increased $0.4 million.
Restructuring expenses decreased $1.4 million compared with the third quarter of fiscal 2020, primarily due to lower severance expenses related to targeted headcount reductions.
Operating income of $12.8 million increased $10.0 million during the quarter, primarily due to higher gross profit and lower restructuring expenses.
Comparison of Nine Months ended September 30, 2020 and 2019
HDE year-to-date net sales decreased $93.8 million, or 16 percent, from the same period last year, primarily due to lower sales volume resulting from the impacts of the COVID-19 pandemic, which were most severe in the Americas and Europe during the first half of the fiscal year. Sales to commercial vehicle and automotive and light vehicle customers decreased $57.2 million and $15.2 million, respectively.
HDE year-to-date cost of sales decreased $83.0 million, or 17 percent, primarily due to lower sales volume. As a percentage of sales, cost of sales decreased 20 basis points to 87.2 percent. The significant unfavorable impact of the lower sales volume was more than offset by favorable impacts from improved operating efficiencies and cost savings from procurement and other cost-reduction initiatives.
As a result of the lower sales and lower cost of sales as a percentage of sales, gross profit decreased $10.8 million and gross margin improved 20 basis points to 12.8 percent.
HDE year-to-date SG&A expenses decreased $6.9 million from the prior year. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $6.0 million, and cost-reduction initiatives, including lower travel expenses.
Restructuring expenses during the first nine months of fiscal 2021 totaled $1.9 million, a decrease of $0.3 million compared with the same period last year, and primarily consisted of severance expenses resulting from targeted headcount reductions in North America.
Operating income of $23.6 million decreased $3.6 million compared with the same period last year, primarily due to lower gross profit, partially offset by lower SG&A expenses.
Automotive
| | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2020 | | | 2019 | | | 2020 | | | 2019 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 113.9 | | | | 100.0 | % | | $ | 110.5 | | | | 100.0 | % | | $ | 285.9 | | | | 100.0 | % | | $ | 339.8 | | | | 100.0 | % | | Cost of sales | | | 95.5 | | | | 83.9 | % | | | 98.3 | | | | 89.0 | % | | | 246.1 | | | | 86.1 | % | | | 302.1 | | | | 88.9 | % | | Gross profit | | | 18.4 | | | | 16.1 | % | | | 12.2 | | | | 11.0 | % | | | 39.8 | | | | 13.9 | % | | | 37.7 | | | | 11.1 | % | | Selling, general and administrative expenses | | | 8.5 | | | | 7.4 | % | | | 11.2 | | | | 10.2 | % | | | 25.5 | | | | 8.9 | % | | | 33.6 | | | | 9.9 | % | | Restructuring expenses | | | 0.4 | | | | 0.4 | % | | | 0.2 | | | | 0.2 | % | | | 0.6 | | | | 0.2 | % | | | 2.9 | | | | 0.8 | % | | Impairment charges | | | 134.4 | | | | 118.0 | % | | | - | | | | - | | | | 134.4 | | | | 47.0 | % | | | - | | | | - | | | Gain on sale of assets | | | - | | | | - | | | | (0.8 | ) | | | -0.8 | % | | | - | | | | - | | | | (0.8 | ) | | | -0.2 | % | | Operating (loss) income | | $ | (124.9 | ) | | | -109.7 | % | | $ | 1.6 | | | | 1.4 | % | | $ | (120.7 | ) | | | -42.2 | % | | $ | 2.0 | | | | 0.6 | % |
Comparison of Three Months ended December 31, 2020 and 2019
Automotive net sales increased $3.4 million, or 3 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021, primarily due to a $6.7 million favorable impact of foreign currency exchange rate changes, partially offset by lower sales volume. Compared with the prior year, sales increased $3.8 million and $2.0 million in Europe and Asia, respectively, and decreased $2.4 million in the Americas.
Automotive cost of sales decreased $2.8 million, or 3 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021. As a percentage of sales, cost of sales decreased 510 basis points to 83.9 percent. Compared with the prior year, cost of sales was favorably impacted by lower depreciation expenses, which decreased approximately $3.0 million, cost savings from procurement and other cost-reduction initiatives, and improved operating efficiencies. The lower depreciation expenses resulted from the Company ceasing depreciation of the long-lived assets within the liquid-cooled automotive business when it was classified as held for sale in November 2020. Foreign currency exchange rate changes negatively impacted cost of sales by $5.7 million.
As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $6.2 million and gross margin improved 510 basis points to 16.1 percent.
SG&A expenses decreased $2.7 million compared with the third quarter of the prior year. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $2.0 million.
Restructuring expenses during the third quarter of fiscal 2021 totaled $0.4 million and primarily consisted of severance expenses resulting from targeted headcount reductions in Europe.
Impairment charges during the third quarter of fiscal 2021 totaled $134.4 million and primarily related to assets in the liquid-cooled automotive business. Upon classifying this business as held for sale during the third quarter, we identified an implied loss in excess of the carrying value of its long-lived assets. Accordingly, we reduced the liquid-cooled automotive business’s long-lived assets, primarily property, plant and equipment, to zero.
During the third quarter of fiscal 2020, we completed the sale of a previously-closed manufacturing facility in Germany and, as a result, recorded a gain of $0.8 million.
The Automotive operating loss of $124.9 million in the third quarter of fiscal 2021, as compared with operating income of $1.6 million in the third quarter of the prior year, was significantly impacted by the large impairment charges associated with the liquid-cooled automotive business and, to a much lesser extent, higher gross profit and lower SG&A expenses.
Comparison of Nine Months ended December 31, 2020 and 2019
Automotive year-to-date net sales decreased $53.9 million, or 16 percent, from the same period last year, primarily due to lower sales volume largely resulting from the impacts of the COVID-19 pandemic, partially offset by a $9.7 million favorable impact of foreign currency exchange rate changes. Sales in Europe and North America decreased $46.8 million and $13.0 million, respectively. Sales in Asia increased $5.9 million.
Automotive year-to-date cost of sales decreased $56.0 million, or 19 percent, from the prior year, primarily due to lower sales volume, partially offset by an $8.2$0.7 million unfavorable impact of foreign currency exchange rate changes. As a percentage
The year-to-date net impairment reversal of sales, cost$56.0 million primarily related to assets in our liquid-cooled automotive business. The $57.2 million impairment reversal during the third quarter of sales decreased 280 basis points to 86.1 percent andfiscal 2022 was favorably impacted by improved operating efficiencies, cost savings from procurement initiatives, and lower depreciation expenses of approximately $4.0 million, partially offset by the unfavorable impact$1.2 million of lower sales volume.
As a result of the lower sales and lower cost of sales as a percentage of sales, gross profit increased $2.1 million and gross margin improved 280 basis points to 13.9 percent.
Automotive year-to-date SG&A expenses decreased $8.1 million compared with the prior year. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $8.0 million.
Restructuring expensesnet impairment charges recorded during the first ninesix months of fiscal 2021 totaled $0.62022. During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’s held for sale assets. These impairment charges were partially offset by a decrease of $2.3$7.4 million compared withimpairment reversal related to certain manufacturing operations that no longer met the same periodrequirements to be classified as held for sale due to a modification in the prior year. The decrease was primarily driven by lower severance expenses in Europe resulting from fewer targeted headcount reductions.
sale perimeter during the first quarter of fiscal 2022.
The Automotive operating loss37
Operating income of $53.6 million during the first nine months of fiscal 2021, as compared with2022 represents a $174.3 million improvement from the operating incomeloss of $2.0$120.7 million duringin the same period last year, was significantly impactedyear. The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the largesignificant impairment reversal and impairment charges, associated withrespectively, related to the liquid-cooled automotive business duringbusiness. In addition, as compared with the third quarterfirst nine months of fiscal 2021, and, to a much lesser extent, higheryear-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profit and lowerhigher SG&A expenses and restructuring charges.expenses.
Liquidity and Capital Resources
Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $72.9$61.1 million as of December 31, 2020,2021 and an available borrowing capacity of $213.6$163.1 million under our revolving credit facility. Given our extensive international operations, approximately $59.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries. Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.
In response to the COVID-19 pandemic, we have taken actions to reduce operating and administrative expenses, conserve cash and maximize liquidity. In addition, as described below, we have focused on reducing our capital expenditures and executed amendments to our primary credit agreements to provide financial covenant flexibility during fiscal 2021 and 2022. We believe our sources of liquidity including cash flow from operations, our cash and cash equivalents, and access to both committed and uncommitted credit facilities, will provide sufficient cash flow to meetadequately cover our obligations during the next twelve monthsfunding needs on both a short-term and beyond. However, we are continuing to monitor the impacts of COVID-19 on our business and the credit and financial markets.long-term basis.
Net Cash Provided by Operating Activities Net cash provided by operating activities for the nine months ended December 31, 20202021 was $146.5$7.4 million, which represents a $100.6$139.1 million increasedecrease compared with the same period in the prior year. This increasedecrease in operating cash flow was primarily due to favorableunfavorable net changes in working capital, including higher inventory levels and lowerhigher payments for separationincentive compensation and project costs associated with our review of strategic alternatives for the automotive businesses. The favorable changes in working capital during the first nine months of fiscal 2021,employee benefits as compared with the same period in the prior year, included loweryear. Inventory, including amounts held for sale, increased $57.8 million from March 31, 2021 to December 31, 2021. The higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and lower payments for incentive compensation, employee benefits, income taxesstrategic safety stock builds in connection with global supply chain constraints 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.challenges.
Capital Expenditures Capital expenditures of $30.7 million during the first nine months of fiscal 2022 increased $7.0 million compared with the same period in the prior year. In response to the economic impacts of the COVID-19 pandemic,fiscal 2021, we have been focused on reducing our capital expenditures and, where possible, have delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in our vehicular businesses. Capital expenditures of $23.7 million duringresponse to the first nine months of fiscal 2021 decreased $34.5 million compared with the same period in the prior year.COVID-19 pandemic.
Debt Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below. Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales. In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.
In May 2020, we executed amendments to our primary credit agreements in the U.S. to provide additional covenant flexibility in light of the risks and uncertainties associated with the COVID-19 pandemic. Under the amended agreements, the leverage ratio covenant limit has been temporarily raised. The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, in relation to ourno more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”). The leverage ratio covenant limit is 5.75 to 1 for the fourth quarter of fiscal 2021. In fiscal 2022, the leverage ratio covenant limit is 4.75 to 1, 3.75 to 1, and 3.50 to 1 for the first, second and third quarters, respectively, and subsequently returns to 3.25 to 1 for the fourth quarter of fiscal 2022. We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.
As of December 31, 2020, we were in compliance with our debt covenants;2021, our leverage ratio and interest coverage ratio were 1.92.5 and 8.7,10.0, respectively. We expect to remain in compliance with our debt covenants during fiscal 2021,the remainder of fiscal 2022 and beyond.
Share Repurchase Program
On November 5, 2020, we announced our Board of Directors approved a two-year, $50.0 million share repurchase program, which allows us to repurchase shares of our common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as we deem appropriate. To date, we have not repurchased shares under this program. Our decision whether and to what extent to repurchase shares under this program will depend on a number of factors, including business conditions, other cash priorities, and stock price.
Forward-Looking Statements
This report, including, but not limited to, the discussion under Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains statements, including information about future financial performance, accompanied by phrases such as “believes,” “estimates,” “expects,” “plans,” “anticipates,” “intends,” and other similar “forward-looking” statements, as defined in the Private Securities Litigation Reform Act of 1995. Modine’s actual results, performance or achievements may differ materially from those expressed or implied in these statements, because of certain risks and uncertainties, including, but not limited to, those described under “Risk Factors” in Item 1A. in Part I. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2020.2021. Other risks and uncertainties include, but are not limited to, the following:
Market Risks:
The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees;
Economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including, in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; 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 or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade, the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the short- and long-term implications of “Brexit”;
The impact of potential price increases associated with raw materials, including aluminum, copper, steel and stainless steel (nickel), and other purchased componentscomponent inventory including, but not limited to, increases in the underlying material cost based upon the London Metal Exchange and related premiums, fabrication, or fabricationfreight costs. These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand. This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whether through our quotation process or through contract provisions for prospective price adjustments, as well as the inherent lag in timing of such contract provisions; and
The impact of current and future environmental laws and regulations on our business and the businesses of our customers, including our ability to take advantage of opportunities to supply alternative new technologies to meet environmental and/or energy standards and objectives.
Operational Risks:
The overall health and continually increasing price-down focus of our vehicular customers in light of economic and market-specific factors, the concentration of sales within our CIS segment attributable to one customer, and the potential impact on us from any deterioration in the stability or performance of any of our major customers;
The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our time, quantity, quality, price and pricetiming demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;
Our ability to maintain current customer programsrelationships and compete effectively for new business, including our ability to offset or otherwise address increasing pricing pressures from competitors and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;
The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims and delays or inefficiencies resulting from restrictions imposed in response to the COVID-19 pandemic;
The impact of any delays or modifications initiated by major customers with respect to program launches, product applications or requirements;
| • | The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages; |
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 reducemodify our cost structure in response to sales volume declinesincreases or decreases and to complete restructuring activities and realize the anticipated benefits of those activities;
Costs and other effects of the investigation and remediation of environmental contamination,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, operational and administrative functions, in light of tight global labor markets;
Our ability to protect our proprietary information and intellectual property from theft or attack by internal or external sources;
The impact of any substantial disruption or material breach of our information technology systems, and any related delays, problems or costs;
Increasingly complex and restrictive laws and regulations, including those associated with being a U.S. public company and others present in various jurisdictions in which we operate, and the costs associated with compliance therewith;
Work stoppages or interference at our facilities or those of our major customers and/or suppliers;
The constant and increasing pressures associated with healthcare and associated insurance costs; and
Costs and other effects of litigation, claims, or other obligations.
Strategic Risks:
Our ability to successfully complete the pending sale of our liquid-cooled automotive business, including the receipt of governmental and third-party approvals and satisfaction of other closing conditions, and our ability to successfully exit our other automotive businesses in a manner that is in the best interest of our shareholders;
| • | Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers; |
Our ability to successfully realize anticipated benefits fromidentify and execute strategies in our increased “industrial” market presence, with our CISautomotive businesses to reduce costs and BHVAC businesses, while maintaining appropriate focus on the market opportunities presented by our HDE and Automotive businesses;improve operating margins;
Our ability to identify and execute growth and diversification opportunities in order to position us for long-term success; and
The potential impacts from any actions by activist shareholders, including disruption of our business and related costs.
Financial Risks:
Our ability to fund our global liquidity requirements efficiently for Modine’s current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;
The impact of potential increases in interest rates, particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations, andobligations;
The impact of changes in federal, state or local tax regulations that could have the continued uncertainty around the utilizationeffect of LIBOR or alternative reference rates;increasing our income tax expense;
Our ability to comply with the financial covenants as amended, in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);
The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and
Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.
Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2020.2021. The Company’s market risks have not materially changed since the fiscal 20202021 Form 10-K was filed.
| Item 4. | Controls and Procedures. |
Evaluation Regarding Disclosure Controls and Procedures
As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Finance and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Finance and Chief Financial Officer have concluded that the design and operation of the Company’sCompany’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2020.2021.
Changes in Internal Control Over Financial Reporting
There have been no changes in internal control over financial reporting during the third quarter of fiscal 20212022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
ISSUER PURCHASES OF EQUITY SECURITIES
The following describes the Company’s purchases of common stock during the third quarter of fiscal 2022: Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (a) | | October 1 – October 31, 2021 | 36,644 (b)
| $11.94 | _______
| $50,000,000 | | | | | | | | November 1 – November 30, 2021 | _______
| _______
| _______
| 50,000,000 | | | | | | | | December 1 – December 31, 2021 | 4,189 (b)
| $10.20 | _______
| 50,000,000 | | | | | | | | Total | 40,833 (b)
| $11.76 | _______
| |
| (a) | Effective November 5, 2020, the Board of Directors approved a two-year, $50.0 million share repurchase program, which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate. |
| (b) | Consists of shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards. The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions. These shares are held as treasury shares. |
| Item 5. | Other Information. |
The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.
| Exhibit No. | Description | | Incorporated Herein By Reference To | Filed Herewith | | | | | | | | Securities and Asset PurchaseTermination Agreement dated as of November 2, 2020, by and between the Company and Dana Incorporated, dated as of October 25, 2021. | | Exhibit 2.1 to Registrant’s Current Report on Form 8-K dated November 2, 2020October 25, 2021 | | | | | | | | | [Corrected] OfferSeparation Letter dated as of November 10, 2020, by andAgreement between the Company and Mr. BrinkerJoel T. Casterton, dated as of October 25, 2021. | | | X | | | | | | | | FormSeparation Letter Agreement between the Company and Matthew J. McBurney, dated as of Make-Whole RSU Award Agreement with Neil Brinker | | | X | | | | | | | Form of Make-Whole Performance Cash Award Agreement with Neil BrinkerOctober 30, 2021. | | | X | | | | | | | | Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer. | | | X | | | | | | | | Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Finance and Chief Financial Officer. | | | X | | | | | | | | Section 1350 Certification of Neil D. Brinker, President and Chief Executive Officer. | | | X | | | | | | | | Section 1350 Certification of Michael B. Lucareli, Executive Vice President, Finance and Chief Financial Officer. | | | X | | | | | | | | 101.INS | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). | | | X | | | | | | | | 101.SCH | Inline XBRL Taxonomy Extension SchemaSchema. | | | X | | | | | | | | 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase DocumentDocument. | | | X | | | | | | | | 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase DocumentDocument. | | | X | | | | | | | 101.LAB10.1.LAB | Inline XBRL Taxonomy Extension Label Linkbase DocumentDocument. | | | X | | | | | | | 101.PRE10.1.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase DocumentDocument. | | | X | | | | | | | | 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101). | | | X |
* Schedules and similar attachments have been omitted pursuant to Item 601(b)(2) of Regulation S-K because they are not material and would likely cause competitive harm to the Company if publicly disclosed.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
MODINE MANUFACTURING COMPANY (Registrant)
By: /s/ Michael B. Lucareli Michael B. Lucareli, Executive Vice President, Finance and Chief Financial Officer*
Date: February 5, 20213, 2022
* Executing as both the principal financial officer and a duly authorized officer of the Company
s | | | % of sales | | |
Comparison of Three Months ended December 31, 20202021 and 20192020
Third quarter net sales of $484.3$502.2 million were $10.9$17.9 million, or 24 percent, higher than the third quarter of the prior year, primarily due to higher sales volume and favorable pricing adjustments in response to raw material price increases in our CIS, BHVAC, and HDE segments, partially offset by lower sales volume in our Automotive segment. Sales in the CIS, BHVAC, and HDE segments increased $23.7 million, $16.9 million, and $15.2 million, respectively. Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.
Third quarter cost of sales increased $26.0 million, or 6 percent, primarily due to higher raw material prices, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, segments and an $11.2 million favorable impactHDE segments. These drivers, which increased cost of foreign currency exchange rate changes,sales, were partially offset by lower sales volume in the CISAutomotive segment and Automotive segments. Sales in the HDE, BHVAC, and Automotive segments increased $20.7 million, $3.8 million, and $3.4 million, respectively. CIS segment sales decreased $18.5 million.
Third quarter cost of sales increased $1.7 million.improved operating efficiencies. As a percentage of sales, cost of sales decreased 160increased 220 basis points to 82.985.1 percent. The increase in cost of sales was primarily due to a $9.7 million unfavorable impact of foreign currency exchange rate changes, partially offset by the favorable impacts of procurement and other cost-reduction initiatives and a $3.0 million decrease in depreciation expense in the Automotive segment. In addition, program and equipment transfer costs to prepare the liquid-cooled automotive business for sale decreased approximately $1.0 million compared with the prior year.
As a result of higher sales and lowerhigher cost of sales as a percentage of sales, third quarter gross profit increased $9.2decreased $8.1 million and gross margin improved 160declined 220 basis points to 17.114.9 percent.
Third quarter SG&A expenses decreased $7.4 million. The decrease in SG&A expenses was primarily due to$5.8 million, primary driven by $2.6 million of lower costs recorded at Corporate associated withrelated to our review of strategic alternatives for the Automotive segment’s business operations,segment businesses and lower compensation-related expenses, which decreased approximately $10.0$2.0 million. This favorable driver was partially offset by a $1.0 million unfavorable impact of foreign currency exchange rate changes and higher environmental chargesThe lower compensation-related expenses were primarily due to lower incentive compensation expenses at Corporate in the HDE segment.current year.
Restructuring expenses of $0.9 million during the third quarter of fiscal 2021 decreased $1.7 million, primarily due to lower restructuring expenses in the HDE segment.
Impairment charges of $134.4$2.1 million in the third quarter of fiscal 2021 primarily related to the write-down of the long-lived assets in the Automotive segment’s liquid-cooled automotive business in connection2022 increased $1.2 million compared with the pending sale of that business.
The operating loss of $108.7 million represents a $116.9 million decline from the prior-year operating income of $8.2 million. The decline was primarily due to the $134.4 million of impairment charges recorded in the Automotive segment and lower earnings in the CIS segment. These negative drivers were partially offset by higher earnings in our HDE and BHVAC segments.
Interest expense decreased $1.0 million, or 18 percent, during the third quarter of fiscal 2021, primarily due to higher severance expenses in the CIS segment.
During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower outstanding long-term debtof their carrying or fair value. During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale, we recorded $134.4 million of impairment charges and reduced the carrying value of the disposal group’s long-lived assets to zero.
Operating income of $79.4 million in the third quarter of fiscal 2022 represents a lesser extent,$188.1 million improvement from the prior-year operating loss of $108.7 million. The operating income and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment. In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.
Interest expense in the third quarter of fiscal 2022 decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorable changes in interest rates.
The provision for income taxes was $81.6$0.1 million and $1.7$81.6 million in the third quarter of fiscal 20212022 and 2020,2021, respectively. The $79.9$81.5 million increasedecrease was primarily due to the absence of $109.9 million of income tax charges totaling $116.5 million recorded in the third quarter of fiscal 2021prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions. These drivers, which decreased the provision for income taxes, were partially offset by the absence of $37.7 million of income tax benefits totaling $37.7 millionrecorded during the prior year related to the Automotive segment impairment charges recorded earlier in the third quarter of fiscal 2021.charges.
Comparison of Nine Months ended December 31, 20202021 and 20192020
Fiscal 20212022 year-to-date net sales of $1,293.5$1,475.7 million were $209.1$182.2 million, or 14 percent, lowerhigher than the same period last year, primarily due to lowerhigher sales volumes and favorable pricing adjustments in response to raw material price increases in our HDE, CIS, and AutomotiveBHVAC segments. Sales in these segments decreased $93.8increased $123.7 million, $87.4$86.6 million, and $53.9$38.4 million, respectively, and were significantly impacted by market-driven volume declines and temporary plant closures earlier in the fiscal year due to the COVID-19 pandemic. BHVACrespectively. Automotive segment sales increased $8.3decreased $61.9 million.
Fiscal 20212022 year-to-date cost of sales of $1,083.9$1,261.6 million decreased $186.1increased $177.7 million, or 1516 percent, primarily due to lowerhigher raw material prices, which increased approximately $117.0 million, and higher sales volume. In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic. These factors, which caused an increase in cost of sales compared with the same period in the prior year, were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies. As a percentage of sales, cost of sales improved 70increased 170 basis points to 83.885.5 percent. The unfavorable impact of lower sales volume was more than offset by the benefits of cost-reduction initiatives implemented earlier in the fiscal year in response to lower end market demand and procurement initiatives.
As a result of lowerhigher sales and lowerhigher cost of sales as a percentage of sales, fiscal 2021 year-to-date gross profit decreased $23.0increased $4.5 million and gross margin improved 70declined 170 basis points to 16.214.5 percent.
Fiscal 20212022 year-to-date SG&A expenses decreased $42.8increased $10.0 million. The decreaseincrease in SG&A expenses was primarily due to higher compensation-related expenses, as the prior year was favorably impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19. In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million. These increases were partially offset by lower strategic reorganization costs and lower costs recorded at Corporate associated withrelated to our review of strategic alternatives for the Automotive segment’s business operations,segment businesses, which decreased approximately $29.0$2.8 million and $1.3 million, respectively. The lower compensation-relatedstrategic reorganization costs primarily resulted from lower severance expenses which decreased approximately $18.0 million. These favorable drivers were partially offset by $5.9 million of costs recorded at Corporate in connection with Mr. Burke stepping down from his position as President and CEO and the search for his successor.executive management positions.
Restructuring expenses of $7.0$3.0 million duringin the first nine months of fiscal 2021 increased $0.32022 decreased $4.0 million compared with the same period last year, primarily due to higher restructuringlower severance expenses in the CIS segment, partially offset by lower restructuring expenses in the Automotive segment.and HDE segments.
The fiscal 2021 year-to-date operating lossnet impairment reversals of $83.4$55.7 million represents a $115.7 million decline from the prior-year operating income of $32.3 million. The decline was primarily due to the $134.4 million of impairment charges recorded in the Automotive segment and lower earnings in our CIS and HDE segments. These negative drivers were partially offset by lower SG&A expenses at Corporate and higher earnings in our BHVAC segment.
Interest expense decreased $2.1 million, or 12 percent, during the first nine months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment. In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale. In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.
We sold our air-cooled automotive business on April 30, 2021. As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.
Operating income of $98.6 million during the first nine months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million. The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business. In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses. Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.
Interest expense during the first nine months of fiscal 2022 decreased $3.4 million compared with the same period last year, primarily due to lower outstanding long-term debt and favorable changes in interest rates.rates and lower debt outstanding during the current-year.
The provision for income taxes was $95.3$7.4 million and $8.3$95.3 million during the first nine months of fiscal 20212022 and 2020,2021, respectively. The $87.0$87.9 million increasedecrease was primarily due to the absence of $116.5 million of income tax charges totaling $123.1 million recorded duringin the first nine months of fiscal 2021prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions. These drivers, which decreased the provision for income taxes, were partially offset by the absence of $37.7 million of income tax benefits totaling $37.7 millionrecorded during the prior year related to the Automotive segment impairment charges recorded during fiscal 2021.charges.
SEGMENT RESULTS OF OPERATIONS
Effective AprilJuly 1, 2020,2021, we began managingaligned the data center businesses previously managed by and reported within the CIS segment under the BHVAC segment. The BHVAC segment assumed management of our global automotive business separate fromin Guadalajara, Spain and a portion of our business in Grenada, Mississippi. Through this segment change, we have aligned our data center businesses under the otherBHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies. As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the previously-reported Vehicular Thermal Solutions (“VTS”)BHVAC segment. We have been managing the automotive business as the Automotive segment as we target the sale or eventual exit of its underlying automotive business operations. We are managing the other businesses of the VTS segment, including the commercial vehicle and off-highway businesses, as the Heavy Duty Equipment segment. We began reporting financial results for our new segment structure beginning for fiscal 2021. Segment financial information for fiscal 2020 has been recast to conform to the fiscal 2021 presentation. The segment realignment had no impact on the CISHDE and BHVAC segments.Automotive segments or on our consolidated financial position, results of operations, and cash flows. Segment financial information for the prior periods has been recast to conform to the current presentation.
As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment. While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment. See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.
The following is a discussion of our segment results of operations for the three months and nine months ended December 31, 20202021 and 2019:2020:
Commercial and Industrial SolutionsBuilding HVAC Systems
| | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2020 | | | 2019 | | | 2020 | | | 2019 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 129.0 | | | | 100.0 | % | | $ | 147.5 | | | | 100.0 | % | | $ | 385.6 | | | | 100.0 | % | | $ | 473.0 | | | | 100.0 | % | | Cost of sales | | | 116.4 | | | | 90.2 | % | | | 124.8 | | | | 84.6 | % | | | 338.2 | | | | 87.7 | % | | | 403.1 | | | | 85.2 | % | | Gross profit | | | 12.6 | | | | 9.8 | % | | | 22.7 | | | | 15.4 | % | | | 47.4 | | | | 12.3 | % | | | 69.9 | | | | 14.8 | % | | Selling, general and administrative expenses | | | 13.8 | | | | 10.7 | % | | | 13.7 | | | | 9.3 | % | | | 39.1 | | | | 10.2 | % | | | 42.8 | | | | 9.1 | % | | Restructuring expenses | | | 0.5 | | | | 0.4 | % | | | 0.7 | | | | 0.5 | % | | | 4.4 | | | | 1.1 | % | | | 1.3 | | | | 0.3 | % | | Operating (loss) income | | $ | (1.7 | ) | | | -1.3 | % | | $ | 8.3 | | | | 5.6 | % | | $ | 3.9 | | | | 1.0 | % | | $ | 25.8 | | | | 5.4 | % |
| | | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2021 | | | 2020 | | | 2021 | | | 2020 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 90.6 | | | | 100.0 | % | | $ | 73.7 | | | | 100.0 | % | | $ | 234.7 | | | | 100.0 | % | | $ | 196.3 | | | | 100.0 | % | | Cost of sales | | | 63.2 | | | | 69.7 | % | | | 48.3 | | | | 65.5 | % | | | 169.5 | | | | 72.2 | % | | | 131.8 | | | | 67.1 | % | | Gross profit | | | 27.4 | | | | 30.3 | % | | | 25.4 | | | | 34.5 | % | | | 65.2 | | | | 27.8 | % | | | 64.5 | | | | 32.9 | % | | Selling, general and administrative expenses | | | 13.0 | | | | 14.4 | % | | | 10.5 | | | | 14.3 | % | | | 35.1 | | | | 15.0 | % | | | 28.9 | | | | 14.8 | % | | Operating income | | $ | 14.4 | | | | 15.9 | % | | $ | 14.9 | | | | 20.1 | % | | $ | 30.1 | | | | 12.8 | % | | $ | 35.6 | | | | 18.1 | % |
Comparison of Three Months ended December 31, 20202021 and 20192020
CISBHVAC net sales decreased $18.5increased $16.9 million, or 1323 percent, from the third quarter of fiscal 20202021 to the third quarter of fiscal 2021,2022, primarily due to lowerhigher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases. Compared with the third quarter of the prior year, BHVAC sales to data center coolingcustomers increased $11.6 million. In addition, sales to commercial HVAC customers increased $5.2 million, primarily due to higher sales of ventilation and heating products in North America.
BHVAC cost of sales increased $14.9 million, or 31 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs. As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.
As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent. While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.
SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.
Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.
Comparison of Nine Months ended December 31, 2021 and 2020
BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a $4.5lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7 million favorable impact of foreign currency exchange rate changes.rates. Sales to data center coolingcommercial HVAC customers decreased $18.4increased $24.5 million, primarily due to lowerhigher sales of heating and air conditioning products. In addition, sales to one individual customer.data center customers increased $13.0 million.
CISBHVAC year-to-date cost of sales decreased $8.4increased $37.7 million, or 729 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021,same period last year, primarily due to lowerhigher sales volume partially offsetand higher raw material prices, which increased by a $4.2approximately $12.0 million. In addition, cost of sales was unfavorably impacted by $4.8 million unfavorable impact offrom foreign currency exchange rate changes. As a percentage of sales, cost of sales increased 560510 basis points to 90.272.2 percent, primarily due to the impacthigher material costs.
As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.
BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.
Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.
Commercial and Industrial Solutions
| | | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2021 | | | 2020 | | | 2021 | | | 2020 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 148.6 | | | | 100.0 | % | | $ | 124.9 | | | | 100.0 | % | | $ | 456.2 | | | | 100.0 | % | | $ | 369.6 | | | | 100.0 | % | | Cost of sales | | | 130.9 | | | | 88.1 | % | | | 112.0 | | | | 89.7 | % | | | 399.4 | | | | 87.5 | % | | | 324.8 | | | | 87.9 | % | | Gross profit | | | 17.7 | | | | 11.9 | % | | | 12.9 | | | | 10.3 | % | | | 56.8 | | | | 12.5 | % | | | 44.8 | | | | 12.1 | % | | Selling, general and administrative expenses | | | 12.4 | | | | 8.4 | % | | | 13.1 | | | | 10.4 | % | | | 37.7 | | | | 8.3 | % | | | 36.0 | | | | 9.7 | % | | Restructuring expenses | | | 1.9 | | | | 1.3 | % | | | 0.5 | | | | 0.4 | % | | | 2.1 | | | | 0.5 | % | | | 4.4 | | | | 1.2 | % | | Impairment charge | | | - | | | | - | | | | - | | | | - | | | | 0.3 | | | | 0.1 | % | | | - | | | | - | | | Operating income (loss) | | $ | 3.4 | | | | 2.2 | % | | $ | (0.7 | ) | | | -0.5 | % | | $ | 16.7 | | | | 3.6 | % | | $ | 4.4 | | | | 1.2 | % |
Comparison of Three Months ended December 31, 2021 and 2020
CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume unfavorableand favorable product pricing adjustments in response to raw material price increases. Compared with the third quarter of the prior year, sales mix,to commercial HVAC&R customers increased $24.5 million.
CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million. As a percentage of sales, cost of sales decreased 160 basis points to 88.1 percent, primarily due to the favorable impacts of the higher sales volume and improved operating efficiencies, partially offset by higher material costs.
As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8 million and gross margin improved 160 basis points to 11.9 percent.
SG&A expenses decreased $0.7 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.
Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses. The severance expenses in the third quarter of fiscal 2022 primarily related to targeted headcount reductions in Europe and China.
Operating income of $3.4 million represents a $4.1 million improvement from the prior-year operating loss of $0.7 million and was primarily due to higher gross profit.
Comparison of Nine Months ended December 31, 2021 and 2020
CIS year-to-date net sales increased $86.6 million, or 23 percent, from the same period last year, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases. In addition, sales were favorably impacted by $5.7 million from foreign currency exchange rates. The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year. Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, compared with the same period in the prior year.
CIS year-to-date cost of sales increased $74.6 million, or 23 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0 million. In addition, cost of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes. As a percentage of sales, cost of sales decreased 40 basis points to 87.5 percent, primarily due to the favorable impacts of the higher sales volume and improved operating efficiencies, partially offset by higher material costs.
As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0 million and gross margin improved 40 basis points to 12.5 percent.
CIS year-to-date SG&A expenses increased $1.7 million, yet decreased 140 basis points as a percentage of sales, from the same period last year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.
Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3 million from the same period last year, primarily due to lower severance expenses. The severance expenses during the first nine months of fiscal 2022 primarily related to targeted headcount reductions in Europe and China. The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.
During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write down a previously-closed manufacturing facility in the U.S to fair value less costs to sell. We sold the facility and received net cash proceeds of $0.7 million during July 2021.
Operating income during the first nine months of fiscal 2022 increased $12.3 million from the same period last year, primarily due to higher gross profit and lower restructuring expenses, partially offset by higher SG&A expenses.
Heavy Duty Equipment
| | | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2021 | | | 2020 | | | 2021 | | | 2020 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 200.8 | | | | 100.0 | % | | $ | 185.6 | | | | 100.0 | % | | $ | 598.4 | | | | 100.0 | % | | $ | 474.7 | | | | 100.0 | % | | Cost of sales | | | 178.6 | | | | 88.9 | % | | | 159.6 | | | | 86.0 | % | | | 535.3 | | | | 89.5 | % | | | 413.8 | | | | 87.2 | % | | Gross profit | | | 22.2 | | | | 11.1 | % | | | 26.0 | | | | 14.0 | % | | | 63.1 | | | | 10.5 | % | | | 60.9 | | | | 12.8 | % | | Selling, general and administrative expenses | | | 11.7 | | | | 5.9 | % | | | 13.2 | | | | 7.1 | % | | | 37.4 | | | | 6.2 | % | | | 35.4 | | | | 7.4 | % | | Restructuring expenses | | | 0.2 | | | | 0.1 | % | | | - | | | | - | | | | 0.7 | | | | 0.1 | % | | | 1.9 | | | | 0.4 | % | | Operating income | | $ | 10.3 | | | | 5.1 | % | | $ | 12.8 | | | | 6.8 | % | | $ | 25.0 | | | | 4.2 | % | | $ | 23.6 | | | | 5.0 | % |
Comparison of Three Months ended December 31, 2021 and 2020
HDE net sales increased $15.2 million, or 8 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to pricing adjustments associated with raw material price increases and higher sales volume. Sales to off-highway and commercial vehicle customers increased $12.3 million and $10.7 million, respectively. Sales to automotive and light vehicle customers decreased $7.7 million.
HDE cost of sales increased $19.0 million, or 12 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher raw material prices, which increased approximately $19.0 million, and to a lesser extent, temporary operating inefficiencies associated with plant consolidation activities in China.higher sales volume. These negative impactsdrivers, which increased cost of sales, were partially offset by benefitsimproved operating efficiencies. While we have provisions within many of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs. As a percentage of sales, cost of sales increased 290 basis points to 88.9 percent, primarily due to the higher material prices.
As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit decreased $3.8 million and gross margin declined 290 basis points to 11.1 percent.
SG&A expenses decreased $1.5 million, or 120 basis points as a percentage of sales, compared with the third quarter of the prior year. The decrease in SG&A expenses was primarily due to lower development costs and environmental charges. These decreases were partially offset by higher compensation-related expenses, which increased approximately $1.0 million.
Restructuring expenses during the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.
Operating income decreased $2.5 million from procurementthe third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower gross profit, partially offset by lower SG&A expenses.
Comparison of Nine Months ended December 31, 2021 and 2020
HDE year-to-date net sales increased $123.7 million, or 26 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, pricing adjustments associated with raw material price increases. HDE sales in fiscal 2021, primarily in the first quarter, were negatively impacted by the COVID-19 pandemic. Sales to commercial vehicle and off-highway customers increased $59.0 million and $57.7 million, respectively.
HDE year-to-date cost of sales increased $121.5 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased approximately $53.0 million. As a percentage of sales, cost of sales increased 230 basis points to 89.5 percent, primarily due to the higher material prices.
As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2 million and gross margin declined 230 basis points to 10.5 percent.
HDE year-to-date SG&A expenses increased $2.0 million, but decreased 120 basis points as a percentage of sales, compared with the same period in the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other cost-reduction initiatives.administrative costs.
Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.
Operating income during the first nine months of fiscal 2022 increased $1.4 million from the same period last year, primarily due to higher gross profit and lower restructuring expenses, partially offset by higher SG&A expenses.
Automotive
| | | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2021 | | | 2020 | | | 2021 | | | 2020 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 72.4 | | | | 100.0 | % | | $ | 113.9 | | | | 100.0 | % | | $ | 224.0 | | | | 100.0 | % | | $ | 285.9 | | | | 100.0 | % | | Cost of sales | | | 64.9 | | | | 89.6 | % | | | 95.5 | | | | 83.9 | % | | | 196.1 | | | | 87.6 | % | | | 246.1 | | | | 86.1 | % | | Gross profit | | | 7.5 | | | | 10.4 | % | | | 18.4 | | | | 16.1 | % | | | 27.9 | | | | 12.4 | % | | | 39.8 | | | | 13.9 | % | | Selling, general and administrative expenses | | | 9.7 | | | | 13.4 | % | | | 8.5 | | | | 7.4 | % | | | 30.1 | | | | 13.4 | % | | | 25.5 | | | | 8.9 | % | | Restructuring expenses | | | - | | | | - | | | | 0.4 | | | | 0.4 | % | | | 0.2 | | | | 0.1 | % | | | 0.6 | | | | 0.2 | % | | Impairment charges (reversals) – net | | | (57.2 | ) | | | -79.0 | % | | | 134.4 | | | | 118.0 | % | | | (56.0 | ) | | | -25.0 | % | | | 134.4 | | | | 47.0 | % | | Operating income (loss) | | $ | 55.0 | | | | 76.0 | % | | $ | (124.9 | ) | | | -109.7 | % | | $ | 53.6 | | | | 24.0 | % | | $ | (120.7 | ) | | | -42.2 | % |
Comparison of Three Months ended December 31, 2021 and 2020
Automotive net sales decreased $41.5 million, or 36 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to the disposition of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market. The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021. Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.
Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume. This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million. As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.
As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.1$10.9 million and gross margin declined 560570 basis points to 9.810.4 percent.
SG&A expenses increased $0.1$1.2 million or 140 basis points as a percentage of sales, compared with the third quarter of the prior year. The increase in SG&A expenses was primarily due to a $0.5higher compensation-related expenses.
During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million unfavorable impact of foreign currency exchange rate changes, partially offset bypreviously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower compensation-related expenses.
Restructuring expensesof their carrying or fair value. The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.
Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million. The operating income and operating loss during the third quarters of fiscal 2022 and 2021 totaled $0.5 million, a decrease of $0.2 millionwere driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business. In addition, as compared with the third quarter of fiscal 2020, and primarily consisted of equipment transfer and plant consolidation costs in China.
The CIS operating loss of $1.7 million represents a $10.0 million decline from the prior-year2021, operating income of $8.3 million and was primarily due tounfavorably impacted by lower gross profit.profit and higher SG&A expenses.
Comparison of Nine Months ended December 31, 20202021 and 20192020
CISAutomotive year-to-date net sales decreased $87.4$61.9 million, or 1822 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes. The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year. Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market. Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.
Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume associated withand lower depreciation expenses, which decreased $9.9 million. We ceased depreciating the impactsproperty, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021. Upon reverting back to held and used classification during the COVID-19 pandemic. In addition, salesthird quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in fiscal 2021 have been negatively impactedthe liquid-cooled automotive business. These decreases were partially offset by lower sales to a significant data center customer. Sales to commercial HVAC&R and data center cooling customers decreased $48.1higher raw material prices, which increased approximately $9.0 million, and $41.1a $5.3 million respectively.
CIS year-to-date cost of sales decreased $64.9 million, or 16 percent, from the same period last year, primarily due to lower sales volume.foreign currency exchange rate changes. As a percentage of sales, cost of sales increased 250150 basis points to 87.7 percent, primarily due to the impact of lower sales volume and unfavorable sales mix, partially offset by cost-reduction and procurement initiatives.87.6 percent.
As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $22.5$11.9 million and gross margin declined 250150 basis points to 12.312.4 percent.
CISAutomotive year-to-date SG&A expenses decreased $3.7increased $4.6 million compared with the priorsame period last year. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $5.0 million, partially offset by a $0.6 million unfavorable impact of foreign currency exchange rate changes.
Restructuring expenses during the first nine months of fiscal 2021 increased $3.1 million compared with the prior year and primarily consisted of severance expenses and equipment transfer costs related to plant consolidation activities in China and targeted headcount reductions in North America.
Operating income decreased $21.9 million to $3.9 million, primarily due to lower gross profit and higher restructuring expenses, partially offset by lower SG&A expenses.
Building HVAC Systems
| | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2020 | | | 2019 | | | 2020 | | | 2019 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 68.7 | | | | 100.0 | % | | $ | 64.9 | | | | 100.0 | % | | $ | 178.2 | | | | 100.0 | % | | $ | 169.9 | | | | 100.0 | % | | Cost of sales | | | 43.0 | | | | 62.7 | % | | | 41.8 | | | | 64.5 | % | | | 116.3 | | | | 65.3 | % | | | 115.4 | | | | 67.9 | % | | Gross profit | | | 25.7 | | | | 37.3 | % | | | 23.1 | | | | 35.5 | % | | | 61.9 | | | | 34.7 | % | | | 54.5 | | | | 32.1 | % | | Selling, general and administrative expenses | | | 9.9 | | | | 14.3 | % | | | 9.6 | | | | 14.7 | % | | | 25.9 | | | | 14.5 | % | | | 26.9 | | | | 15.8 | % | | Operating income | | $ | 15.8 | | | | 23.1 | % | | $ | 13.5 | | | | 20.8 | % | | $ | 36.0 | | | | 20.2 | % | | $ | 27.6 | | | | 16.2 | % |
Comparison of Three Months ended December 31, 2020 and 2019
BHVAC net sales increased $3.8 million, or 6 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021, primarily due to higher sales in the U.S. and the U.K., which both increased approximately $2.0 million. The higher sales in the U.S. were primarily due to higher sales of heating products, partially offset by lower sales of ventilation products. The higher sales in the U.K. were primarily due to higher sales of air conditioning and data center cooling products.
BHVAC cost of sales increased $1.2 million, or 3 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021, primarily due to higher sales volume. As a percentage of sales, cost of sales decreased 180 basis points to 62.7 percent and was positively impacted by favorable customer pricing and sales mix.
As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $2.6 million and gross margin improved 180 basis points to 37.3 percent.
SG&A expenses increased $0.3 million from the prior year, yet decreased 40 basis points as a percentage of sales. The increase in SG&A expenses was primarily due to higher compensation-related expenses, including commission expenses.
Operating income of $15.8 millionwhich increased $2.3 million during the quarter, primarily due to higher gross profit.
Comparison of Nine Months ended December 31, 2020 and 2019
BHVAC year-to-date net sales increased $8.3 million, or 5 percent, from the same period last year, primarily due to higher sales volume. Compared with the first nine months of the prior year, sales increased $9.2 million in the U.K. and decreased $0.9 million in the U.S. The higher sales in the U.K. were primarily due to higher sales of data center products. The lower sales in the U.S. resulted primarily from the negative impacts of the COVID-19 pandemic and decreased sales of ventilation products, partially offset by higher sales of heating products.
BHVAC year-to-date cost of sales increased $0.9 million from the same period last year. As a percentage of sales, cost of sales decreased 260 basis points to 65.3 percent and was positively impacted by favorable customer pricing, sales mix and cost-reduction initiatives.
As a result of higher sales and lower cost of sales as a percentage of sales, gross profit increased $7.4approximately $2.0 million, and gross margin improved 260 basis points to 34.7 percent.
BHVAC year-to-date SG&A expenses decreased $1.0 million, or 130 basis points as a percentage of sales, from the prior year. The decrease in SG&A expenses was primary due to lower travel expenses.
Operating income of $36.0 million increased $8.4 million compared with the same period last year, primarily due to higher gross profit and lower SG&A expenses.
Heavy Duty Equipment
| | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2020 | | | 2019 | | | 2020 | | | 2019 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 185.6 | | | | 100.0 | % | | $ | 164.9 | | | | 100.0 | % | | $ | 474.7 | | | | 100.0 | % | | $ | 568.5 | | | | 100.0 | % | | Cost of sales | | | 159.6 | | | | 86.0 | % | | | 148.1 | | | | 89.8 | % | | | 413.8 | | | | 87.2 | % | | | 496.8 | | | | 87.4 | % | | Gross profit | | | 26.0 | | | | 14.0 | % | | | 16.8 | | | | 10.2 | % | | | 60.9 | | | | 12.8 | % | | | 71.7 | | | | 12.6 | % | | Selling, general and administrative expenses | | | 13.2 | | | | 7.1 | % | | | 12.6 | | | | 7.7 | % | | | 35.4 | | | | 7.4 | % | | | 42.3 | | | | 7.4 | % | | Restructuring expenses | | | - | | | | - | | | | 1.4 | | | | 0.8 | % | | | 1.9 | | | | 0.4 | % | | | 2.2 | | | | 0.4 | % | | Operating income | | $ | 12.8 | | | | 6.8 | % | | $ | 2.8 | | | | 1.7 | % | | $ | 23.6 | | | | 5.0 | % | | $ | 27.2 | | | | 4.8 | % |
Comparison of Three Months ended December 31, 2020 and 2019
HDE net sales increased $20.7 million, or 13 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021, primarily due to higher sales volume to global off-highway customers. Sales to off-highway and commercial vehicle customers increased $16.7 million and $3.8 million, respectively. Geographically, sales increased most significantly in Asia.
HDE cost of sales increased $11.5 million, or 8 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021, primarily due to higher sales volume. As a percentage of sales, cost of sales decreased 380 basis points to 86.0 percent and was favorably impacted by the higher sales volume, cost savings from procurement and other cost-reduction initiatives, and, to a lesser extent, improved operating efficiencies.
As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $9.2 million and gross margin improved 380 basis points to 14.0 percent.
SG&A expenses increased $0.6 million, yet decreased 60 basis points as a percentage of sales, compared with the third quarter of the prior year. The increase in SG&A expenses was primarily due to environmental charges related to a previously-owned U.S. manufacturing facility, which increased $0.4 million.
Restructuring expenses decreased $1.4 million compared with the third quarter of fiscal 2020, primarily due to lower severance expenses related to targeted headcount reductions.
Operating income of $12.8 million increased $10.0 million during the quarter, primarily due to higher gross profit and lower restructuring expenses.
Comparison of Nine Months ended September 30, 2020 and 2019
HDE year-to-date net sales decreased $93.8 million, or 16 percent, from the same period last year, primarily due to lower sales volume resulting from the impacts of the COVID-19 pandemic, which were most severe in the Americas and Europe during the first half of the fiscal year. Sales to commercial vehicle and automotive and light vehicle customers decreased $57.2 million and $15.2 million, respectively.
HDE year-to-date cost of sales decreased $83.0 million, or 17 percent, primarily due to lower sales volume. As a percentage of sales, cost of sales decreased 20 basis points to 87.2 percent. The significant unfavorable impact of the lower sales volume was more than offset by favorable impacts from improved operating efficiencies and cost savings from procurement and other cost-reduction initiatives.
As a result of the lower sales and lower cost of sales as a percentage of sales, gross profit decreased $10.8 million and gross margin improved 20 basis points to 12.8 percent.
HDE year-to-date SG&A expenses decreased $6.9 million from the prior year. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $6.0 million, and cost-reduction initiatives, including lower travel expenses.
Restructuring expenses during the first nine months of fiscal 2021 totaled $1.9 million, a decrease of $0.3 million compared with the same period last year, and primarily consisted of severance expenses resulting from targeted headcount reductions in North America.
Operating income of $23.6 million decreased $3.6 million compared with the same period last year, primarily due to lower gross profit, partially offset by lower SG&A expenses.
Automotive
| | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2020 | | | 2019 | | | 2020 | | | 2019 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 113.9 | | | | 100.0 | % | | $ | 110.5 | | | | 100.0 | % | | $ | 285.9 | | | | 100.0 | % | | $ | 339.8 | | | | 100.0 | % | | Cost of sales | | | 95.5 | | | | 83.9 | % | | | 98.3 | | | | 89.0 | % | | | 246.1 | | | | 86.1 | % | | | 302.1 | | | | 88.9 | % | | Gross profit | | | 18.4 | | | | 16.1 | % | | | 12.2 | | | | 11.0 | % | | | 39.8 | | | | 13.9 | % | | | 37.7 | | | | 11.1 | % | | Selling, general and administrative expenses | | | 8.5 | | | | 7.4 | % | | | 11.2 | | | | 10.2 | % | | | 25.5 | | | | 8.9 | % | | | 33.6 | | | | 9.9 | % | | Restructuring expenses | | | 0.4 | | | | 0.4 | % | | | 0.2 | | | | 0.2 | % | | | 0.6 | | | | 0.2 | % | | | 2.9 | | | | 0.8 | % | | Impairment charges | | | 134.4 | | | | 118.0 | % | | | - | | | | - | | | | 134.4 | | | | 47.0 | % | | | - | | | | - | | | Gain on sale of assets | | | - | | | | - | | | | (0.8 | ) | | | -0.8 | % | | | - | | | | - | | | | (0.8 | ) | | | -0.2 | % | | Operating (loss) income | | $ | (124.9 | ) | | | -109.7 | % | | $ | 1.6 | | | | 1.4 | % | | $ | (120.7 | ) | | | -42.2 | % | | $ | 2.0 | | | | 0.6 | % |
Comparison of Three Months ended December 31, 2020 and 2019
Automotive net sales increased $3.4 million, or 3 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021, primarily due to a $6.7 million favorable impact of foreign currency exchange rate changes, partially offset by lower sales volume. Compared with the prior year, sales increased $3.8 million and $2.0 million in Europe and Asia, respectively, and decreased $2.4 million in the Americas.
Automotive cost of sales decreased $2.8 million, or 3 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021. As a percentage of sales, cost of sales decreased 510 basis points to 83.9 percent. Compared with the prior year, cost of sales was favorably impacted by lower depreciation expenses, which decreased approximately $3.0 million, cost savings from procurement and other cost-reduction initiatives, and improved operating efficiencies. The lower depreciation expenses resulted from the Company ceasing depreciation of the long-lived assets within the liquid-cooled automotive business when it was classified as held for sale in November 2020. Foreign currency exchange rate changes negatively impacted cost of sales by $5.7 million.
As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $6.2 million and gross margin improved 510 basis points to 16.1 percent.
SG&A expenses decreased $2.7 million compared with the third quarter of the prior year. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $2.0 million.
Restructuring expenses during the third quarter of fiscal 2021 totaled $0.4 million and primarily consisted of severance expenses resulting from targeted headcount reductions in Europe.
Impairment charges during the third quarter of fiscal 2021 totaled $134.4 million and primarily related to assets in the liquid-cooled automotive business. Upon classifying this business as held for sale during the third quarter, we identified an implied loss in excess of the carrying value of its long-lived assets. Accordingly, we reduced the liquid-cooled automotive business’s long-lived assets, primarily property, plant and equipment, to zero.
During the third quarter of fiscal 2020, we completed the sale of a previously-closed manufacturing facility in Germany and, as a result, recorded a gain of $0.8 million.
The Automotive operating loss of $124.9 million in the third quarter of fiscal 2021, as compared with operating income of $1.6 million in the third quarter of the prior year, was significantly impacted by the large impairment charges associated with the liquid-cooled automotive business and, to a much lesser extent, higher gross profit and lower SG&A expenses.
Comparison of Nine Months ended December 31, 2020 and 2019
Automotive year-to-date net sales decreased $53.9 million, or 16 percent, from the same period last year, primarily due to lower sales volume largely resulting from the impacts of the COVID-19 pandemic, partially offset by a $9.7 million favorable impact of foreign currency exchange rate changes. Sales in Europe and North America decreased $46.8 million and $13.0 million, respectively. Sales in Asia increased $5.9 million.
Automotive year-to-date cost of sales decreased $56.0 million, or 19 percent, from the prior year, primarily due to lower sales volume, partially offset by an $8.2$0.7 million unfavorable impact of foreign currency exchange rate changes. As a percentage
The year-to-date net impairment reversal of sales, cost$56.0 million primarily related to assets in our liquid-cooled automotive business. The $57.2 million impairment reversal during the third quarter of sales decreased 280 basis points to 86.1 percent andfiscal 2022 was favorably impacted by improved operating efficiencies, cost savings from procurement initiatives, and lower depreciation expenses of approximately $4.0 million, partially offset by the unfavorable impact$1.2 million of lower sales volume.
As a result of the lower sales and lower cost of sales as a percentage of sales, gross profit increased $2.1 million and gross margin improved 280 basis points to 13.9 percent.
Automotive year-to-date SG&A expenses decreased $8.1 million compared with the prior year. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $8.0 million.
Restructuring expensesnet impairment charges recorded during the first ninesix months of fiscal 2021 totaled $0.62022. During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’s held for sale assets. These impairment charges were partially offset by a decrease of $2.3$7.4 million compared withimpairment reversal related to certain manufacturing operations that no longer met the same periodrequirements to be classified as held for sale due to a modification in the prior year. The decrease was primarily driven by lower severance expenses in Europe resulting from fewer targeted headcount reductions.
sale perimeter during the first quarter of fiscal 2022.
The Automotive operating loss37
Operating income of $53.6 million during the first nine months of fiscal 2021, as compared with2022 represents a $174.3 million improvement from the operating incomeloss of $2.0$120.7 million duringin the same period last year, was significantly impactedyear. The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the largesignificant impairment reversal and impairment charges, associated withrespectively, related to the liquid-cooled automotive business duringbusiness. In addition, as compared with the third quarterfirst nine months of fiscal 2021, and, to a much lesser extent, higheryear-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profit and lowerhigher SG&A expenses and restructuring charges.expenses.
Liquidity and Capital Resources
Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $72.9$61.1 million as of December 31, 2020,2021 and an available borrowing capacity of $213.6$163.1 million under our revolving credit facility. Given our extensive international operations, approximately $59.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries. Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.
In response to the COVID-19 pandemic, we have taken actions to reduce operating and administrative expenses, conserve cash and maximize liquidity. In addition, as described below, we have focused on reducing our capital expenditures and executed amendments to our primary credit agreements to provide financial covenant flexibility during fiscal 2021 and 2022. We believe our sources of liquidity including cash flow from operations, our cash and cash equivalents, and access to both committed and uncommitted credit facilities, will provide sufficient cash flow to meetadequately cover our obligations during the next twelve monthsfunding needs on both a short-term and beyond. However, we are continuing to monitor the impacts of COVID-19 on our business and the credit and financial markets.long-term basis.
Net Cash Provided by Operating Activities Net cash provided by operating activities for the nine months ended December 31, 20202021 was $146.5$7.4 million, which represents a $100.6$139.1 million increasedecrease compared with the same period in the prior year. This increasedecrease in operating cash flow was primarily due to favorableunfavorable net changes in working capital, including higher inventory levels and lowerhigher payments for separationincentive compensation and project costs associated with our review of strategic alternatives for the automotive businesses. The favorable changes in working capital during the first nine months of fiscal 2021,employee benefits as compared with the same period in the prior year, included loweryear. Inventory, including amounts held for sale, increased $57.8 million from March 31, 2021 to December 31, 2021. The higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and lower payments for incentive compensation, employee benefits, income taxesstrategic safety stock builds in connection with global supply chain constraints 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.challenges.
Capital Expenditures Capital expenditures of $30.7 million during the first nine months of fiscal 2022 increased $7.0 million compared with the same period in the prior year. In response to the economic impacts of the COVID-19 pandemic,fiscal 2021, we have been focused on reducing our capital expenditures and, where possible, have delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in our vehicular businesses. Capital expenditures of $23.7 million duringresponse to the first nine months of fiscal 2021 decreased $34.5 million compared with the same period in the prior year.COVID-19 pandemic.
Debt Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below. Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales. In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.
In May 2020, we executed amendments to our primary credit agreements in the U.S. to provide additional covenant flexibility in light of the risks and uncertainties associated with the COVID-19 pandemic. Under the amended agreements, the leverage ratio covenant limit has been temporarily raised. The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, in relation to ourno more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”). The leverage ratio covenant limit is 5.75 to 1 for the fourth quarter of fiscal 2021. In fiscal 2022, the leverage ratio covenant limit is 4.75 to 1, 3.75 to 1, and 3.50 to 1 for the first, second and third quarters, respectively, and subsequently returns to 3.25 to 1 for the fourth quarter of fiscal 2022. We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.
As of December 31, 2020, we were in compliance with our debt covenants;2021, our leverage ratio and interest coverage ratio were 1.92.5 and 8.7,10.0, respectively. We expect to remain in compliance with our debt covenants during fiscal 2021,the remainder of fiscal 2022 and beyond.
Share Repurchase Program
On November 5, 2020, we announced our Board of Directors approved a two-year, $50.0 million share repurchase program, which allows us to repurchase shares of our common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as we deem appropriate. To date, we have not repurchased shares under this program. Our decision whether and to what extent to repurchase shares under this program will depend on a number of factors, including business conditions, other cash priorities, and stock price.
Forward-Looking Statements
This report, including, but not limited to, the discussion under Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains statements, including information about future financial performance, accompanied by phrases such as “believes,” “estimates,” “expects,” “plans,” “anticipates,” “intends,” and other similar “forward-looking” statements, as defined in the Private Securities Litigation Reform Act of 1995. Modine’s actual results, performance or achievements may differ materially from those expressed or implied in these statements, because of certain risks and uncertainties, including, but not limited to, those described under “Risk Factors” in Item 1A. in Part I. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2020.2021. Other risks and uncertainties include, but are not limited to, the following:
Market Risks:
The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees;
Economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including, in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; 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 or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade, the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the short- and long-term implications of “Brexit”;
The impact of potential price increases associated with raw materials, including aluminum, copper, steel and stainless steel (nickel), and other purchased componentscomponent inventory including, but not limited to, increases in the underlying material cost based upon the London Metal Exchange and related premiums, fabrication, or fabricationfreight costs. These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand. This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whether through our quotation process or through contract provisions for prospective price adjustments, as well as the inherent lag in timing of such contract provisions; and
The impact of current and future environmental laws and regulations on our business and the businesses of our customers, including our ability to take advantage of opportunities to supply alternative new technologies to meet environmental and/or energy standards and objectives.
Operational Risks:
The overall health and continually increasing price-down focus of our vehicular customers in light of economic and market-specific factors, the concentration of sales within our CIS segment attributable to one customer, and the potential impact on us from any deterioration in the stability or performance of any of our major customers;
The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our time, quantity, quality, price and pricetiming demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;
Our ability to maintain current customer programsrelationships and compete effectively for new business, including our ability to offset or otherwise address increasing pricing pressures from competitors and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;
The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims and delays or inefficiencies resulting from restrictions imposed in response to the COVID-19 pandemic;
The impact of any delays or modifications initiated by major customers with respect to program launches, product applications or requirements;
| • | The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages; |
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 reducemodify our cost structure in response to sales volume declinesincreases or decreases and to complete restructuring activities and realize the anticipated benefits of those activities;
Costs and other effects of the investigation and remediation of environmental contamination,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, operational and administrative functions, in light of tight global labor markets;
Our ability to protect our proprietary information and intellectual property from theft or attack by internal or external sources;
The impact of any substantial disruption or material breach of our information technology systems, and any related delays, problems or costs;
Increasingly complex and restrictive laws and regulations, including those associated with being a U.S. public company and others present in various jurisdictions in which we operate, and the costs associated with compliance therewith;
Work stoppages or interference at our facilities or those of our major customers and/or suppliers;
The constant and increasing pressures associated with healthcare and associated insurance costs; and
Costs and other effects of litigation, claims, or other obligations.
Strategic Risks:
Our ability to successfully complete the pending sale of our liquid-cooled automotive business, including the receipt of governmental and third-party approvals and satisfaction of other closing conditions, and our ability to successfully exit our other automotive businesses in a manner that is in the best interest of our shareholders;
| • | Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers; |
Our ability to successfully realize anticipated benefits fromidentify and execute strategies in our increased “industrial” market presence, with our CISautomotive businesses to reduce costs and BHVAC businesses, while maintaining appropriate focus on the market opportunities presented by our HDE and Automotive businesses;improve operating margins;
Our ability to identify and execute growth and diversification opportunities in order to position us for long-term success; and
The potential impacts from any actions by activist shareholders, including disruption of our business and related costs.
Financial Risks:
Our ability to fund our global liquidity requirements efficiently for Modine’s current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;
The impact of potential increases in interest rates, particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations, andobligations;
The impact of changes in federal, state or local tax regulations that could have the continued uncertainty around the utilizationeffect of LIBOR or alternative reference rates;increasing our income tax expense;
Our ability to comply with the financial covenants as amended, in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);
The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and
Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.
Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2020.2021. The Company’s market risks have not materially changed since the fiscal 20202021 Form 10-K was filed.
| Item 4. | Controls and Procedures. |
Evaluation Regarding Disclosure Controls and Procedures
As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Finance and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Finance and Chief Financial Officer have concluded that the design and operation of the Company’sCompany’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2020.2021.
Changes in Internal Control Over Financial Reporting
There have been no changes in internal control over financial reporting during the third quarter of fiscal 20212022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
ISSUER PURCHASES OF EQUITY SECURITIES
The following describes the Company’s purchases of common stock during the third quarter of fiscal 2022: Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (a) | | October 1 – October 31, 2021 | 36,644 (b)
| $11.94 | _______
| $50,000,000 | | | | | | | | November 1 – November 30, 2021 | _______
| _______
| _______
| 50,000,000 | | | | | | | | December 1 – December 31, 2021 | 4,189 (b)
| $10.20 | _______
| 50,000,000 | | | | | | | | Total | 40,833 (b)
| $11.76 | _______
| |
| (a) | Effective November 5, 2020, the Board of Directors approved a two-year, $50.0 million share repurchase program, which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate. |
| (b) | Consists of shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards. The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions. These shares are held as treasury shares. |
| Item 5. | Other Information. |
The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.
| Exhibit No. | Description | | Incorporated Herein By Reference To | Filed Herewith | | | | | | | | Securities and Asset PurchaseTermination Agreement dated as of November 2, 2020, by and between the Company and Dana Incorporated, dated as of October 25, 2021. | | Exhibit 2.1 to Registrant’s Current Report on Form 8-K dated November 2, 2020October 25, 2021 | | | | | | | | | [Corrected] OfferSeparation Letter dated as of November 10, 2020, by andAgreement between the Company and Mr. BrinkerJoel T. Casterton, dated as of October 25, 2021. | | | X | | | | | | | | FormSeparation Letter Agreement between the Company and Matthew J. McBurney, dated as of Make-Whole RSU Award Agreement with Neil Brinker | | | X | | | | | | | Form of Make-Whole Performance Cash Award Agreement with Neil BrinkerOctober 30, 2021. | | | X | | | | | | | | Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer. | | | X | | | | | | | | Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Finance and Chief Financial Officer. | | | X | | | | | | | | Section 1350 Certification of Neil D. Brinker, President and Chief Executive Officer. | | | X | | | | | | | | Section 1350 Certification of Michael B. Lucareli, Executive Vice President, Finance and Chief Financial Officer. | | | X | | | | | | | | 101.INS | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). | | | X | | | | | | | | 101.SCH | Inline XBRL Taxonomy Extension SchemaSchema. | | | X | | | | | | | | 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase DocumentDocument. | | | X | | | | | | | | 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase DocumentDocument. | | | X | | | | | | | 101.LAB10.1.LAB | Inline XBRL Taxonomy Extension Label Linkbase DocumentDocument. | | | X | | | | | | | 101.PRE10.1.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase DocumentDocument. | | | X | | | | | | | | 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101). | | | X |
* Schedules and similar attachments have been omitted pursuant to Item 601(b)(2) of Regulation S-K because they are not material and would likely cause competitive harm to the Company if publicly disclosed.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
MODINE MANUFACTURING COMPANY (Registrant)
By: /s/ Michael B. Lucareli Michael B. Lucareli, Executive Vice President, Finance and Chief Financial Officer*
Date: February 5, 20213, 2022
* Executing as both the principal financial officer and a duly authorized officer of the Company
s | | | % of sales | | |
Comparison of Three Months ended December 31, 20202021 and 20192020
Third quarter net sales of $484.3$502.2 million were $10.9$17.9 million, or 24 percent, higher than the third quarter of the prior year, primarily due to higher sales volume and favorable pricing adjustments in response to raw material price increases in our CIS, BHVAC, and HDE segments, partially offset by lower sales volume in our Automotive segment. Sales in the CIS, BHVAC, and HDE segments increased $23.7 million, $16.9 million, and $15.2 million, respectively. Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.
Third quarter cost of sales increased $26.0 million, or 6 percent, primarily due to higher raw material prices, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, segments and an $11.2 million favorable impactHDE segments. These drivers, which increased cost of foreign currency exchange rate changes,sales, were partially offset by lower sales volume in the CISAutomotive segment and Automotive segments. Sales in the HDE, BHVAC, and Automotive segments increased $20.7 million, $3.8 million, and $3.4 million, respectively. CIS segment sales decreased $18.5 million.
Third quarter cost of sales increased $1.7 million.improved operating efficiencies. As a percentage of sales, cost of sales decreased 160increased 220 basis points to 82.985.1 percent. The increase in cost of sales was primarily due to a $9.7 million unfavorable impact of foreign currency exchange rate changes, partially offset by the favorable impacts of procurement and other cost-reduction initiatives and a $3.0 million decrease in depreciation expense in the Automotive segment. In addition, program and equipment transfer costs to prepare the liquid-cooled automotive business for sale decreased approximately $1.0 million compared with the prior year.
As a result of higher sales and lowerhigher cost of sales as a percentage of sales, third quarter gross profit increased $9.2decreased $8.1 million and gross margin improved 160declined 220 basis points to 17.114.9 percent.
Third quarter SG&A expenses decreased $7.4 million. The decrease in SG&A expenses was primarily due to$5.8 million, primary driven by $2.6 million of lower costs recorded at Corporate associated withrelated to our review of strategic alternatives for the Automotive segment’s business operations,segment businesses and lower compensation-related expenses, which decreased approximately $10.0$2.0 million. This favorable driver was partially offset by a $1.0 million unfavorable impact of foreign currency exchange rate changes and higher environmental chargesThe lower compensation-related expenses were primarily due to lower incentive compensation expenses at Corporate in the HDE segment.current year.
Restructuring expenses of $0.9 million during the third quarter of fiscal 2021 decreased $1.7 million, primarily due to lower restructuring expenses in the HDE segment.
Impairment charges of $134.4$2.1 million in the third quarter of fiscal 2021 primarily related to the write-down of the long-lived assets in the Automotive segment’s liquid-cooled automotive business in connection2022 increased $1.2 million compared with the pending sale of that business.
The operating loss of $108.7 million represents a $116.9 million decline from the prior-year operating income of $8.2 million. The decline was primarily due to the $134.4 million of impairment charges recorded in the Automotive segment and lower earnings in the CIS segment. These negative drivers were partially offset by higher earnings in our HDE and BHVAC segments.
Interest expense decreased $1.0 million, or 18 percent, during the third quarter of fiscal 2021, primarily due to higher severance expenses in the CIS segment.
During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower outstanding long-term debtof their carrying or fair value. During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale, we recorded $134.4 million of impairment charges and reduced the carrying value of the disposal group’s long-lived assets to zero.
Operating income of $79.4 million in the third quarter of fiscal 2022 represents a lesser extent,$188.1 million improvement from the prior-year operating loss of $108.7 million. The operating income and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment. In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.
Interest expense in the third quarter of fiscal 2022 decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorable changes in interest rates.
The provision for income taxes was $81.6$0.1 million and $1.7$81.6 million in the third quarter of fiscal 20212022 and 2020,2021, respectively. The $79.9$81.5 million increasedecrease was primarily due to the absence of $109.9 million of income tax charges totaling $116.5 million recorded in the third quarter of fiscal 2021prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions. These drivers, which decreased the provision for income taxes, were partially offset by the absence of $37.7 million of income tax benefits totaling $37.7 millionrecorded during the prior year related to the Automotive segment impairment charges recorded earlier in the third quarter of fiscal 2021.charges.
Comparison of Nine Months ended December 31, 20202021 and 20192020
Fiscal 20212022 year-to-date net sales of $1,293.5$1,475.7 million were $209.1$182.2 million, or 14 percent, lowerhigher than the same period last year, primarily due to lowerhigher sales volumes and favorable pricing adjustments in response to raw material price increases in our HDE, CIS, and AutomotiveBHVAC segments. Sales in these segments decreased $93.8increased $123.7 million, $87.4$86.6 million, and $53.9$38.4 million, respectively, and were significantly impacted by market-driven volume declines and temporary plant closures earlier in the fiscal year due to the COVID-19 pandemic. BHVACrespectively. Automotive segment sales increased $8.3decreased $61.9 million.
Fiscal 20212022 year-to-date cost of sales of $1,083.9$1,261.6 million decreased $186.1increased $177.7 million, or 1516 percent, primarily due to lowerhigher raw material prices, which increased approximately $117.0 million, and higher sales volume. In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic. These factors, which caused an increase in cost of sales compared with the same period in the prior year, were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies. As a percentage of sales, cost of sales improved 70increased 170 basis points to 83.885.5 percent. The unfavorable impact of lower sales volume was more than offset by the benefits of cost-reduction initiatives implemented earlier in the fiscal year in response to lower end market demand and procurement initiatives.
As a result of lowerhigher sales and lowerhigher cost of sales as a percentage of sales, fiscal 2021 year-to-date gross profit decreased $23.0increased $4.5 million and gross margin improved 70declined 170 basis points to 16.214.5 percent.
Fiscal 20212022 year-to-date SG&A expenses decreased $42.8increased $10.0 million. The decreaseincrease in SG&A expenses was primarily due to higher compensation-related expenses, as the prior year was favorably impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19. In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million. These increases were partially offset by lower strategic reorganization costs and lower costs recorded at Corporate associated withrelated to our review of strategic alternatives for the Automotive segment’s business operations,segment businesses, which decreased approximately $29.0$2.8 million and $1.3 million, respectively. The lower compensation-relatedstrategic reorganization costs primarily resulted from lower severance expenses which decreased approximately $18.0 million. These favorable drivers were partially offset by $5.9 million of costs recorded at Corporate in connection with Mr. Burke stepping down from his position as President and CEO and the search for his successor.executive management positions.
Restructuring expenses of $7.0$3.0 million duringin the first nine months of fiscal 2021 increased $0.32022 decreased $4.0 million compared with the same period last year, primarily due to higher restructuringlower severance expenses in the CIS segment, partially offset by lower restructuring expenses in the Automotive segment.and HDE segments.
The fiscal 2021 year-to-date operating lossnet impairment reversals of $83.4$55.7 million represents a $115.7 million decline from the prior-year operating income of $32.3 million. The decline was primarily due to the $134.4 million of impairment charges recorded in the Automotive segment and lower earnings in our CIS and HDE segments. These negative drivers were partially offset by lower SG&A expenses at Corporate and higher earnings in our BHVAC segment.
Interest expense decreased $2.1 million, or 12 percent, during the first nine months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment. In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale. In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.
We sold our air-cooled automotive business on April 30, 2021. As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.
Operating income of $98.6 million during the first nine months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million. The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business. In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses. Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.
Interest expense during the first nine months of fiscal 2022 decreased $3.4 million compared with the same period last year, primarily due to lower outstanding long-term debt and favorable changes in interest rates.rates and lower debt outstanding during the current-year.
The provision for income taxes was $95.3$7.4 million and $8.3$95.3 million during the first nine months of fiscal 20212022 and 2020,2021, respectively. The $87.0$87.9 million increasedecrease was primarily due to the absence of $116.5 million of income tax charges totaling $123.1 million recorded duringin the first nine months of fiscal 2021prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions. These drivers, which decreased the provision for income taxes, were partially offset by the absence of $37.7 million of income tax benefits totaling $37.7 millionrecorded during the prior year related to the Automotive segment impairment charges recorded during fiscal 2021.charges.
SEGMENT RESULTS OF OPERATIONS
Effective AprilJuly 1, 2020,2021, we began managingaligned the data center businesses previously managed by and reported within the CIS segment under the BHVAC segment. The BHVAC segment assumed management of our global automotive business separate fromin Guadalajara, Spain and a portion of our business in Grenada, Mississippi. Through this segment change, we have aligned our data center businesses under the otherBHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies. As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the previously-reported Vehicular Thermal Solutions (“VTS”)BHVAC segment. We have been managing the automotive business as the Automotive segment as we target the sale or eventual exit of its underlying automotive business operations. We are managing the other businesses of the VTS segment, including the commercial vehicle and off-highway businesses, as the Heavy Duty Equipment segment. We began reporting financial results for our new segment structure beginning for fiscal 2021. Segment financial information for fiscal 2020 has been recast to conform to the fiscal 2021 presentation. The segment realignment had no impact on the CISHDE and BHVAC segments.Automotive segments or on our consolidated financial position, results of operations, and cash flows. Segment financial information for the prior periods has been recast to conform to the current presentation.
As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment. While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment. See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.
The following is a discussion of our segment results of operations for the three months and nine months ended December 31, 20202021 and 2019:2020:
Commercial and Industrial SolutionsBuilding HVAC Systems
| | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2020 | | | 2019 | | | 2020 | | | 2019 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 129.0 | | | | 100.0 | % | | $ | 147.5 | | | | 100.0 | % | | $ | 385.6 | | | | 100.0 | % | | $ | 473.0 | | | | 100.0 | % | | Cost of sales | | | 116.4 | | | | 90.2 | % | | | 124.8 | | | | 84.6 | % | | | 338.2 | | | | 87.7 | % | | | 403.1 | | | | 85.2 | % | | Gross profit | | | 12.6 | | | | 9.8 | % | | | 22.7 | | | | 15.4 | % | | | 47.4 | | | | 12.3 | % | | | 69.9 | | | | 14.8 | % | | Selling, general and administrative expenses | | | 13.8 | | | | 10.7 | % | | | 13.7 | | | | 9.3 | % | | | 39.1 | | | | 10.2 | % | | | 42.8 | | | | 9.1 | % | | Restructuring expenses | | | 0.5 | | | | 0.4 | % | | | 0.7 | | | | 0.5 | % | | | 4.4 | | | | 1.1 | % | | | 1.3 | | | | 0.3 | % | | Operating (loss) income | | $ | (1.7 | ) | | | -1.3 | % | | $ | 8.3 | | | | 5.6 | % | | $ | 3.9 | | | | 1.0 | % | | $ | 25.8 | | | | 5.4 | % |
| | | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2021 | | | 2020 | | | 2021 | | | 2020 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 90.6 | | | | 100.0 | % | | $ | 73.7 | | | | 100.0 | % | | $ | 234.7 | | | | 100.0 | % | | $ | 196.3 | | | | 100.0 | % | | Cost of sales | | | 63.2 | | | | 69.7 | % | | | 48.3 | | | | 65.5 | % | | | 169.5 | | | | 72.2 | % | | | 131.8 | | | | 67.1 | % | | Gross profit | | | 27.4 | | | | 30.3 | % | | | 25.4 | | | | 34.5 | % | | | 65.2 | | | | 27.8 | % | | | 64.5 | | | | 32.9 | % | | Selling, general and administrative expenses | | | 13.0 | | | | 14.4 | % | | | 10.5 | | | | 14.3 | % | | | 35.1 | | | | 15.0 | % | | | 28.9 | | | | 14.8 | % | | Operating income | | $ | 14.4 | | | | 15.9 | % | | $ | 14.9 | | | | 20.1 | % | | $ | 30.1 | | | | 12.8 | % | | $ | 35.6 | | | | 18.1 | % |
Comparison of Three Months ended December 31, 20202021 and 20192020
CISBHVAC net sales decreased $18.5increased $16.9 million, or 1323 percent, from the third quarter of fiscal 20202021 to the third quarter of fiscal 2021,2022, primarily due to lowerhigher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases. Compared with the third quarter of the prior year, BHVAC sales to data center coolingcustomers increased $11.6 million. In addition, sales to commercial HVAC customers increased $5.2 million, primarily due to higher sales of ventilation and heating products in North America.
BHVAC cost of sales increased $14.9 million, or 31 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs. As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.
As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent. While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.
SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.
Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.
Comparison of Nine Months ended December 31, 2021 and 2020
BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a $4.5lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7 million favorable impact of foreign currency exchange rate changes.rates. Sales to data center coolingcommercial HVAC customers decreased $18.4increased $24.5 million, primarily due to lowerhigher sales of heating and air conditioning products. In addition, sales to one individual customer.data center customers increased $13.0 million.
CISBHVAC year-to-date cost of sales decreased $8.4increased $37.7 million, or 729 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021,same period last year, primarily due to lowerhigher sales volume partially offsetand higher raw material prices, which increased by a $4.2approximately $12.0 million. In addition, cost of sales was unfavorably impacted by $4.8 million unfavorable impact offrom foreign currency exchange rate changes. As a percentage of sales, cost of sales increased 560510 basis points to 90.272.2 percent, primarily due to the impacthigher material costs.
As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.
BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.
Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.
Commercial and Industrial Solutions
| | | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2021 | | | 2020 | | | 2021 | | | 2020 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 148.6 | | | | 100.0 | % | | $ | 124.9 | | | | 100.0 | % | | $ | 456.2 | | | | 100.0 | % | | $ | 369.6 | | | | 100.0 | % | | Cost of sales | | | 130.9 | | | | 88.1 | % | | | 112.0 | | | | 89.7 | % | | | 399.4 | | | | 87.5 | % | | | 324.8 | | | | 87.9 | % | | Gross profit | | | 17.7 | | | | 11.9 | % | | | 12.9 | | | | 10.3 | % | | | 56.8 | | | | 12.5 | % | | | 44.8 | | | | 12.1 | % | | Selling, general and administrative expenses | | | 12.4 | | | | 8.4 | % | | | 13.1 | | | | 10.4 | % | | | 37.7 | | | | 8.3 | % | | | 36.0 | | | | 9.7 | % | | Restructuring expenses | | | 1.9 | | | | 1.3 | % | | | 0.5 | | | | 0.4 | % | | | 2.1 | | | | 0.5 | % | | | 4.4 | | | | 1.2 | % | | Impairment charge | | | - | | | | - | | | | - | | | | - | | | | 0.3 | | | | 0.1 | % | | | - | | | | - | | | Operating income (loss) | | $ | 3.4 | | | | 2.2 | % | | $ | (0.7 | ) | | | -0.5 | % | | $ | 16.7 | | | | 3.6 | % | | $ | 4.4 | | | | 1.2 | % |
Comparison of Three Months ended December 31, 2021 and 2020
CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume unfavorableand favorable product pricing adjustments in response to raw material price increases. Compared with the third quarter of the prior year, sales mix,to commercial HVAC&R customers increased $24.5 million.
CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million. As a percentage of sales, cost of sales decreased 160 basis points to 88.1 percent, primarily due to the favorable impacts of the higher sales volume and improved operating efficiencies, partially offset by higher material costs.
As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8 million and gross margin improved 160 basis points to 11.9 percent.
SG&A expenses decreased $0.7 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.
Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses. The severance expenses in the third quarter of fiscal 2022 primarily related to targeted headcount reductions in Europe and China.
Operating income of $3.4 million represents a $4.1 million improvement from the prior-year operating loss of $0.7 million and was primarily due to higher gross profit.
Comparison of Nine Months ended December 31, 2021 and 2020
CIS year-to-date net sales increased $86.6 million, or 23 percent, from the same period last year, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases. In addition, sales were favorably impacted by $5.7 million from foreign currency exchange rates. The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year. Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, compared with the same period in the prior year.
CIS year-to-date cost of sales increased $74.6 million, or 23 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0 million. In addition, cost of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes. As a percentage of sales, cost of sales decreased 40 basis points to 87.5 percent, primarily due to the favorable impacts of the higher sales volume and improved operating efficiencies, partially offset by higher material costs.
As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0 million and gross margin improved 40 basis points to 12.5 percent.
CIS year-to-date SG&A expenses increased $1.7 million, yet decreased 140 basis points as a percentage of sales, from the same period last year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.
Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3 million from the same period last year, primarily due to lower severance expenses. The severance expenses during the first nine months of fiscal 2022 primarily related to targeted headcount reductions in Europe and China. The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.
During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write down a previously-closed manufacturing facility in the U.S to fair value less costs to sell. We sold the facility and received net cash proceeds of $0.7 million during July 2021.
Operating income during the first nine months of fiscal 2022 increased $12.3 million from the same period last year, primarily due to higher gross profit and lower restructuring expenses, partially offset by higher SG&A expenses.
Heavy Duty Equipment
| | | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2021 | | | 2020 | | | 2021 | | | 2020 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 200.8 | | | | 100.0 | % | | $ | 185.6 | | | | 100.0 | % | | $ | 598.4 | | | | 100.0 | % | | $ | 474.7 | | | | 100.0 | % | | Cost of sales | | | 178.6 | | | | 88.9 | % | | | 159.6 | | | | 86.0 | % | | | 535.3 | | | | 89.5 | % | | | 413.8 | | | | 87.2 | % | | Gross profit | | | 22.2 | | | | 11.1 | % | | | 26.0 | | | | 14.0 | % | | | 63.1 | | | | 10.5 | % | | | 60.9 | | | | 12.8 | % | | Selling, general and administrative expenses | | | 11.7 | | | | 5.9 | % | | | 13.2 | | | | 7.1 | % | | | 37.4 | | | | 6.2 | % | | | 35.4 | | | | 7.4 | % | | Restructuring expenses | | | 0.2 | | | | 0.1 | % | | | - | | | | - | | | | 0.7 | | | | 0.1 | % | | | 1.9 | | | | 0.4 | % | | Operating income | | $ | 10.3 | | | | 5.1 | % | | $ | 12.8 | | | | 6.8 | % | | $ | 25.0 | | | | 4.2 | % | | $ | 23.6 | | | | 5.0 | % |
Comparison of Three Months ended December 31, 2021 and 2020
HDE net sales increased $15.2 million, or 8 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to pricing adjustments associated with raw material price increases and higher sales volume. Sales to off-highway and commercial vehicle customers increased $12.3 million and $10.7 million, respectively. Sales to automotive and light vehicle customers decreased $7.7 million.
HDE cost of sales increased $19.0 million, or 12 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher raw material prices, which increased approximately $19.0 million, and to a lesser extent, temporary operating inefficiencies associated with plant consolidation activities in China.higher sales volume. These negative impactsdrivers, which increased cost of sales, were partially offset by benefitsimproved operating efficiencies. While we have provisions within many of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs. As a percentage of sales, cost of sales increased 290 basis points to 88.9 percent, primarily due to the higher material prices.
As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit decreased $3.8 million and gross margin declined 290 basis points to 11.1 percent.
SG&A expenses decreased $1.5 million, or 120 basis points as a percentage of sales, compared with the third quarter of the prior year. The decrease in SG&A expenses was primarily due to lower development costs and environmental charges. These decreases were partially offset by higher compensation-related expenses, which increased approximately $1.0 million.
Restructuring expenses during the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.
Operating income decreased $2.5 million from procurementthe third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower gross profit, partially offset by lower SG&A expenses.
Comparison of Nine Months ended December 31, 2021 and 2020
HDE year-to-date net sales increased $123.7 million, or 26 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, pricing adjustments associated with raw material price increases. HDE sales in fiscal 2021, primarily in the first quarter, were negatively impacted by the COVID-19 pandemic. Sales to commercial vehicle and off-highway customers increased $59.0 million and $57.7 million, respectively.
HDE year-to-date cost of sales increased $121.5 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased approximately $53.0 million. As a percentage of sales, cost of sales increased 230 basis points to 89.5 percent, primarily due to the higher material prices.
As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2 million and gross margin declined 230 basis points to 10.5 percent.
HDE year-to-date SG&A expenses increased $2.0 million, but decreased 120 basis points as a percentage of sales, compared with the same period in the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other cost-reduction initiatives.administrative costs.
Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.
Operating income during the first nine months of fiscal 2022 increased $1.4 million from the same period last year, primarily due to higher gross profit and lower restructuring expenses, partially offset by higher SG&A expenses.
Automotive
| | | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2021 | | | 2020 | | | 2021 | | | 2020 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 72.4 | | | | 100.0 | % | | $ | 113.9 | | | | 100.0 | % | | $ | 224.0 | | | | 100.0 | % | | $ | 285.9 | | | | 100.0 | % | | Cost of sales | | | 64.9 | | | | 89.6 | % | | | 95.5 | | | | 83.9 | % | | | 196.1 | | | | 87.6 | % | | | 246.1 | | | | 86.1 | % | | Gross profit | | | 7.5 | | | | 10.4 | % | | | 18.4 | | | | 16.1 | % | | | 27.9 | | | | 12.4 | % | | | 39.8 | | | | 13.9 | % | | Selling, general and administrative expenses | | | 9.7 | | | | 13.4 | % | | | 8.5 | | | | 7.4 | % | | | 30.1 | | | | 13.4 | % | | | 25.5 | | | | 8.9 | % | | Restructuring expenses | | | - | | | | - | | | | 0.4 | | | | 0.4 | % | | | 0.2 | | | | 0.1 | % | | | 0.6 | | | | 0.2 | % | | Impairment charges (reversals) – net | | | (57.2 | ) | | | -79.0 | % | | | 134.4 | | | | 118.0 | % | | | (56.0 | ) | | | -25.0 | % | | | 134.4 | | | | 47.0 | % | | Operating income (loss) | | $ | 55.0 | | | | 76.0 | % | | $ | (124.9 | ) | | | -109.7 | % | | $ | 53.6 | | | | 24.0 | % | | $ | (120.7 | ) | | | -42.2 | % |
Comparison of Three Months ended December 31, 2021 and 2020
Automotive net sales decreased $41.5 million, or 36 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to the disposition of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market. The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021. Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.
Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume. This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million. As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.
As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.1$10.9 million and gross margin declined 560570 basis points to 9.810.4 percent.
SG&A expenses increased $0.1$1.2 million or 140 basis points as a percentage of sales, compared with the third quarter of the prior year. The increase in SG&A expenses was primarily due to a $0.5higher compensation-related expenses.
During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million unfavorable impact of foreign currency exchange rate changes, partially offset bypreviously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower compensation-related expenses.
Restructuring expensesof their carrying or fair value. The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.
Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million. The operating income and operating loss during the third quarters of fiscal 2022 and 2021 totaled $0.5 million, a decrease of $0.2 millionwere driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business. In addition, as compared with the third quarter of fiscal 2020, and primarily consisted of equipment transfer and plant consolidation costs in China.
The CIS operating loss of $1.7 million represents a $10.0 million decline from the prior-year2021, operating income of $8.3 million and was primarily due tounfavorably impacted by lower gross profit.profit and higher SG&A expenses.
Comparison of Nine Months ended December 31, 20202021 and 20192020
CISAutomotive year-to-date net sales decreased $87.4$61.9 million, or 1822 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes. The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year. Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market. Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.
Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume associated withand lower depreciation expenses, which decreased $9.9 million. We ceased depreciating the impactsproperty, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021. Upon reverting back to held and used classification during the COVID-19 pandemic. In addition, salesthird quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in fiscal 2021 have been negatively impactedthe liquid-cooled automotive business. These decreases were partially offset by lower sales to a significant data center customer. Sales to commercial HVAC&R and data center cooling customers decreased $48.1higher raw material prices, which increased approximately $9.0 million, and $41.1a $5.3 million respectively.
CIS year-to-date cost of sales decreased $64.9 million, or 16 percent, from the same period last year, primarily due to lower sales volume.foreign currency exchange rate changes. As a percentage of sales, cost of sales increased 250150 basis points to 87.7 percent, primarily due to the impact of lower sales volume and unfavorable sales mix, partially offset by cost-reduction and procurement initiatives.87.6 percent.
As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $22.5$11.9 million and gross margin declined 250150 basis points to 12.312.4 percent.
CISAutomotive year-to-date SG&A expenses decreased $3.7increased $4.6 million compared with the priorsame period last year. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $5.0 million, partially offset by a $0.6 million unfavorable impact of foreign currency exchange rate changes.
Restructuring expenses during the first nine months of fiscal 2021 increased $3.1 million compared with the prior year and primarily consisted of severance expenses and equipment transfer costs related to plant consolidation activities in China and targeted headcount reductions in North America.
Operating income decreased $21.9 million to $3.9 million, primarily due to lower gross profit and higher restructuring expenses, partially offset by lower SG&A expenses.
Building HVAC Systems
| | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2020 | | | 2019 | | | 2020 | | | 2019 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 68.7 | | | | 100.0 | % | | $ | 64.9 | | | | 100.0 | % | | $ | 178.2 | | | | 100.0 | % | | $ | 169.9 | | | | 100.0 | % | | Cost of sales | | | 43.0 | | | | 62.7 | % | | | 41.8 | | | | 64.5 | % | | | 116.3 | | | | 65.3 | % | | | 115.4 | | | | 67.9 | % | | Gross profit | | | 25.7 | | | | 37.3 | % | | | 23.1 | | | | 35.5 | % | | | 61.9 | | | | 34.7 | % | | | 54.5 | | | | 32.1 | % | | Selling, general and administrative expenses | | | 9.9 | | | | 14.3 | % | | | 9.6 | | | | 14.7 | % | | | 25.9 | | | | 14.5 | % | | | 26.9 | | | | 15.8 | % | | Operating income | | $ | 15.8 | | | | 23.1 | % | | $ | 13.5 | | | | 20.8 | % | | $ | 36.0 | | | | 20.2 | % | | $ | 27.6 | | | | 16.2 | % |
Comparison of Three Months ended December 31, 2020 and 2019
BHVAC net sales increased $3.8 million, or 6 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021, primarily due to higher sales in the U.S. and the U.K., which both increased approximately $2.0 million. The higher sales in the U.S. were primarily due to higher sales of heating products, partially offset by lower sales of ventilation products. The higher sales in the U.K. were primarily due to higher sales of air conditioning and data center cooling products.
BHVAC cost of sales increased $1.2 million, or 3 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021, primarily due to higher sales volume. As a percentage of sales, cost of sales decreased 180 basis points to 62.7 percent and was positively impacted by favorable customer pricing and sales mix.
As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $2.6 million and gross margin improved 180 basis points to 37.3 percent.
SG&A expenses increased $0.3 million from the prior year, yet decreased 40 basis points as a percentage of sales. The increase in SG&A expenses was primarily due to higher compensation-related expenses, including commission expenses.
Operating income of $15.8 millionwhich increased $2.3 million during the quarter, primarily due to higher gross profit.
Comparison of Nine Months ended December 31, 2020 and 2019
BHVAC year-to-date net sales increased $8.3 million, or 5 percent, from the same period last year, primarily due to higher sales volume. Compared with the first nine months of the prior year, sales increased $9.2 million in the U.K. and decreased $0.9 million in the U.S. The higher sales in the U.K. were primarily due to higher sales of data center products. The lower sales in the U.S. resulted primarily from the negative impacts of the COVID-19 pandemic and decreased sales of ventilation products, partially offset by higher sales of heating products.
BHVAC year-to-date cost of sales increased $0.9 million from the same period last year. As a percentage of sales, cost of sales decreased 260 basis points to 65.3 percent and was positively impacted by favorable customer pricing, sales mix and cost-reduction initiatives.
As a result of higher sales and lower cost of sales as a percentage of sales, gross profit increased $7.4approximately $2.0 million, and gross margin improved 260 basis points to 34.7 percent.
BHVAC year-to-date SG&A expenses decreased $1.0 million, or 130 basis points as a percentage of sales, from the prior year. The decrease in SG&A expenses was primary due to lower travel expenses.
Operating income of $36.0 million increased $8.4 million compared with the same period last year, primarily due to higher gross profit and lower SG&A expenses.
Heavy Duty Equipment
| | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2020 | | | 2019 | | | 2020 | | | 2019 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 185.6 | | | | 100.0 | % | | $ | 164.9 | | | | 100.0 | % | | $ | 474.7 | | | | 100.0 | % | | $ | 568.5 | | | | 100.0 | % | | Cost of sales | | | 159.6 | | | | 86.0 | % | | | 148.1 | | | | 89.8 | % | | | 413.8 | | | | 87.2 | % | | | 496.8 | | | | 87.4 | % | | Gross profit | | | 26.0 | | | | 14.0 | % | | | 16.8 | | | | 10.2 | % | | | 60.9 | | | | 12.8 | % | | | 71.7 | | | | 12.6 | % | | Selling, general and administrative expenses | | | 13.2 | | | | 7.1 | % | | | 12.6 | | | | 7.7 | % | | | 35.4 | | | | 7.4 | % | | | 42.3 | | | | 7.4 | % | | Restructuring expenses | | | - | | | | - | | | | 1.4 | | | | 0.8 | % | | | 1.9 | | | | 0.4 | % | | | 2.2 | | | | 0.4 | % | | Operating income | | $ | 12.8 | | | | 6.8 | % | | $ | 2.8 | | | | 1.7 | % | | $ | 23.6 | | | | 5.0 | % | | $ | 27.2 | | | | 4.8 | % |
Comparison of Three Months ended December 31, 2020 and 2019
HDE net sales increased $20.7 million, or 13 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021, primarily due to higher sales volume to global off-highway customers. Sales to off-highway and commercial vehicle customers increased $16.7 million and $3.8 million, respectively. Geographically, sales increased most significantly in Asia.
HDE cost of sales increased $11.5 million, or 8 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021, primarily due to higher sales volume. As a percentage of sales, cost of sales decreased 380 basis points to 86.0 percent and was favorably impacted by the higher sales volume, cost savings from procurement and other cost-reduction initiatives, and, to a lesser extent, improved operating efficiencies.
As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $9.2 million and gross margin improved 380 basis points to 14.0 percent.
SG&A expenses increased $0.6 million, yet decreased 60 basis points as a percentage of sales, compared with the third quarter of the prior year. The increase in SG&A expenses was primarily due to environmental charges related to a previously-owned U.S. manufacturing facility, which increased $0.4 million.
Restructuring expenses decreased $1.4 million compared with the third quarter of fiscal 2020, primarily due to lower severance expenses related to targeted headcount reductions.
Operating income of $12.8 million increased $10.0 million during the quarter, primarily due to higher gross profit and lower restructuring expenses.
Comparison of Nine Months ended September 30, 2020 and 2019
HDE year-to-date net sales decreased $93.8 million, or 16 percent, from the same period last year, primarily due to lower sales volume resulting from the impacts of the COVID-19 pandemic, which were most severe in the Americas and Europe during the first half of the fiscal year. Sales to commercial vehicle and automotive and light vehicle customers decreased $57.2 million and $15.2 million, respectively.
HDE year-to-date cost of sales decreased $83.0 million, or 17 percent, primarily due to lower sales volume. As a percentage of sales, cost of sales decreased 20 basis points to 87.2 percent. The significant unfavorable impact of the lower sales volume was more than offset by favorable impacts from improved operating efficiencies and cost savings from procurement and other cost-reduction initiatives.
As a result of the lower sales and lower cost of sales as a percentage of sales, gross profit decreased $10.8 million and gross margin improved 20 basis points to 12.8 percent.
HDE year-to-date SG&A expenses decreased $6.9 million from the prior year. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $6.0 million, and cost-reduction initiatives, including lower travel expenses.
Restructuring expenses during the first nine months of fiscal 2021 totaled $1.9 million, a decrease of $0.3 million compared with the same period last year, and primarily consisted of severance expenses resulting from targeted headcount reductions in North America.
Operating income of $23.6 million decreased $3.6 million compared with the same period last year, primarily due to lower gross profit, partially offset by lower SG&A expenses.
Automotive
| | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2020 | | | 2019 | | | 2020 | | | 2019 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 113.9 | | | | 100.0 | % | | $ | 110.5 | | | | 100.0 | % | | $ | 285.9 | | | | 100.0 | % | | $ | 339.8 | | | | 100.0 | % | | Cost of sales | | | 95.5 | | | | 83.9 | % | | | 98.3 | | | | 89.0 | % | | | 246.1 | | | | 86.1 | % | | | 302.1 | | | | 88.9 | % | | Gross profit | | | 18.4 | | | | 16.1 | % | | | 12.2 | | | | 11.0 | % | | | 39.8 | | | | 13.9 | % | | | 37.7 | | | | 11.1 | % | | Selling, general and administrative expenses | | | 8.5 | | | | 7.4 | % | | | 11.2 | | | | 10.2 | % | | | 25.5 | | | | 8.9 | % | | | 33.6 | | | | 9.9 | % | | Restructuring expenses | | | 0.4 | | | | 0.4 | % | | | 0.2 | | | | 0.2 | % | | | 0.6 | | | | 0.2 | % | | | 2.9 | | | | 0.8 | % | | Impairment charges | | | 134.4 | | | | 118.0 | % | | | - | | | | - | | | | 134.4 | | | | 47.0 | % | | | - | | | | - | | | Gain on sale of assets | | | - | | | | - | | | | (0.8 | ) | | | -0.8 | % | | | - | | | | - | | | | (0.8 | ) | | | -0.2 | % | | Operating (loss) income | | $ | (124.9 | ) | | | -109.7 | % | | $ | 1.6 | | | | 1.4 | % | | $ | (120.7 | ) | | | -42.2 | % | | $ | 2.0 | | | | 0.6 | % |
Comparison of Three Months ended December 31, 2020 and 2019
Automotive net sales increased $3.4 million, or 3 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021, primarily due to a $6.7 million favorable impact of foreign currency exchange rate changes, partially offset by lower sales volume. Compared with the prior year, sales increased $3.8 million and $2.0 million in Europe and Asia, respectively, and decreased $2.4 million in the Americas.
Automotive cost of sales decreased $2.8 million, or 3 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021. As a percentage of sales, cost of sales decreased 510 basis points to 83.9 percent. Compared with the prior year, cost of sales was favorably impacted by lower depreciation expenses, which decreased approximately $3.0 million, cost savings from procurement and other cost-reduction initiatives, and improved operating efficiencies. The lower depreciation expenses resulted from the Company ceasing depreciation of the long-lived assets within the liquid-cooled automotive business when it was classified as held for sale in November 2020. Foreign currency exchange rate changes negatively impacted cost of sales by $5.7 million.
As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $6.2 million and gross margin improved 510 basis points to 16.1 percent.
SG&A expenses decreased $2.7 million compared with the third quarter of the prior year. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $2.0 million.
Restructuring expenses during the third quarter of fiscal 2021 totaled $0.4 million and primarily consisted of severance expenses resulting from targeted headcount reductions in Europe.
Impairment charges during the third quarter of fiscal 2021 totaled $134.4 million and primarily related to assets in the liquid-cooled automotive business. Upon classifying this business as held for sale during the third quarter, we identified an implied loss in excess of the carrying value of its long-lived assets. Accordingly, we reduced the liquid-cooled automotive business’s long-lived assets, primarily property, plant and equipment, to zero.
During the third quarter of fiscal 2020, we completed the sale of a previously-closed manufacturing facility in Germany and, as a result, recorded a gain of $0.8 million.
The Automotive operating loss of $124.9 million in the third quarter of fiscal 2021, as compared with operating income of $1.6 million in the third quarter of the prior year, was significantly impacted by the large impairment charges associated with the liquid-cooled automotive business and, to a much lesser extent, higher gross profit and lower SG&A expenses.
Comparison of Nine Months ended December 31, 2020 and 2019
Automotive year-to-date net sales decreased $53.9 million, or 16 percent, from the same period last year, primarily due to lower sales volume largely resulting from the impacts of the COVID-19 pandemic, partially offset by a $9.7 million favorable impact of foreign currency exchange rate changes. Sales in Europe and North America decreased $46.8 million and $13.0 million, respectively. Sales in Asia increased $5.9 million.
Automotive year-to-date cost of sales decreased $56.0 million, or 19 percent, from the prior year, primarily due to lower sales volume, partially offset by an $8.2$0.7 million unfavorable impact of foreign currency exchange rate changes. As a percentage
The year-to-date net impairment reversal of sales, cost$56.0 million primarily related to assets in our liquid-cooled automotive business. The $57.2 million impairment reversal during the third quarter of sales decreased 280 basis points to 86.1 percent andfiscal 2022 was favorably impacted by improved operating efficiencies, cost savings from procurement initiatives, and lower depreciation expenses of approximately $4.0 million, partially offset by the unfavorable impact$1.2 million of lower sales volume.
As a result of the lower sales and lower cost of sales as a percentage of sales, gross profit increased $2.1 million and gross margin improved 280 basis points to 13.9 percent.
Automotive year-to-date SG&A expenses decreased $8.1 million compared with the prior year. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $8.0 million.
Restructuring expensesnet impairment charges recorded during the first ninesix months of fiscal 2021 totaled $0.62022. During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’s held for sale assets. These impairment charges were partially offset by a decrease of $2.3$7.4 million compared withimpairment reversal related to certain manufacturing operations that no longer met the same periodrequirements to be classified as held for sale due to a modification in the prior year. The decrease was primarily driven by lower severance expenses in Europe resulting from fewer targeted headcount reductions.
sale perimeter during the first quarter of fiscal 2022.
The Automotive operating loss37
Operating income of $53.6 million during the first nine months of fiscal 2021, as compared with2022 represents a $174.3 million improvement from the operating incomeloss of $2.0$120.7 million duringin the same period last year, was significantly impactedyear. The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the largesignificant impairment reversal and impairment charges, associated withrespectively, related to the liquid-cooled automotive business duringbusiness. In addition, as compared with the third quarterfirst nine months of fiscal 2021, and, to a much lesser extent, higheryear-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profit and lowerhigher SG&A expenses and restructuring charges.expenses.
Liquidity and Capital Resources
Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $72.9$61.1 million as of December 31, 2020,2021 and an available borrowing capacity of $213.6$163.1 million under our revolving credit facility. Given our extensive international operations, approximately $59.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries. Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.
In response to the COVID-19 pandemic, we have taken actions to reduce operating and administrative expenses, conserve cash and maximize liquidity. In addition, as described below, we have focused on reducing our capital expenditures and executed amendments to our primary credit agreements to provide financial covenant flexibility during fiscal 2021 and 2022. We believe our sources of liquidity including cash flow from operations, our cash and cash equivalents, and access to both committed and uncommitted credit facilities, will provide sufficient cash flow to meetadequately cover our obligations during the next twelve monthsfunding needs on both a short-term and beyond. However, we are continuing to monitor the impacts of COVID-19 on our business and the credit and financial markets.long-term basis.
Net Cash Provided by Operating Activities Net cash provided by operating activities for the nine months ended December 31, 20202021 was $146.5$7.4 million, which represents a $100.6$139.1 million increasedecrease compared with the same period in the prior year. This increasedecrease in operating cash flow was primarily due to favorableunfavorable net changes in working capital, including higher inventory levels and lowerhigher payments for separationincentive compensation and project costs associated with our review of strategic alternatives for the automotive businesses. The favorable changes in working capital during the first nine months of fiscal 2021,employee benefits as compared with the same period in the prior year, included loweryear. Inventory, including amounts held for sale, increased $57.8 million from March 31, 2021 to December 31, 2021. The higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and lower payments for incentive compensation, employee benefits, income taxesstrategic safety stock builds in connection with global supply chain constraints 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.challenges.
Capital Expenditures Capital expenditures of $30.7 million during the first nine months of fiscal 2022 increased $7.0 million compared with the same period in the prior year. In response to the economic impacts of the COVID-19 pandemic,fiscal 2021, we have been focused on reducing our capital expenditures and, where possible, have delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in our vehicular businesses. Capital expenditures of $23.7 million duringresponse to the first nine months of fiscal 2021 decreased $34.5 million compared with the same period in the prior year.COVID-19 pandemic.
Debt Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below. Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales. In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.
In May 2020, we executed amendments to our primary credit agreements in the U.S. to provide additional covenant flexibility in light of the risks and uncertainties associated with the COVID-19 pandemic. Under the amended agreements, the leverage ratio covenant limit has been temporarily raised. The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, in relation to ourno more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”). The leverage ratio covenant limit is 5.75 to 1 for the fourth quarter of fiscal 2021. In fiscal 2022, the leverage ratio covenant limit is 4.75 to 1, 3.75 to 1, and 3.50 to 1 for the first, second and third quarters, respectively, and subsequently returns to 3.25 to 1 for the fourth quarter of fiscal 2022. We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.
As of December 31, 2020, we were in compliance with our debt covenants;2021, our leverage ratio and interest coverage ratio were 1.92.5 and 8.7,10.0, respectively. We expect to remain in compliance with our debt covenants during fiscal 2021,the remainder of fiscal 2022 and beyond.
Share Repurchase Program
On November 5, 2020, we announced our Board of Directors approved a two-year, $50.0 million share repurchase program, which allows us to repurchase shares of our common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as we deem appropriate. To date, we have not repurchased shares under this program. Our decision whether and to what extent to repurchase shares under this program will depend on a number of factors, including business conditions, other cash priorities, and stock price.
Forward-Looking Statements
This report, including, but not limited to, the discussion under Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains statements, including information about future financial performance, accompanied by phrases such as “believes,” “estimates,” “expects,” “plans,” “anticipates,” “intends,” and other similar “forward-looking” statements, as defined in the Private Securities Litigation Reform Act of 1995. Modine’s actual results, performance or achievements may differ materially from those expressed or implied in these statements, because of certain risks and uncertainties, including, but not limited to, those described under “Risk Factors” in Item 1A. in Part I. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2020.2021. Other risks and uncertainties include, but are not limited to, the following:
Market Risks:
The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees;
Economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including, in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; 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 or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade, the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the short- and long-term implications of “Brexit”;
The impact of potential price increases associated with raw materials, including aluminum, copper, steel and stainless steel (nickel), and other purchased componentscomponent inventory including, but not limited to, increases in the underlying material cost based upon the London Metal Exchange and related premiums, fabrication, or fabricationfreight costs. These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand. This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whether through our quotation process or through contract provisions for prospective price adjustments, as well as the inherent lag in timing of such contract provisions; and
The impact of current and future environmental laws and regulations on our business and the businesses of our customers, including our ability to take advantage of opportunities to supply alternative new technologies to meet environmental and/or energy standards and objectives.
Operational Risks:
The overall health and continually increasing price-down focus of our vehicular customers in light of economic and market-specific factors, the concentration of sales within our CIS segment attributable to one customer, and the potential impact on us from any deterioration in the stability or performance of any of our major customers;
The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our time, quantity, quality, price and pricetiming demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;
Our ability to maintain current customer programsrelationships and compete effectively for new business, including our ability to offset or otherwise address increasing pricing pressures from competitors and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;
The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims and delays or inefficiencies resulting from restrictions imposed in response to the COVID-19 pandemic;
The impact of any delays or modifications initiated by major customers with respect to program launches, product applications or requirements;
| • | The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages; |
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 reducemodify our cost structure in response to sales volume declinesincreases or decreases and to complete restructuring activities and realize the anticipated benefits of those activities;
Costs and other effects of the investigation and remediation of environmental contamination,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, operational and administrative functions, in light of tight global labor markets;
Our ability to protect our proprietary information and intellectual property from theft or attack by internal or external sources;
The impact of any substantial disruption or material breach of our information technology systems, and any related delays, problems or costs;
Increasingly complex and restrictive laws and regulations, including those associated with being a U.S. public company and others present in various jurisdictions in which we operate, and the costs associated with compliance therewith;
Work stoppages or interference at our facilities or those of our major customers and/or suppliers;
The constant and increasing pressures associated with healthcare and associated insurance costs; and
Costs and other effects of litigation, claims, or other obligations.
Strategic Risks:
Our ability to successfully complete the pending sale of our liquid-cooled automotive business, including the receipt of governmental and third-party approvals and satisfaction of other closing conditions, and our ability to successfully exit our other automotive businesses in a manner that is in the best interest of our shareholders;
| • | Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers; |
Our ability to successfully realize anticipated benefits fromidentify and execute strategies in our increased “industrial” market presence, with our CISautomotive businesses to reduce costs and BHVAC businesses, while maintaining appropriate focus on the market opportunities presented by our HDE and Automotive businesses;improve operating margins;
Our ability to identify and execute growth and diversification opportunities in order to position us for long-term success; and
The potential impacts from any actions by activist shareholders, including disruption of our business and related costs.
Financial Risks:
Our ability to fund our global liquidity requirements efficiently for Modine’s current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;
The impact of potential increases in interest rates, particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations, andobligations;
The impact of changes in federal, state or local tax regulations that could have the continued uncertainty around the utilizationeffect of LIBOR or alternative reference rates;increasing our income tax expense;
Our ability to comply with the financial covenants as amended, in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);
The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and
Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.
Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2020.2021. The Company’s market risks have not materially changed since the fiscal 20202021 Form 10-K was filed.
| Item 4. | Controls and Procedures. |
Evaluation Regarding Disclosure Controls and Procedures
As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Finance and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Finance and Chief Financial Officer have concluded that the design and operation of the Company’sCompany’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2020.2021.
Changes in Internal Control Over Financial Reporting
There have been no changes in internal control over financial reporting during the third quarter of fiscal 20212022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
ISSUER PURCHASES OF EQUITY SECURITIES
The following describes the Company’s purchases of common stock during the third quarter of fiscal 2022: Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (a) | | October 1 – October 31, 2021 | 36,644 (b)
| $11.94 | _______
| $50,000,000 | | | | | | | | November 1 – November 30, 2021 | _______
| _______
| _______
| 50,000,000 | | | | | | | | December 1 – December 31, 2021 | 4,189 (b)
| $10.20 | _______
| 50,000,000 | | | | | | | | Total | 40,833 (b)
| $11.76 | _______
| |
| (a) | Effective November 5, 2020, the Board of Directors approved a two-year, $50.0 million share repurchase program, which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate. |
| (b) | Consists of shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards. The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions. These shares are held as treasury shares. |
| Item 5. | Other Information. |
The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.
| Exhibit No. | Description | | Incorporated Herein By Reference To | Filed Herewith | | | | | | | | Securities and Asset PurchaseTermination Agreement dated as of November 2, 2020, by and between the Company and Dana Incorporated, dated as of October 25, 2021. | | Exhibit 2.1 to Registrant’s Current Report on Form 8-K dated November 2, 2020October 25, 2021 | | | | | | | | | [Corrected] OfferSeparation Letter dated as of November 10, 2020, by andAgreement between the Company and Mr. BrinkerJoel T. Casterton, dated as of October 25, 2021. | | | X | | | | | | | | FormSeparation Letter Agreement between the Company and Matthew J. McBurney, dated as of Make-Whole RSU Award Agreement with Neil Brinker | | | X | | | | | | | Form of Make-Whole Performance Cash Award Agreement with Neil BrinkerOctober 30, 2021. | | | X | | | | | | | | Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer. | | | X | | | | | | | | Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Finance and Chief Financial Officer. | | | X | | | | | | | | Section 1350 Certification of Neil D. Brinker, President and Chief Executive Officer. | | | X | | | | | | | | Section 1350 Certification of Michael B. Lucareli, Executive Vice President, Finance and Chief Financial Officer. | | | X | | | | | | | | 101.INS | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). | | | X | | | | | | | | 101.SCH | Inline XBRL Taxonomy Extension SchemaSchema. | | | X | | | | | | | | 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase DocumentDocument. | | | X | | | | | | | | 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase DocumentDocument. | | | X | | | | | | | 101.LAB10.1.LAB | Inline XBRL Taxonomy Extension Label Linkbase DocumentDocument. | | | X | | | | | | | 101.PRE10.1.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase DocumentDocument. | | | X | | | | | | | | 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101). | | | X |
* Schedules and similar attachments have been omitted pursuant to Item 601(b)(2) of Regulation S-K because they are not material and would likely cause competitive harm to the Company if publicly disclosed.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
MODINE MANUFACTURING COMPANY (Registrant)
By: /s/ Michael B. Lucareli Michael B. Lucareli, Executive Vice President, Finance and Chief Financial Officer*
Date: February 5, 20213, 2022
* Executing as both the principal financial officer and a duly authorized officer of the Company
s | | | % of sales | | |
Comparison of Three Months ended December 31, 20202021 and 20192020
Third quarter net sales of $484.3$502.2 million were $10.9$17.9 million, or 24 percent, higher than the third quarter of the prior year, primarily due to higher sales volume and favorable pricing adjustments in response to raw material price increases in our CIS, BHVAC, and HDE segments, partially offset by lower sales volume in our Automotive segment. Sales in the CIS, BHVAC, and HDE segments increased $23.7 million, $16.9 million, and $15.2 million, respectively. Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.
Third quarter cost of sales increased $26.0 million, or 6 percent, primarily due to higher raw material prices, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, segments and an $11.2 million favorable impactHDE segments. These drivers, which increased cost of foreign currency exchange rate changes,sales, were partially offset by lower sales volume in the CISAutomotive segment and Automotive segments. Sales in the HDE, BHVAC, and Automotive segments increased $20.7 million, $3.8 million, and $3.4 million, respectively. CIS segment sales decreased $18.5 million.
Third quarter cost of sales increased $1.7 million.improved operating efficiencies. As a percentage of sales, cost of sales decreased 160increased 220 basis points to 82.985.1 percent. The increase in cost of sales was primarily due to a $9.7 million unfavorable impact of foreign currency exchange rate changes, partially offset by the favorable impacts of procurement and other cost-reduction initiatives and a $3.0 million decrease in depreciation expense in the Automotive segment. In addition, program and equipment transfer costs to prepare the liquid-cooled automotive business for sale decreased approximately $1.0 million compared with the prior year.
As a result of higher sales and lowerhigher cost of sales as a percentage of sales, third quarter gross profit increased $9.2decreased $8.1 million and gross margin improved 160declined 220 basis points to 17.114.9 percent.
Third quarter SG&A expenses decreased $7.4 million. The decrease in SG&A expenses was primarily due to$5.8 million, primary driven by $2.6 million of lower costs recorded at Corporate associated withrelated to our review of strategic alternatives for the Automotive segment’s business operations,segment businesses and lower compensation-related expenses, which decreased approximately $10.0$2.0 million. This favorable driver was partially offset by a $1.0 million unfavorable impact of foreign currency exchange rate changes and higher environmental chargesThe lower compensation-related expenses were primarily due to lower incentive compensation expenses at Corporate in the HDE segment.current year.
Restructuring expenses of $0.9 million during the third quarter of fiscal 2021 decreased $1.7 million, primarily due to lower restructuring expenses in the HDE segment.
Impairment charges of $134.4$2.1 million in the third quarter of fiscal 2021 primarily related to the write-down of the long-lived assets in the Automotive segment’s liquid-cooled automotive business in connection2022 increased $1.2 million compared with the pending sale of that business.
The operating loss of $108.7 million represents a $116.9 million decline from the prior-year operating income of $8.2 million. The decline was primarily due to the $134.4 million of impairment charges recorded in the Automotive segment and lower earnings in the CIS segment. These negative drivers were partially offset by higher earnings in our HDE and BHVAC segments.
Interest expense decreased $1.0 million, or 18 percent, during the third quarter of fiscal 2021, primarily due to higher severance expenses in the CIS segment.
During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower outstanding long-term debtof their carrying or fair value. During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale, we recorded $134.4 million of impairment charges and reduced the carrying value of the disposal group’s long-lived assets to zero.
Operating income of $79.4 million in the third quarter of fiscal 2022 represents a lesser extent,$188.1 million improvement from the prior-year operating loss of $108.7 million. The operating income and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment. In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.
Interest expense in the third quarter of fiscal 2022 decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorable changes in interest rates.
The provision for income taxes was $81.6$0.1 million and $1.7$81.6 million in the third quarter of fiscal 20212022 and 2020,2021, respectively. The $79.9$81.5 million increasedecrease was primarily due to the absence of $109.9 million of income tax charges totaling $116.5 million recorded in the third quarter of fiscal 2021prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions. These drivers, which decreased the provision for income taxes, were partially offset by the absence of $37.7 million of income tax benefits totaling $37.7 millionrecorded during the prior year related to the Automotive segment impairment charges recorded earlier in the third quarter of fiscal 2021.charges.
Comparison of Nine Months ended December 31, 20202021 and 20192020
Fiscal 20212022 year-to-date net sales of $1,293.5$1,475.7 million were $209.1$182.2 million, or 14 percent, lowerhigher than the same period last year, primarily due to lowerhigher sales volumes and favorable pricing adjustments in response to raw material price increases in our HDE, CIS, and AutomotiveBHVAC segments. Sales in these segments decreased $93.8increased $123.7 million, $87.4$86.6 million, and $53.9$38.4 million, respectively, and were significantly impacted by market-driven volume declines and temporary plant closures earlier in the fiscal year due to the COVID-19 pandemic. BHVACrespectively. Automotive segment sales increased $8.3decreased $61.9 million.
Fiscal 20212022 year-to-date cost of sales of $1,083.9$1,261.6 million decreased $186.1increased $177.7 million, or 1516 percent, primarily due to lowerhigher raw material prices, which increased approximately $117.0 million, and higher sales volume. In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic. These factors, which caused an increase in cost of sales compared with the same period in the prior year, were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies. As a percentage of sales, cost of sales improved 70increased 170 basis points to 83.885.5 percent. The unfavorable impact of lower sales volume was more than offset by the benefits of cost-reduction initiatives implemented earlier in the fiscal year in response to lower end market demand and procurement initiatives.
As a result of lowerhigher sales and lowerhigher cost of sales as a percentage of sales, fiscal 2021 year-to-date gross profit decreased $23.0increased $4.5 million and gross margin improved 70declined 170 basis points to 16.214.5 percent.
Fiscal 20212022 year-to-date SG&A expenses decreased $42.8increased $10.0 million. The decreaseincrease in SG&A expenses was primarily due to higher compensation-related expenses, as the prior year was favorably impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19. In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million. These increases were partially offset by lower strategic reorganization costs and lower costs recorded at Corporate associated withrelated to our review of strategic alternatives for the Automotive segment’s business operations,segment businesses, which decreased approximately $29.0$2.8 million and $1.3 million, respectively. The lower compensation-relatedstrategic reorganization costs primarily resulted from lower severance expenses which decreased approximately $18.0 million. These favorable drivers were partially offset by $5.9 million of costs recorded at Corporate in connection with Mr. Burke stepping down from his position as President and CEO and the search for his successor.executive management positions.
Restructuring expenses of $7.0$3.0 million duringin the first nine months of fiscal 2021 increased $0.32022 decreased $4.0 million compared with the same period last year, primarily due to higher restructuringlower severance expenses in the CIS segment, partially offset by lower restructuring expenses in the Automotive segment.and HDE segments.
The fiscal 2021 year-to-date operating lossnet impairment reversals of $83.4$55.7 million represents a $115.7 million decline from the prior-year operating income of $32.3 million. The decline was primarily due to the $134.4 million of impairment charges recorded in the Automotive segment and lower earnings in our CIS and HDE segments. These negative drivers were partially offset by lower SG&A expenses at Corporate and higher earnings in our BHVAC segment.
Interest expense decreased $2.1 million, or 12 percent, during the first nine months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment. In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale. In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.
We sold our air-cooled automotive business on April 30, 2021. As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.
Operating income of $98.6 million during the first nine months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million. The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business. In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses. Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.
Interest expense during the first nine months of fiscal 2022 decreased $3.4 million compared with the same period last year, primarily due to lower outstanding long-term debt and favorable changes in interest rates.rates and lower debt outstanding during the current-year.
The provision for income taxes was $95.3$7.4 million and $8.3$95.3 million during the first nine months of fiscal 20212022 and 2020,2021, respectively. The $87.0$87.9 million increasedecrease was primarily due to the absence of $116.5 million of income tax charges totaling $123.1 million recorded duringin the first nine months of fiscal 2021prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions. These drivers, which decreased the provision for income taxes, were partially offset by the absence of $37.7 million of income tax benefits totaling $37.7 millionrecorded during the prior year related to the Automotive segment impairment charges recorded during fiscal 2021.charges.
SEGMENT RESULTS OF OPERATIONS
Effective AprilJuly 1, 2020,2021, we began managingaligned the data center businesses previously managed by and reported within the CIS segment under the BHVAC segment. The BHVAC segment assumed management of our global automotive business separate fromin Guadalajara, Spain and a portion of our business in Grenada, Mississippi. Through this segment change, we have aligned our data center businesses under the otherBHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies. As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the previously-reported Vehicular Thermal Solutions (“VTS”)BHVAC segment. We have been managing the automotive business as the Automotive segment as we target the sale or eventual exit of its underlying automotive business operations. We are managing the other businesses of the VTS segment, including the commercial vehicle and off-highway businesses, as the Heavy Duty Equipment segment. We began reporting financial results for our new segment structure beginning for fiscal 2021. Segment financial information for fiscal 2020 has been recast to conform to the fiscal 2021 presentation. The segment realignment had no impact on the CISHDE and BHVAC segments.Automotive segments or on our consolidated financial position, results of operations, and cash flows. Segment financial information for the prior periods has been recast to conform to the current presentation.
As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment. While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment. See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.
The following is a discussion of our segment results of operations for the three months and nine months ended December 31, 20202021 and 2019:2020:
Commercial and Industrial SolutionsBuilding HVAC Systems
| | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2020 | | | 2019 | | | 2020 | | | 2019 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 129.0 | | | | 100.0 | % | | $ | 147.5 | | | | 100.0 | % | | $ | 385.6 | | | | 100.0 | % | | $ | 473.0 | | | | 100.0 | % | | Cost of sales | | | 116.4 | | | | 90.2 | % | | | 124.8 | | | | 84.6 | % | | | 338.2 | | | | 87.7 | % | | | 403.1 | | | | 85.2 | % | | Gross profit | | | 12.6 | | | | 9.8 | % | | | 22.7 | | | | 15.4 | % | | | 47.4 | | | | 12.3 | % | | | 69.9 | | | | 14.8 | % | | Selling, general and administrative expenses | | | 13.8 | | | | 10.7 | % | | | 13.7 | | | | 9.3 | % | | | 39.1 | | | | 10.2 | % | | | 42.8 | | | | 9.1 | % | | Restructuring expenses | | | 0.5 | | | | 0.4 | % | | | 0.7 | | | | 0.5 | % | | | 4.4 | | | | 1.1 | % | | | 1.3 | | | | 0.3 | % | | Operating (loss) income | | $ | (1.7 | ) | | | -1.3 | % | | $ | 8.3 | | | | 5.6 | % | | $ | 3.9 | | | | 1.0 | % | | $ | 25.8 | | | | 5.4 | % |
| | | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2021 | | | 2020 | | | 2021 | | | 2020 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 90.6 | | | | 100.0 | % | | $ | 73.7 | | | | 100.0 | % | | $ | 234.7 | | | | 100.0 | % | | $ | 196.3 | | | | 100.0 | % | | Cost of sales | | | 63.2 | | | | 69.7 | % | | | 48.3 | | | | 65.5 | % | | | 169.5 | | | | 72.2 | % | | | 131.8 | | | | 67.1 | % | | Gross profit | | | 27.4 | | | | 30.3 | % | | | 25.4 | | | | 34.5 | % | | | 65.2 | | | | 27.8 | % | | | 64.5 | | | | 32.9 | % | | Selling, general and administrative expenses | | | 13.0 | | | | 14.4 | % | | | 10.5 | | | | 14.3 | % | | | 35.1 | | | | 15.0 | % | | | 28.9 | | | | 14.8 | % | | Operating income | | $ | 14.4 | | | | 15.9 | % | | $ | 14.9 | | | | 20.1 | % | | $ | 30.1 | | | | 12.8 | % | | $ | 35.6 | | | | 18.1 | % |
Comparison of Three Months ended December 31, 20202021 and 20192020
CISBHVAC net sales decreased $18.5increased $16.9 million, or 1323 percent, from the third quarter of fiscal 20202021 to the third quarter of fiscal 2021,2022, primarily due to lowerhigher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases. Compared with the third quarter of the prior year, BHVAC sales to data center coolingcustomers increased $11.6 million. In addition, sales to commercial HVAC customers increased $5.2 million, primarily due to higher sales of ventilation and heating products in North America.
BHVAC cost of sales increased $14.9 million, or 31 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs. As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.
As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent. While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.
SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.
Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.
Comparison of Nine Months ended December 31, 2021 and 2020
BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a $4.5lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7 million favorable impact of foreign currency exchange rate changes.rates. Sales to data center coolingcommercial HVAC customers decreased $18.4increased $24.5 million, primarily due to lowerhigher sales of heating and air conditioning products. In addition, sales to one individual customer.data center customers increased $13.0 million.
CISBHVAC year-to-date cost of sales decreased $8.4increased $37.7 million, or 729 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021,same period last year, primarily due to lowerhigher sales volume partially offsetand higher raw material prices, which increased by a $4.2approximately $12.0 million. In addition, cost of sales was unfavorably impacted by $4.8 million unfavorable impact offrom foreign currency exchange rate changes. As a percentage of sales, cost of sales increased 560510 basis points to 90.272.2 percent, primarily due to the impacthigher material costs.
As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.
BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.
Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.
Commercial and Industrial Solutions
| | | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2021 | | | 2020 | | | 2021 | | | 2020 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 148.6 | | | | 100.0 | % | | $ | 124.9 | | | | 100.0 | % | | $ | 456.2 | | | | 100.0 | % | | $ | 369.6 | | | | 100.0 | % | | Cost of sales | | | 130.9 | | | | 88.1 | % | | | 112.0 | | | | 89.7 | % | | | 399.4 | | | | 87.5 | % | | | 324.8 | | | | 87.9 | % | | Gross profit | | | 17.7 | | | | 11.9 | % | | | 12.9 | | | | 10.3 | % | | | 56.8 | | | | 12.5 | % | | | 44.8 | | | | 12.1 | % | | Selling, general and administrative expenses | | | 12.4 | | | | 8.4 | % | | | 13.1 | | | | 10.4 | % | | | 37.7 | | | | 8.3 | % | | | 36.0 | | | | 9.7 | % | | Restructuring expenses | | | 1.9 | | | | 1.3 | % | | | 0.5 | | | | 0.4 | % | | | 2.1 | | | | 0.5 | % | | | 4.4 | | | | 1.2 | % | | Impairment charge | | | - | | | | - | | | | - | | | | - | | | | 0.3 | | | | 0.1 | % | | | - | | | | - | | | Operating income (loss) | | $ | 3.4 | | | | 2.2 | % | | $ | (0.7 | ) | | | -0.5 | % | | $ | 16.7 | | | | 3.6 | % | | $ | 4.4 | | | | 1.2 | % |
Comparison of Three Months ended December 31, 2021 and 2020
CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume unfavorableand favorable product pricing adjustments in response to raw material price increases. Compared with the third quarter of the prior year, sales mix,to commercial HVAC&R customers increased $24.5 million.
CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million. As a percentage of sales, cost of sales decreased 160 basis points to 88.1 percent, primarily due to the favorable impacts of the higher sales volume and improved operating efficiencies, partially offset by higher material costs.
As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8 million and gross margin improved 160 basis points to 11.9 percent.
SG&A expenses decreased $0.7 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.
Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses. The severance expenses in the third quarter of fiscal 2022 primarily related to targeted headcount reductions in Europe and China.
Operating income of $3.4 million represents a $4.1 million improvement from the prior-year operating loss of $0.7 million and was primarily due to higher gross profit.
Comparison of Nine Months ended December 31, 2021 and 2020
CIS year-to-date net sales increased $86.6 million, or 23 percent, from the same period last year, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases. In addition, sales were favorably impacted by $5.7 million from foreign currency exchange rates. The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year. Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, compared with the same period in the prior year.
CIS year-to-date cost of sales increased $74.6 million, or 23 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0 million. In addition, cost of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes. As a percentage of sales, cost of sales decreased 40 basis points to 87.5 percent, primarily due to the favorable impacts of the higher sales volume and improved operating efficiencies, partially offset by higher material costs.
As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0 million and gross margin improved 40 basis points to 12.5 percent.
CIS year-to-date SG&A expenses increased $1.7 million, yet decreased 140 basis points as a percentage of sales, from the same period last year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.
Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3 million from the same period last year, primarily due to lower severance expenses. The severance expenses during the first nine months of fiscal 2022 primarily related to targeted headcount reductions in Europe and China. The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.
During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write down a previously-closed manufacturing facility in the U.S to fair value less costs to sell. We sold the facility and received net cash proceeds of $0.7 million during July 2021.
Operating income during the first nine months of fiscal 2022 increased $12.3 million from the same period last year, primarily due to higher gross profit and lower restructuring expenses, partially offset by higher SG&A expenses.
Heavy Duty Equipment
| | | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2021 | | | 2020 | | | 2021 | | | 2020 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 200.8 | | | | 100.0 | % | | $ | 185.6 | | | | 100.0 | % | | $ | 598.4 | | | | 100.0 | % | | $ | 474.7 | | | | 100.0 | % | | Cost of sales | | | 178.6 | | | | 88.9 | % | | | 159.6 | | | | 86.0 | % | | | 535.3 | | | | 89.5 | % | | | 413.8 | | | | 87.2 | % | | Gross profit | | | 22.2 | | | | 11.1 | % | | | 26.0 | | | | 14.0 | % | | | 63.1 | | | | 10.5 | % | | | 60.9 | | | | 12.8 | % | | Selling, general and administrative expenses | | | 11.7 | | | | 5.9 | % | | | 13.2 | | | | 7.1 | % | | | 37.4 | | | | 6.2 | % | | | 35.4 | | | | 7.4 | % | | Restructuring expenses | | | 0.2 | | | | 0.1 | % | | | - | | | | - | | | | 0.7 | | | | 0.1 | % | | | 1.9 | | | | 0.4 | % | | Operating income | | $ | 10.3 | | | | 5.1 | % | | $ | 12.8 | | | | 6.8 | % | | $ | 25.0 | | | | 4.2 | % | | $ | 23.6 | | | | 5.0 | % |
Comparison of Three Months ended December 31, 2021 and 2020
HDE net sales increased $15.2 million, or 8 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to pricing adjustments associated with raw material price increases and higher sales volume. Sales to off-highway and commercial vehicle customers increased $12.3 million and $10.7 million, respectively. Sales to automotive and light vehicle customers decreased $7.7 million.
HDE cost of sales increased $19.0 million, or 12 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher raw material prices, which increased approximately $19.0 million, and to a lesser extent, temporary operating inefficiencies associated with plant consolidation activities in China.higher sales volume. These negative impactsdrivers, which increased cost of sales, were partially offset by benefitsimproved operating efficiencies. While we have provisions within many of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs. As a percentage of sales, cost of sales increased 290 basis points to 88.9 percent, primarily due to the higher material prices.
As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit decreased $3.8 million and gross margin declined 290 basis points to 11.1 percent.
SG&A expenses decreased $1.5 million, or 120 basis points as a percentage of sales, compared with the third quarter of the prior year. The decrease in SG&A expenses was primarily due to lower development costs and environmental charges. These decreases were partially offset by higher compensation-related expenses, which increased approximately $1.0 million.
Restructuring expenses during the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.
Operating income decreased $2.5 million from procurementthe third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower gross profit, partially offset by lower SG&A expenses.
Comparison of Nine Months ended December 31, 2021 and 2020
HDE year-to-date net sales increased $123.7 million, or 26 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, pricing adjustments associated with raw material price increases. HDE sales in fiscal 2021, primarily in the first quarter, were negatively impacted by the COVID-19 pandemic. Sales to commercial vehicle and off-highway customers increased $59.0 million and $57.7 million, respectively.
HDE year-to-date cost of sales increased $121.5 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased approximately $53.0 million. As a percentage of sales, cost of sales increased 230 basis points to 89.5 percent, primarily due to the higher material prices.
As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2 million and gross margin declined 230 basis points to 10.5 percent.
HDE year-to-date SG&A expenses increased $2.0 million, but decreased 120 basis points as a percentage of sales, compared with the same period in the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other cost-reduction initiatives.administrative costs.
Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.
Operating income during the first nine months of fiscal 2022 increased $1.4 million from the same period last year, primarily due to higher gross profit and lower restructuring expenses, partially offset by higher SG&A expenses.
Automotive
| | | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2021 | | | 2020 | | | 2021 | | | 2020 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 72.4 | | | | 100.0 | % | | $ | 113.9 | | | | 100.0 | % | | $ | 224.0 | | | | 100.0 | % | | $ | 285.9 | | | | 100.0 | % | | Cost of sales | | | 64.9 | | | | 89.6 | % | | | 95.5 | | | | 83.9 | % | | | 196.1 | | | | 87.6 | % | | | 246.1 | | | | 86.1 | % | | Gross profit | | | 7.5 | | | | 10.4 | % | | | 18.4 | | | | 16.1 | % | | | 27.9 | | | | 12.4 | % | | | 39.8 | | | | 13.9 | % | | Selling, general and administrative expenses | | | 9.7 | | | | 13.4 | % | | | 8.5 | | | | 7.4 | % | | | 30.1 | | | | 13.4 | % | | | 25.5 | | | | 8.9 | % | | Restructuring expenses | | | - | | | | - | | | | 0.4 | | | | 0.4 | % | | | 0.2 | | | | 0.1 | % | | | 0.6 | | | | 0.2 | % | | Impairment charges (reversals) – net | | | (57.2 | ) | | | -79.0 | % | | | 134.4 | | | | 118.0 | % | | | (56.0 | ) | | | -25.0 | % | | | 134.4 | | | | 47.0 | % | | Operating income (loss) | | $ | 55.0 | | | | 76.0 | % | | $ | (124.9 | ) | | | -109.7 | % | | $ | 53.6 | | | | 24.0 | % | | $ | (120.7 | ) | | | -42.2 | % |
Comparison of Three Months ended December 31, 2021 and 2020
Automotive net sales decreased $41.5 million, or 36 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to the disposition of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market. The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021. Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.
Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume. This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million. As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.
As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.1$10.9 million and gross margin declined 560570 basis points to 9.810.4 percent.
SG&A expenses increased $0.1$1.2 million or 140 basis points as a percentage of sales, compared with the third quarter of the prior year. The increase in SG&A expenses was primarily due to a $0.5higher compensation-related expenses.
During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million unfavorable impact of foreign currency exchange rate changes, partially offset bypreviously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower compensation-related expenses.
Restructuring expensesof their carrying or fair value. The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.
Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million. The operating income and operating loss during the third quarters of fiscal 2022 and 2021 totaled $0.5 million, a decrease of $0.2 millionwere driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business. In addition, as compared with the third quarter of fiscal 2020, and primarily consisted of equipment transfer and plant consolidation costs in China.
The CIS operating loss of $1.7 million represents a $10.0 million decline from the prior-year2021, operating income of $8.3 million and was primarily due tounfavorably impacted by lower gross profit.profit and higher SG&A expenses.
Comparison of Nine Months ended December 31, 20202021 and 20192020
CISAutomotive year-to-date net sales decreased $87.4$61.9 million, or 1822 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes. The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year. Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market. Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.
Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume associated withand lower depreciation expenses, which decreased $9.9 million. We ceased depreciating the impactsproperty, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021. Upon reverting back to held and used classification during the COVID-19 pandemic. In addition, salesthird quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in fiscal 2021 have been negatively impactedthe liquid-cooled automotive business. These decreases were partially offset by lower sales to a significant data center customer. Sales to commercial HVAC&R and data center cooling customers decreased $48.1higher raw material prices, which increased approximately $9.0 million, and $41.1a $5.3 million respectively.
CIS year-to-date cost of sales decreased $64.9 million, or 16 percent, from the same period last year, primarily due to lower sales volume.foreign currency exchange rate changes. As a percentage of sales, cost of sales increased 250150 basis points to 87.7 percent, primarily due to the impact of lower sales volume and unfavorable sales mix, partially offset by cost-reduction and procurement initiatives.87.6 percent.
As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $22.5$11.9 million and gross margin declined 250150 basis points to 12.312.4 percent.
CISAutomotive year-to-date SG&A expenses decreased $3.7increased $4.6 million compared with the priorsame period last year. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $5.0 million, partially offset by a $0.6 million unfavorable impact of foreign currency exchange rate changes.
Restructuring expenses during the first nine months of fiscal 2021 increased $3.1 million compared with the prior year and primarily consisted of severance expenses and equipment transfer costs related to plant consolidation activities in China and targeted headcount reductions in North America.
Operating income decreased $21.9 million to $3.9 million, primarily due to lower gross profit and higher restructuring expenses, partially offset by lower SG&A expenses.
Building HVAC Systems
| | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2020 | | | 2019 | | | 2020 | | | 2019 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 68.7 | | | | 100.0 | % | | $ | 64.9 | | | | 100.0 | % | | $ | 178.2 | | | | 100.0 | % | | $ | 169.9 | | | | 100.0 | % | | Cost of sales | | | 43.0 | | | | 62.7 | % | | | 41.8 | | | | 64.5 | % | | | 116.3 | | | | 65.3 | % | | | 115.4 | | | | 67.9 | % | | Gross profit | | | 25.7 | | | | 37.3 | % | | | 23.1 | | | | 35.5 | % | | | 61.9 | | | | 34.7 | % | | | 54.5 | | | | 32.1 | % | | Selling, general and administrative expenses | | | 9.9 | | | | 14.3 | % | | | 9.6 | | | | 14.7 | % | | | 25.9 | | | | 14.5 | % | | | 26.9 | | | | 15.8 | % | | Operating income | | $ | 15.8 | | | | 23.1 | % | | $ | 13.5 | | | | 20.8 | % | | $ | 36.0 | | | | 20.2 | % | | $ | 27.6 | | | | 16.2 | % |
Comparison of Three Months ended December 31, 2020 and 2019
BHVAC net sales increased $3.8 million, or 6 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021, primarily due to higher sales in the U.S. and the U.K., which both increased approximately $2.0 million. The higher sales in the U.S. were primarily due to higher sales of heating products, partially offset by lower sales of ventilation products. The higher sales in the U.K. were primarily due to higher sales of air conditioning and data center cooling products.
BHVAC cost of sales increased $1.2 million, or 3 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021, primarily due to higher sales volume. As a percentage of sales, cost of sales decreased 180 basis points to 62.7 percent and was positively impacted by favorable customer pricing and sales mix.
As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $2.6 million and gross margin improved 180 basis points to 37.3 percent.
SG&A expenses increased $0.3 million from the prior year, yet decreased 40 basis points as a percentage of sales. The increase in SG&A expenses was primarily due to higher compensation-related expenses, including commission expenses.
Operating income of $15.8 millionwhich increased $2.3 million during the quarter, primarily due to higher gross profit.
Comparison of Nine Months ended December 31, 2020 and 2019
BHVAC year-to-date net sales increased $8.3 million, or 5 percent, from the same period last year, primarily due to higher sales volume. Compared with the first nine months of the prior year, sales increased $9.2 million in the U.K. and decreased $0.9 million in the U.S. The higher sales in the U.K. were primarily due to higher sales of data center products. The lower sales in the U.S. resulted primarily from the negative impacts of the COVID-19 pandemic and decreased sales of ventilation products, partially offset by higher sales of heating products.
BHVAC year-to-date cost of sales increased $0.9 million from the same period last year. As a percentage of sales, cost of sales decreased 260 basis points to 65.3 percent and was positively impacted by favorable customer pricing, sales mix and cost-reduction initiatives.
As a result of higher sales and lower cost of sales as a percentage of sales, gross profit increased $7.4approximately $2.0 million, and gross margin improved 260 basis points to 34.7 percent.
BHVAC year-to-date SG&A expenses decreased $1.0 million, or 130 basis points as a percentage of sales, from the prior year. The decrease in SG&A expenses was primary due to lower travel expenses.
Operating income of $36.0 million increased $8.4 million compared with the same period last year, primarily due to higher gross profit and lower SG&A expenses.
Heavy Duty Equipment
| | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2020 | | | 2019 | | | 2020 | | | 2019 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 185.6 | | | | 100.0 | % | | $ | 164.9 | | | | 100.0 | % | | $ | 474.7 | | | | 100.0 | % | | $ | 568.5 | | | | 100.0 | % | | Cost of sales | | | 159.6 | | | | 86.0 | % | | | 148.1 | | | | 89.8 | % | | | 413.8 | | | | 87.2 | % | | | 496.8 | | | | 87.4 | % | | Gross profit | | | 26.0 | | | | 14.0 | % | | | 16.8 | | | | 10.2 | % | | | 60.9 | | | | 12.8 | % | | | 71.7 | | | | 12.6 | % | | Selling, general and administrative expenses | | | 13.2 | | | | 7.1 | % | | | 12.6 | | | | 7.7 | % | | | 35.4 | | | | 7.4 | % | | | 42.3 | | | | 7.4 | % | | Restructuring expenses | | | - | | | | - | | | | 1.4 | | | | 0.8 | % | | | 1.9 | | | | 0.4 | % | | | 2.2 | | | | 0.4 | % | | Operating income | | $ | 12.8 | | | | 6.8 | % | | $ | 2.8 | | | | 1.7 | % | | $ | 23.6 | | | | 5.0 | % | | $ | 27.2 | | | | 4.8 | % |
Comparison of Three Months ended December 31, 2020 and 2019
HDE net sales increased $20.7 million, or 13 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021, primarily due to higher sales volume to global off-highway customers. Sales to off-highway and commercial vehicle customers increased $16.7 million and $3.8 million, respectively. Geographically, sales increased most significantly in Asia.
HDE cost of sales increased $11.5 million, or 8 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021, primarily due to higher sales volume. As a percentage of sales, cost of sales decreased 380 basis points to 86.0 percent and was favorably impacted by the higher sales volume, cost savings from procurement and other cost-reduction initiatives, and, to a lesser extent, improved operating efficiencies.
As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $9.2 million and gross margin improved 380 basis points to 14.0 percent.
SG&A expenses increased $0.6 million, yet decreased 60 basis points as a percentage of sales, compared with the third quarter of the prior year. The increase in SG&A expenses was primarily due to environmental charges related to a previously-owned U.S. manufacturing facility, which increased $0.4 million.
Restructuring expenses decreased $1.4 million compared with the third quarter of fiscal 2020, primarily due to lower severance expenses related to targeted headcount reductions.
Operating income of $12.8 million increased $10.0 million during the quarter, primarily due to higher gross profit and lower restructuring expenses.
Comparison of Nine Months ended September 30, 2020 and 2019
HDE year-to-date net sales decreased $93.8 million, or 16 percent, from the same period last year, primarily due to lower sales volume resulting from the impacts of the COVID-19 pandemic, which were most severe in the Americas and Europe during the first half of the fiscal year. Sales to commercial vehicle and automotive and light vehicle customers decreased $57.2 million and $15.2 million, respectively.
HDE year-to-date cost of sales decreased $83.0 million, or 17 percent, primarily due to lower sales volume. As a percentage of sales, cost of sales decreased 20 basis points to 87.2 percent. The significant unfavorable impact of the lower sales volume was more than offset by favorable impacts from improved operating efficiencies and cost savings from procurement and other cost-reduction initiatives.
As a result of the lower sales and lower cost of sales as a percentage of sales, gross profit decreased $10.8 million and gross margin improved 20 basis points to 12.8 percent.
HDE year-to-date SG&A expenses decreased $6.9 million from the prior year. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $6.0 million, and cost-reduction initiatives, including lower travel expenses.
Restructuring expenses during the first nine months of fiscal 2021 totaled $1.9 million, a decrease of $0.3 million compared with the same period last year, and primarily consisted of severance expenses resulting from targeted headcount reductions in North America.
Operating income of $23.6 million decreased $3.6 million compared with the same period last year, primarily due to lower gross profit, partially offset by lower SG&A expenses.
Automotive
| | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2020 | | | 2019 | | | 2020 | | | 2019 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 113.9 | | | | 100.0 | % | | $ | 110.5 | | | | 100.0 | % | | $ | 285.9 | | | | 100.0 | % | | $ | 339.8 | | | | 100.0 | % | | Cost of sales | | | 95.5 | | | | 83.9 | % | | | 98.3 | | | | 89.0 | % | | | 246.1 | | | | 86.1 | % | | | 302.1 | | | | 88.9 | % | | Gross profit | | | 18.4 | | | | 16.1 | % | | | 12.2 | | | | 11.0 | % | | | 39.8 | | | | 13.9 | % | | | 37.7 | | | | 11.1 | % | | Selling, general and administrative expenses | | | 8.5 | | | | 7.4 | % | | | 11.2 | | | | 10.2 | % | | | 25.5 | | | | 8.9 | % | | | 33.6 | | | | 9.9 | % | | Restructuring expenses | | | 0.4 | | | | 0.4 | % | | | 0.2 | | | | 0.2 | % | | | 0.6 | | | | 0.2 | % | | | 2.9 | | | | 0.8 | % | | Impairment charges | | | 134.4 | | | | 118.0 | % | | | - | | | | - | | | | 134.4 | | | | 47.0 | % | | | - | | | | - | | | Gain on sale of assets | | | - | | | | - | | | | (0.8 | ) | | | -0.8 | % | | | - | | | | - | | | | (0.8 | ) | | | -0.2 | % | | Operating (loss) income | | $ | (124.9 | ) | | | -109.7 | % | | $ | 1.6 | | | | 1.4 | % | | $ | (120.7 | ) | | | -42.2 | % | | $ | 2.0 | | | | 0.6 | % |
Comparison of Three Months ended December 31, 2020 and 2019
Automotive net sales increased $3.4 million, or 3 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021, primarily due to a $6.7 million favorable impact of foreign currency exchange rate changes, partially offset by lower sales volume. Compared with the prior year, sales increased $3.8 million and $2.0 million in Europe and Asia, respectively, and decreased $2.4 million in the Americas.
Automotive cost of sales decreased $2.8 million, or 3 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021. As a percentage of sales, cost of sales decreased 510 basis points to 83.9 percent. Compared with the prior year, cost of sales was favorably impacted by lower depreciation expenses, which decreased approximately $3.0 million, cost savings from procurement and other cost-reduction initiatives, and improved operating efficiencies. The lower depreciation expenses resulted from the Company ceasing depreciation of the long-lived assets within the liquid-cooled automotive business when it was classified as held for sale in November 2020. Foreign currency exchange rate changes negatively impacted cost of sales by $5.7 million.
As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $6.2 million and gross margin improved 510 basis points to 16.1 percent.
SG&A expenses decreased $2.7 million compared with the third quarter of the prior year. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $2.0 million.
Restructuring expenses during the third quarter of fiscal 2021 totaled $0.4 million and primarily consisted of severance expenses resulting from targeted headcount reductions in Europe.
Impairment charges during the third quarter of fiscal 2021 totaled $134.4 million and primarily related to assets in the liquid-cooled automotive business. Upon classifying this business as held for sale during the third quarter, we identified an implied loss in excess of the carrying value of its long-lived assets. Accordingly, we reduced the liquid-cooled automotive business’s long-lived assets, primarily property, plant and equipment, to zero.
During the third quarter of fiscal 2020, we completed the sale of a previously-closed manufacturing facility in Germany and, as a result, recorded a gain of $0.8 million.
The Automotive operating loss of $124.9 million in the third quarter of fiscal 2021, as compared with operating income of $1.6 million in the third quarter of the prior year, was significantly impacted by the large impairment charges associated with the liquid-cooled automotive business and, to a much lesser extent, higher gross profit and lower SG&A expenses.
Comparison of Nine Months ended December 31, 2020 and 2019
Automotive year-to-date net sales decreased $53.9 million, or 16 percent, from the same period last year, primarily due to lower sales volume largely resulting from the impacts of the COVID-19 pandemic, partially offset by a $9.7 million favorable impact of foreign currency exchange rate changes. Sales in Europe and North America decreased $46.8 million and $13.0 million, respectively. Sales in Asia increased $5.9 million.
Automotive year-to-date cost of sales decreased $56.0 million, or 19 percent, from the prior year, primarily due to lower sales volume, partially offset by an $8.2$0.7 million unfavorable impact of foreign currency exchange rate changes. As a percentage
The year-to-date net impairment reversal of sales, cost$56.0 million primarily related to assets in our liquid-cooled automotive business. The $57.2 million impairment reversal during the third quarter of sales decreased 280 basis points to 86.1 percent andfiscal 2022 was favorably impacted by improved operating efficiencies, cost savings from procurement initiatives, and lower depreciation expenses of approximately $4.0 million, partially offset by the unfavorable impact$1.2 million of lower sales volume.
As a result of the lower sales and lower cost of sales as a percentage of sales, gross profit increased $2.1 million and gross margin improved 280 basis points to 13.9 percent.
Automotive year-to-date SG&A expenses decreased $8.1 million compared with the prior year. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $8.0 million.
Restructuring expensesnet impairment charges recorded during the first ninesix months of fiscal 2021 totaled $0.62022. During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’s held for sale assets. These impairment charges were partially offset by a decrease of $2.3$7.4 million compared withimpairment reversal related to certain manufacturing operations that no longer met the same periodrequirements to be classified as held for sale due to a modification in the prior year. The decrease was primarily driven by lower severance expenses in Europe resulting from fewer targeted headcount reductions.
sale perimeter during the first quarter of fiscal 2022.
The Automotive operating loss37
Operating income of $53.6 million during the first nine months of fiscal 2021, as compared with2022 represents a $174.3 million improvement from the operating incomeloss of $2.0$120.7 million duringin the same period last year, was significantly impactedyear. The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the largesignificant impairment reversal and impairment charges, associated withrespectively, related to the liquid-cooled automotive business duringbusiness. In addition, as compared with the third quarterfirst nine months of fiscal 2021, and, to a much lesser extent, higheryear-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profit and lowerhigher SG&A expenses and restructuring charges.expenses.
Liquidity and Capital Resources
Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $72.9$61.1 million as of December 31, 2020,2021 and an available borrowing capacity of $213.6$163.1 million under our revolving credit facility. Given our extensive international operations, approximately $59.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries. Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.
In response to the COVID-19 pandemic, we have taken actions to reduce operating and administrative expenses, conserve cash and maximize liquidity. In addition, as described below, we have focused on reducing our capital expenditures and executed amendments to our primary credit agreements to provide financial covenant flexibility during fiscal 2021 and 2022. We believe our sources of liquidity including cash flow from operations, our cash and cash equivalents, and access to both committed and uncommitted credit facilities, will provide sufficient cash flow to meetadequately cover our obligations during the next twelve monthsfunding needs on both a short-term and beyond. However, we are continuing to monitor the impacts of COVID-19 on our business and the credit and financial markets.long-term basis.
Net Cash Provided by Operating Activities Net cash provided by operating activities for the nine months ended December 31, 20202021 was $146.5$7.4 million, which represents a $100.6$139.1 million increasedecrease compared with the same period in the prior year. This increasedecrease in operating cash flow was primarily due to favorableunfavorable net changes in working capital, including higher inventory levels and lowerhigher payments for separationincentive compensation and project costs associated with our review of strategic alternatives for the automotive businesses. The favorable changes in working capital during the first nine months of fiscal 2021,employee benefits as compared with the same period in the prior year, included loweryear. Inventory, including amounts held for sale, increased $57.8 million from March 31, 2021 to December 31, 2021. The higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and lower payments for incentive compensation, employee benefits, income taxesstrategic safety stock builds in connection with global supply chain constraints 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.challenges.
Capital Expenditures Capital expenditures of $30.7 million during the first nine months of fiscal 2022 increased $7.0 million compared with the same period in the prior year. In response to the economic impacts of the COVID-19 pandemic,fiscal 2021, we have been focused on reducing our capital expenditures and, where possible, have delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in our vehicular businesses. Capital expenditures of $23.7 million duringresponse to the first nine months of fiscal 2021 decreased $34.5 million compared with the same period in the prior year.COVID-19 pandemic.
Debt Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below. Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales. In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.
In May 2020, we executed amendments to our primary credit agreements in the U.S. to provide additional covenant flexibility in light of the risks and uncertainties associated with the COVID-19 pandemic. Under the amended agreements, the leverage ratio covenant limit has been temporarily raised. The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, in relation to ourno more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”). The leverage ratio covenant limit is 5.75 to 1 for the fourth quarter of fiscal 2021. In fiscal 2022, the leverage ratio covenant limit is 4.75 to 1, 3.75 to 1, and 3.50 to 1 for the first, second and third quarters, respectively, and subsequently returns to 3.25 to 1 for the fourth quarter of fiscal 2022. We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.
As of December 31, 2020, we were in compliance with our debt covenants;2021, our leverage ratio and interest coverage ratio were 1.92.5 and 8.7,10.0, respectively. We expect to remain in compliance with our debt covenants during fiscal 2021,the remainder of fiscal 2022 and beyond.
Share Repurchase Program
On November 5, 2020, we announced our Board of Directors approved a two-year, $50.0 million share repurchase program, which allows us to repurchase shares of our common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as we deem appropriate. To date, we have not repurchased shares under this program. Our decision whether and to what extent to repurchase shares under this program will depend on a number of factors, including business conditions, other cash priorities, and stock price.
Forward-Looking Statements
This report, including, but not limited to, the discussion under Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains statements, including information about future financial performance, accompanied by phrases such as “believes,” “estimates,” “expects,” “plans,” “anticipates,” “intends,” and other similar “forward-looking” statements, as defined in the Private Securities Litigation Reform Act of 1995. Modine’s actual results, performance or achievements may differ materially from those expressed or implied in these statements, because of certain risks and uncertainties, including, but not limited to, those described under “Risk Factors” in Item 1A. in Part I. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2020.2021. Other risks and uncertainties include, but are not limited to, the following:
Market Risks:
The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees;
Economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including, in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; 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 or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade, the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the short- and long-term implications of “Brexit”;
The impact of potential price increases associated with raw materials, including aluminum, copper, steel and stainless steel (nickel), and other purchased componentscomponent inventory including, but not limited to, increases in the underlying material cost based upon the London Metal Exchange and related premiums, fabrication, or fabricationfreight costs. These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand. This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whether through our quotation process or through contract provisions for prospective price adjustments, as well as the inherent lag in timing of such contract provisions; and
The impact of current and future environmental laws and regulations on our business and the businesses of our customers, including our ability to take advantage of opportunities to supply alternative new technologies to meet environmental and/or energy standards and objectives.
Operational Risks:
The overall health and continually increasing price-down focus of our vehicular customers in light of economic and market-specific factors, the concentration of sales within our CIS segment attributable to one customer, and the potential impact on us from any deterioration in the stability or performance of any of our major customers;
The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our time, quantity, quality, price and pricetiming demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;
Our ability to maintain current customer programsrelationships and compete effectively for new business, including our ability to offset or otherwise address increasing pricing pressures from competitors and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;
The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims and delays or inefficiencies resulting from restrictions imposed in response to the COVID-19 pandemic;
The impact of any delays or modifications initiated by major customers with respect to program launches, product applications or requirements;
| • | The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages; |
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 reducemodify our cost structure in response to sales volume declinesincreases or decreases and to complete restructuring activities and realize the anticipated benefits of those activities;
Costs and other effects of the investigation and remediation of environmental contamination,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, operational and administrative functions, in light of tight global labor markets;
Our ability to protect our proprietary information and intellectual property from theft or attack by internal or external sources;
The impact of any substantial disruption or material breach of our information technology systems, and any related delays, problems or costs;
Increasingly complex and restrictive laws and regulations, including those associated with being a U.S. public company and others present in various jurisdictions in which we operate, and the costs associated with compliance therewith;
Work stoppages or interference at our facilities or those of our major customers and/or suppliers;
The constant and increasing pressures associated with healthcare and associated insurance costs; and
Costs and other effects of litigation, claims, or other obligations.
Strategic Risks:
Our ability to successfully complete the pending sale of our liquid-cooled automotive business, including the receipt of governmental and third-party approvals and satisfaction of other closing conditions, and our ability to successfully exit our other automotive businesses in a manner that is in the best interest of our shareholders;
| • | Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers; |
Our ability to successfully realize anticipated benefits fromidentify and execute strategies in our increased “industrial” market presence, with our CISautomotive businesses to reduce costs and BHVAC businesses, while maintaining appropriate focus on the market opportunities presented by our HDE and Automotive businesses;improve operating margins;
Our ability to identify and execute growth and diversification opportunities in order to position us for long-term success; and
The potential impacts from any actions by activist shareholders, including disruption of our business and related costs.
Financial Risks:
Our ability to fund our global liquidity requirements efficiently for Modine’s current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;
The impact of potential increases in interest rates, particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations, andobligations;
The impact of changes in federal, state or local tax regulations that could have the continued uncertainty around the utilizationeffect of LIBOR or alternative reference rates;increasing our income tax expense;
Our ability to comply with the financial covenants as amended, in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);
The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and
Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.
Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2020.2021. The Company’s market risks have not materially changed since the fiscal 20202021 Form 10-K was filed.
| Item 4. | Controls and Procedures. |
Evaluation Regarding Disclosure Controls and Procedures
As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Finance and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Finance and Chief Financial Officer have concluded that the design and operation of the Company’sCompany’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2020.2021.
Changes in Internal Control Over Financial Reporting
There have been no changes in internal control over financial reporting during the third quarter of fiscal 20212022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
ISSUER PURCHASES OF EQUITY SECURITIES
The following describes the Company’s purchases of common stock during the third quarter of fiscal 2022: Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (a) | | October 1 – October 31, 2021 | 36,644 (b)
| $11.94 | _______
| $50,000,000 | | | | | | | | November 1 – November 30, 2021 | _______
| _______
| _______
| 50,000,000 | | | | | | | | December 1 – December 31, 2021 | 4,189 (b)
| $10.20 | _______
| 50,000,000 | | | | | | | | Total | 40,833 (b)
| $11.76 | _______
| |
| (a) | Effective November 5, 2020, the Board of Directors approved a two-year, $50.0 million share repurchase program, which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate. |
| (b) | Consists of shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards. The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions. These shares are held as treasury shares. |
| Item 5. | Other Information. |
The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.
| Exhibit No. | Description | | Incorporated Herein By Reference To | Filed Herewith | | | | | | | | Securities and Asset PurchaseTermination Agreement dated as of November 2, 2020, by and between the Company and Dana Incorporated, dated as of October 25, 2021. | | Exhibit 2.1 to Registrant’s Current Report on Form 8-K dated November 2, 2020October 25, 2021 | | | | | | | | | [Corrected] OfferSeparation Letter dated as of November 10, 2020, by andAgreement between the Company and Mr. BrinkerJoel T. Casterton, dated as of October 25, 2021. | | | X | | | | | | | | FormSeparation Letter Agreement between the Company and Matthew J. McBurney, dated as of Make-Whole RSU Award Agreement with Neil Brinker | | | X | | | | | | | Form of Make-Whole Performance Cash Award Agreement with Neil BrinkerOctober 30, 2021. | | | X | | | | | | | | Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer. | | | X | | | | | | | | Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Finance and Chief Financial Officer. | | | X | | | | | | | | Section 1350 Certification of Neil D. Brinker, President and Chief Executive Officer. | | | X | | | | | | | | Section 1350 Certification of Michael B. Lucareli, Executive Vice President, Finance and Chief Financial Officer. | | | X | | | | | | | | 101.INS | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). | | | X | | | | | | | | 101.SCH | Inline XBRL Taxonomy Extension SchemaSchema. | | | X | | | | | | | | 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase DocumentDocument. | | | X | | | | | | | | 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase DocumentDocument. | | | X | | | | | | | 101.LAB10.1.LAB | Inline XBRL Taxonomy Extension Label Linkbase DocumentDocument. | | | X | | | | | | | 101.PRE10.1.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase DocumentDocument. | | | X | | | | | | | | 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101). | | | X |
* Schedules and similar attachments have been omitted pursuant to Item 601(b)(2) of Regulation S-K because they are not material and would likely cause competitive harm to the Company if publicly disclosed.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
MODINE MANUFACTURING COMPANY (Registrant)
By: /s/ Michael B. Lucareli Michael B. Lucareli, Executive Vice President, Finance and Chief Financial Officer*
Date: February 5, 20213, 2022
* Executing as both the principal financial officer and a duly authorized officer of the Company
s | | % of sales | |
Comparison of Three Months ended December 31, 20202021 and 20192020
Third quarter net sales of $484.3$502.2 million were $10.9$17.9 million, or 24 percent, higher than the third quarter of the prior year, primarily due to higher sales volume and favorable pricing adjustments in response to raw material price increases in our CIS, BHVAC, and HDE segments, partially offset by lower sales volume in our Automotive segment. Sales in the CIS, BHVAC, and HDE segments increased $23.7 million, $16.9 million, and $15.2 million, respectively. Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.
Third quarter cost of sales increased $26.0 million, or 6 percent, primarily due to higher raw material prices, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, segments and an $11.2 million favorable impactHDE segments. These drivers, which increased cost of foreign currency exchange rate changes,sales, were partially offset by lower sales volume in the CISAutomotive segment and Automotive segments. Sales in the HDE, BHVAC, and Automotive segments increased $20.7 million, $3.8 million, and $3.4 million, respectively. CIS segment sales decreased $18.5 million.
Third quarter cost of sales increased $1.7 million.improved operating efficiencies. As a percentage of sales, cost of sales decreased 160increased 220 basis points to 82.985.1 percent. The increase in cost of sales was primarily due to a $9.7 million unfavorable impact of foreign currency exchange rate changes, partially offset by the favorable impacts of procurement and other cost-reduction initiatives and a $3.0 million decrease in depreciation expense in the Automotive segment. In addition, program and equipment transfer costs to prepare the liquid-cooled automotive business for sale decreased approximately $1.0 million compared with the prior year.
As a result of higher sales and lowerhigher cost of sales as a percentage of sales, third quarter gross profit increased $9.2decreased $8.1 million and gross margin improved 160declined 220 basis points to 17.114.9 percent.
Third quarter SG&A expenses decreased $7.4 million. The decrease in SG&A expenses was primarily due to$5.8 million, primary driven by $2.6 million of lower costs recorded at Corporate associated withrelated to our review of strategic alternatives for the Automotive segment’s business operations,segment businesses and lower compensation-related expenses, which decreased approximately $10.0$2.0 million. This favorable driver was partially offset by a $1.0 million unfavorable impact of foreign currency exchange rate changes and higher environmental chargesThe lower compensation-related expenses were primarily due to lower incentive compensation expenses at Corporate in the HDE segment.current year.
Restructuring expenses of $0.9 million during the third quarter of fiscal 2021 decreased $1.7 million, primarily due to lower restructuring expenses in the HDE segment.
Impairment charges of $134.4$2.1 million in the third quarter of fiscal 2021 primarily related to the write-down of the long-lived assets in the Automotive segment’s liquid-cooled automotive business in connection2022 increased $1.2 million compared with the pending sale of that business.
The operating loss of $108.7 million represents a $116.9 million decline from the prior-year operating income of $8.2 million. The decline was primarily due to the $134.4 million of impairment charges recorded in the Automotive segment and lower earnings in the CIS segment. These negative drivers were partially offset by higher earnings in our HDE and BHVAC segments.
Interest expense decreased $1.0 million, or 18 percent, during the third quarter of fiscal 2021, primarily due to higher severance expenses in the CIS segment.
During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower outstanding long-term debtof their carrying or fair value. During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale, we recorded $134.4 million of impairment charges and reduced the carrying value of the disposal group’s long-lived assets to zero.
Operating income of $79.4 million in the third quarter of fiscal 2022 represents a lesser extent,$188.1 million improvement from the prior-year operating loss of $108.7 million. The operating income and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment. In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.
Interest expense in the third quarter of fiscal 2022 decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorable changes in interest rates.
The provision for income taxes was $81.6$0.1 million and $1.7$81.6 million in the third quarter of fiscal 20212022 and 2020,2021, respectively. The $79.9$81.5 million increasedecrease was primarily due to the absence of $109.9 million of income tax charges totaling $116.5 million recorded in the third quarter of fiscal 2021prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions. These drivers, which decreased the provision for income taxes, were partially offset by the absence of $37.7 million of income tax benefits totaling $37.7 millionrecorded during the prior year related to the Automotive segment impairment charges recorded earlier in the third quarter of fiscal 2021.charges.
Comparison of Nine Months ended December 31, 20202021 and 20192020
Fiscal 20212022 year-to-date net sales of $1,293.5$1,475.7 million were $209.1$182.2 million, or 14 percent, lowerhigher than the same period last year, primarily due to lowerhigher sales volumes and favorable pricing adjustments in response to raw material price increases in our HDE, CIS, and AutomotiveBHVAC segments. Sales in these segments decreased $93.8increased $123.7 million, $87.4$86.6 million, and $53.9$38.4 million, respectively, and were significantly impacted by market-driven volume declines and temporary plant closures earlier in the fiscal year due to the COVID-19 pandemic. BHVACrespectively. Automotive segment sales increased $8.3decreased $61.9 million.
Fiscal 20212022 year-to-date cost of sales of $1,083.9$1,261.6 million decreased $186.1increased $177.7 million, or 1516 percent, primarily due to lowerhigher raw material prices, which increased approximately $117.0 million, and higher sales volume. In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic. These factors, which caused an increase in cost of sales compared with the same period in the prior year, were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies. As a percentage of sales, cost of sales improved 70increased 170 basis points to 83.885.5 percent. The unfavorable impact of lower sales volume was more than offset by the benefits of cost-reduction initiatives implemented earlier in the fiscal year in response to lower end market demand and procurement initiatives.
As a result of lowerhigher sales and lowerhigher cost of sales as a percentage of sales, fiscal 2021 year-to-date gross profit decreased $23.0increased $4.5 million and gross margin improved 70declined 170 basis points to 16.214.5 percent.
Fiscal 20212022 year-to-date SG&A expenses decreased $42.8increased $10.0 million. The decreaseincrease in SG&A expenses was primarily due to higher compensation-related expenses, as the prior year was favorably impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19. In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million. These increases were partially offset by lower strategic reorganization costs and lower costs recorded at Corporate associated withrelated to our review of strategic alternatives for the Automotive segment’s business operations,segment businesses, which decreased approximately $29.0$2.8 million and $1.3 million, respectively. The lower compensation-relatedstrategic reorganization costs primarily resulted from lower severance expenses which decreased approximately $18.0 million. These favorable drivers were partially offset by $5.9 million of costs recorded at Corporate in connection with Mr. Burke stepping down from his position as President and CEO and the search for his successor.executive management positions.
Restructuring expenses of $7.0$3.0 million duringin the first nine months of fiscal 2021 increased $0.32022 decreased $4.0 million compared with the same period last year, primarily due to higher restructuringlower severance expenses in the CIS segment, partially offset by lower restructuring expenses in the Automotive segment.and HDE segments.
The fiscal 2021 year-to-date operating lossnet impairment reversals of $83.4$55.7 million represents a $115.7 million decline from the prior-year operating income of $32.3 million. The decline was primarily due to the $134.4 million of impairment charges recorded in the Automotive segment and lower earnings in our CIS and HDE segments. These negative drivers were partially offset by lower SG&A expenses at Corporate and higher earnings in our BHVAC segment.
Interest expense decreased $2.1 million, or 12 percent, during the first nine months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment. In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale. In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.
We sold our air-cooled automotive business on April 30, 2021. As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.
Operating income of $98.6 million during the first nine months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million. The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business. In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses. Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.
Interest expense during the first nine months of fiscal 2022 decreased $3.4 million compared with the same period last year, primarily due to lower outstanding long-term debt and favorable changes in interest rates.rates and lower debt outstanding during the current-year.
The provision for income taxes was $95.3$7.4 million and $8.3$95.3 million during the first nine months of fiscal 20212022 and 2020,2021, respectively. The $87.0$87.9 million increasedecrease was primarily due to the absence of $116.5 million of income tax charges totaling $123.1 million recorded duringin the first nine months of fiscal 2021prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions. These drivers, which decreased the provision for income taxes, were partially offset by the absence of $37.7 million of income tax benefits totaling $37.7 millionrecorded during the prior year related to the Automotive segment impairment charges recorded during fiscal 2021.charges.
SEGMENT RESULTS OF OPERATIONS
Effective AprilJuly 1, 2020,2021, we began managingaligned the data center businesses previously managed by and reported within the CIS segment under the BHVAC segment. The BHVAC segment assumed management of our global automotive business separate fromin Guadalajara, Spain and a portion of our business in Grenada, Mississippi. Through this segment change, we have aligned our data center businesses under the otherBHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies. As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the previously-reported Vehicular Thermal Solutions (“VTS”)BHVAC segment. We have been managing the automotive business as the Automotive segment as we target the sale or eventual exit of its underlying automotive business operations. We are managing the other businesses of the VTS segment, including the commercial vehicle and off-highway businesses, as the Heavy Duty Equipment segment. We began reporting financial results for our new segment structure beginning for fiscal 2021. Segment financial information for fiscal 2020 has been recast to conform to the fiscal 2021 presentation. The segment realignment had no impact on the CISHDE and BHVAC segments.Automotive segments or on our consolidated financial position, results of operations, and cash flows. Segment financial information for the prior periods has been recast to conform to the current presentation.
As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment. While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment. See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.
The following is a discussion of our segment results of operations for the three months and nine months ended December 31, 20202021 and 2019:2020:
Commercial and Industrial SolutionsBuilding HVAC Systems
| | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2020 | | | 2019 | | | 2020 | | | 2019 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 129.0 | | | | 100.0 | % | | $ | 147.5 | | | | 100.0 | % | | $ | 385.6 | | | | 100.0 | % | | $ | 473.0 | | | | 100.0 | % | | Cost of sales | | | 116.4 | | | | 90.2 | % | | | 124.8 | | | | 84.6 | % | | | 338.2 | | | | 87.7 | % | | | 403.1 | | | | 85.2 | % | | Gross profit | | | 12.6 | | | | 9.8 | % | | | 22.7 | | | | 15.4 | % | | | 47.4 | | | | 12.3 | % | | | 69.9 | | | | 14.8 | % | | Selling, general and administrative expenses | | | 13.8 | | | | 10.7 | % | | | 13.7 | | | | 9.3 | % | | | 39.1 | | | | 10.2 | % | | | 42.8 | | | | 9.1 | % | | Restructuring expenses | | | 0.5 | | | | 0.4 | % | | | 0.7 | | | | 0.5 | % | | | 4.4 | | | | 1.1 | % | | | 1.3 | | | | 0.3 | % | | Operating (loss) income | | $ | (1.7 | ) | | | -1.3 | % | | $ | 8.3 | | | | 5.6 | % | | $ | 3.9 | | | | 1.0 | % | | $ | 25.8 | | | | 5.4 | % |
| | | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2021 | | | 2020 | | | 2021 | | | 2020 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 90.6 | | | | 100.0 | % | | $ | 73.7 | | | | 100.0 | % | | $ | 234.7 | | | | 100.0 | % | | $ | 196.3 | | | | 100.0 | % | | Cost of sales | | | 63.2 | | | | 69.7 | % | | | 48.3 | | | | 65.5 | % | | | 169.5 | | | | 72.2 | % | | | 131.8 | | | | 67.1 | % | | Gross profit | | | 27.4 | | | | 30.3 | % | | | 25.4 | | | | 34.5 | % | | | 65.2 | | | | 27.8 | % | | | 64.5 | | | | 32.9 | % | | Selling, general and administrative expenses | | | 13.0 | | | | 14.4 | % | | | 10.5 | | | | 14.3 | % | | | 35.1 | | | | 15.0 | % | | | 28.9 | | | | 14.8 | % | | Operating income | | $ | 14.4 | | | | 15.9 | % | | $ | 14.9 | | | | 20.1 | % | | $ | 30.1 | | | | 12.8 | % | | $ | 35.6 | | | | 18.1 | % |
Comparison of Three Months ended December 31, 20202021 and 20192020
CISBHVAC net sales decreased $18.5increased $16.9 million, or 1323 percent, from the third quarter of fiscal 20202021 to the third quarter of fiscal 2021,2022, primarily due to lowerhigher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases. Compared with the third quarter of the prior year, BHVAC sales to data center coolingcustomers increased $11.6 million. In addition, sales to commercial HVAC customers increased $5.2 million, primarily due to higher sales of ventilation and heating products in North America.
BHVAC cost of sales increased $14.9 million, or 31 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs. As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.
As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent. While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.
SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.
Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.
Comparison of Nine Months ended December 31, 2021 and 2020
BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a $4.5lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7 million favorable impact of foreign currency exchange rate changes.rates. Sales to data center coolingcommercial HVAC customers decreased $18.4increased $24.5 million, primarily due to lowerhigher sales of heating and air conditioning products. In addition, sales to one individual customer.data center customers increased $13.0 million.
CISBHVAC year-to-date cost of sales decreased $8.4increased $37.7 million, or 729 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021,same period last year, primarily due to lowerhigher sales volume partially offsetand higher raw material prices, which increased by a $4.2approximately $12.0 million. In addition, cost of sales was unfavorably impacted by $4.8 million unfavorable impact offrom foreign currency exchange rate changes. As a percentage of sales, cost of sales increased 560510 basis points to 90.272.2 percent, primarily due to the impacthigher material costs.
As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.
BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.
Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.
Commercial and Industrial Solutions
| | | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2021 | | | 2020 | | | 2021 | | | 2020 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 148.6 | | | | 100.0 | % | | $ | 124.9 | | | | 100.0 | % | | $ | 456.2 | | | | 100.0 | % | | $ | 369.6 | | | | 100.0 | % | | Cost of sales | | | 130.9 | | | | 88.1 | % | | | 112.0 | | | | 89.7 | % | | | 399.4 | | | | 87.5 | % | | | 324.8 | | | | 87.9 | % | | Gross profit | | | 17.7 | | | | 11.9 | % | | | 12.9 | | | | 10.3 | % | | | 56.8 | | | | 12.5 | % | | | 44.8 | | | | 12.1 | % | | Selling, general and administrative expenses | | | 12.4 | | | | 8.4 | % | | | 13.1 | | | | 10.4 | % | | | 37.7 | | | | 8.3 | % | | | 36.0 | | | | 9.7 | % | | Restructuring expenses | | | 1.9 | | | | 1.3 | % | | | 0.5 | | | | 0.4 | % | | | 2.1 | | | | 0.5 | % | | | 4.4 | | | | 1.2 | % | | Impairment charge | | | - | | | | - | | | | - | | | | - | | | | 0.3 | | | | 0.1 | % | | | - | | | | - | | | Operating income (loss) | | $ | 3.4 | | | | 2.2 | % | | $ | (0.7 | ) | | | -0.5 | % | | $ | 16.7 | | | | 3.6 | % | | $ | 4.4 | | | | 1.2 | % |
Comparison of Three Months ended December 31, 2021 and 2020
CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume unfavorableand favorable product pricing adjustments in response to raw material price increases. Compared with the third quarter of the prior year, sales mix,to commercial HVAC&R customers increased $24.5 million.
CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million. As a percentage of sales, cost of sales decreased 160 basis points to 88.1 percent, primarily due to the favorable impacts of the higher sales volume and improved operating efficiencies, partially offset by higher material costs.
As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8 million and gross margin improved 160 basis points to 11.9 percent.
SG&A expenses decreased $0.7 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.
Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses. The severance expenses in the third quarter of fiscal 2022 primarily related to targeted headcount reductions in Europe and China.
Operating income of $3.4 million represents a $4.1 million improvement from the prior-year operating loss of $0.7 million and was primarily due to higher gross profit.
Comparison of Nine Months ended December 31, 2021 and 2020
CIS year-to-date net sales increased $86.6 million, or 23 percent, from the same period last year, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases. In addition, sales were favorably impacted by $5.7 million from foreign currency exchange rates. The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year. Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, compared with the same period in the prior year.
CIS year-to-date cost of sales increased $74.6 million, or 23 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0 million. In addition, cost of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes. As a percentage of sales, cost of sales decreased 40 basis points to 87.5 percent, primarily due to the favorable impacts of the higher sales volume and improved operating efficiencies, partially offset by higher material costs.
As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0 million and gross margin improved 40 basis points to 12.5 percent.
CIS year-to-date SG&A expenses increased $1.7 million, yet decreased 140 basis points as a percentage of sales, from the same period last year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.
Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3 million from the same period last year, primarily due to lower severance expenses. The severance expenses during the first nine months of fiscal 2022 primarily related to targeted headcount reductions in Europe and China. The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.
During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write down a previously-closed manufacturing facility in the U.S to fair value less costs to sell. We sold the facility and received net cash proceeds of $0.7 million during July 2021.
Operating income during the first nine months of fiscal 2022 increased $12.3 million from the same period last year, primarily due to higher gross profit and lower restructuring expenses, partially offset by higher SG&A expenses.
Heavy Duty Equipment
| | | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2021 | | | 2020 | | | 2021 | | | 2020 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 200.8 | | | | 100.0 | % | | $ | 185.6 | | | | 100.0 | % | | $ | 598.4 | | | | 100.0 | % | | $ | 474.7 | | | | 100.0 | % | | Cost of sales | | | 178.6 | | | | 88.9 | % | | | 159.6 | | | | 86.0 | % | | | 535.3 | | | | 89.5 | % | | | 413.8 | | | | 87.2 | % | | Gross profit | | | 22.2 | | | | 11.1 | % | | | 26.0 | | | | 14.0 | % | | | 63.1 | | | | 10.5 | % | | | 60.9 | | | | 12.8 | % | | Selling, general and administrative expenses | | | 11.7 | | | | 5.9 | % | | | 13.2 | | | | 7.1 | % | | | 37.4 | | | | 6.2 | % | | | 35.4 | | | | 7.4 | % | | Restructuring expenses | | | 0.2 | | | | 0.1 | % | | | - | | | | - | | | | 0.7 | | | | 0.1 | % | | | 1.9 | | | | 0.4 | % | | Operating income | | $ | 10.3 | | | | 5.1 | % | | $ | 12.8 | | | | 6.8 | % | | $ | 25.0 | | | | 4.2 | % | | $ | 23.6 | | | | 5.0 | % |
Comparison of Three Months ended December 31, 2021 and 2020
HDE net sales increased $15.2 million, or 8 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to pricing adjustments associated with raw material price increases and higher sales volume. Sales to off-highway and commercial vehicle customers increased $12.3 million and $10.7 million, respectively. Sales to automotive and light vehicle customers decreased $7.7 million.
HDE cost of sales increased $19.0 million, or 12 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher raw material prices, which increased approximately $19.0 million, and to a lesser extent, temporary operating inefficiencies associated with plant consolidation activities in China.higher sales volume. These negative impactsdrivers, which increased cost of sales, were partially offset by benefitsimproved operating efficiencies. While we have provisions within many of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs. As a percentage of sales, cost of sales increased 290 basis points to 88.9 percent, primarily due to the higher material prices.
As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit decreased $3.8 million and gross margin declined 290 basis points to 11.1 percent.
SG&A expenses decreased $1.5 million, or 120 basis points as a percentage of sales, compared with the third quarter of the prior year. The decrease in SG&A expenses was primarily due to lower development costs and environmental charges. These decreases were partially offset by higher compensation-related expenses, which increased approximately $1.0 million.
Restructuring expenses during the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.
Operating income decreased $2.5 million from procurementthe third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower gross profit, partially offset by lower SG&A expenses.
Comparison of Nine Months ended December 31, 2021 and 2020
HDE year-to-date net sales increased $123.7 million, or 26 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, pricing adjustments associated with raw material price increases. HDE sales in fiscal 2021, primarily in the first quarter, were negatively impacted by the COVID-19 pandemic. Sales to commercial vehicle and off-highway customers increased $59.0 million and $57.7 million, respectively.
HDE year-to-date cost of sales increased $121.5 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased approximately $53.0 million. As a percentage of sales, cost of sales increased 230 basis points to 89.5 percent, primarily due to the higher material prices.
As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2 million and gross margin declined 230 basis points to 10.5 percent.
HDE year-to-date SG&A expenses increased $2.0 million, but decreased 120 basis points as a percentage of sales, compared with the same period in the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other cost-reduction initiatives.administrative costs.
Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.
Operating income during the first nine months of fiscal 2022 increased $1.4 million from the same period last year, primarily due to higher gross profit and lower restructuring expenses, partially offset by higher SG&A expenses.
Automotive
| | | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2021 | | | 2020 | | | 2021 | | | 2020 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 72.4 | | | | 100.0 | % | | $ | 113.9 | | | | 100.0 | % | | $ | 224.0 | | | | 100.0 | % | | $ | 285.9 | | | | 100.0 | % | | Cost of sales | | | 64.9 | | | | 89.6 | % | | | 95.5 | | | | 83.9 | % | | | 196.1 | | | | 87.6 | % | | | 246.1 | | | | 86.1 | % | | Gross profit | | | 7.5 | | | | 10.4 | % | | | 18.4 | | | | 16.1 | % | | | 27.9 | | | | 12.4 | % | | | 39.8 | | | | 13.9 | % | | Selling, general and administrative expenses | | | 9.7 | | | | 13.4 | % | | | 8.5 | | | | 7.4 | % | | | 30.1 | | | | 13.4 | % | | | 25.5 | | | | 8.9 | % | | Restructuring expenses | | | - | | | | - | | | | 0.4 | | | | 0.4 | % | | | 0.2 | | | | 0.1 | % | | | 0.6 | | | | 0.2 | % | | Impairment charges (reversals) – net | | | (57.2 | ) | | | -79.0 | % | | | 134.4 | | | | 118.0 | % | | | (56.0 | ) | | | -25.0 | % | | | 134.4 | | | | 47.0 | % | | Operating income (loss) | | $ | 55.0 | | | | 76.0 | % | | $ | (124.9 | ) | | | -109.7 | % | | $ | 53.6 | | | | 24.0 | % | | $ | (120.7 | ) | | | -42.2 | % |
Comparison of Three Months ended December 31, 2021 and 2020
Automotive net sales decreased $41.5 million, or 36 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to the disposition of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market. The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021. Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.
Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume. This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million. As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.
As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.1$10.9 million and gross margin declined 560570 basis points to 9.810.4 percent.
SG&A expenses increased $0.1$1.2 million or 140 basis points as a percentage of sales, compared with the third quarter of the prior year. The increase in SG&A expenses was primarily due to a $0.5higher compensation-related expenses.
During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million unfavorable impact of foreign currency exchange rate changes, partially offset bypreviously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower compensation-related expenses.
Restructuring expensesof their carrying or fair value. The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.
Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million. The operating income and operating loss during the third quarters of fiscal 2022 and 2021 totaled $0.5 million, a decrease of $0.2 millionwere driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business. In addition, as compared with the third quarter of fiscal 2020, and primarily consisted of equipment transfer and plant consolidation costs in China.
The CIS operating loss of $1.7 million represents a $10.0 million decline from the prior-year2021, operating income of $8.3 million and was primarily due tounfavorably impacted by lower gross profit.profit and higher SG&A expenses.
Comparison of Nine Months ended December 31, 20202021 and 20192020
CISAutomotive year-to-date net sales decreased $87.4$61.9 million, or 1822 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes. The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year. Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market. Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.
Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume associated withand lower depreciation expenses, which decreased $9.9 million. We ceased depreciating the impactsproperty, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021. Upon reverting back to held and used classification during the COVID-19 pandemic. In addition, salesthird quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in fiscal 2021 have been negatively impactedthe liquid-cooled automotive business. These decreases were partially offset by lower sales to a significant data center customer. Sales to commercial HVAC&R and data center cooling customers decreased $48.1higher raw material prices, which increased approximately $9.0 million, and $41.1a $5.3 million respectively.
CIS year-to-date cost of sales decreased $64.9 million, or 16 percent, from the same period last year, primarily due to lower sales volume.foreign currency exchange rate changes. As a percentage of sales, cost of sales increased 250150 basis points to 87.7 percent, primarily due to the impact of lower sales volume and unfavorable sales mix, partially offset by cost-reduction and procurement initiatives.87.6 percent.
As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $22.5$11.9 million and gross margin declined 250150 basis points to 12.312.4 percent.
CISAutomotive year-to-date SG&A expenses decreased $3.7increased $4.6 million compared with the priorsame period last year. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $5.0 million, partially offset by a $0.6 million unfavorable impact of foreign currency exchange rate changes.
Restructuring expenses during the first nine months of fiscal 2021 increased $3.1 million compared with the prior year and primarily consisted of severance expenses and equipment transfer costs related to plant consolidation activities in China and targeted headcount reductions in North America.
Operating income decreased $21.9 million to $3.9 million, primarily due to lower gross profit and higher restructuring expenses, partially offset by lower SG&A expenses.
Building HVAC Systems
| | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2020 | | | 2019 | | | 2020 | | | 2019 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 68.7 | | | | 100.0 | % | | $ | 64.9 | | | | 100.0 | % | | $ | 178.2 | | | | 100.0 | % | | $ | 169.9 | | | | 100.0 | % | | Cost of sales | | | 43.0 | | | | 62.7 | % | | | 41.8 | | | | 64.5 | % | | | 116.3 | | | | 65.3 | % | | | 115.4 | | | | 67.9 | % | | Gross profit | | | 25.7 | | | | 37.3 | % | | | 23.1 | | | | 35.5 | % | | | 61.9 | | | | 34.7 | % | | | 54.5 | | | | 32.1 | % | | Selling, general and administrative expenses | | | 9.9 | | | | 14.3 | % | | | 9.6 | | | | 14.7 | % | | | 25.9 | | | | 14.5 | % | | | 26.9 | | | | 15.8 | % | | Operating income | | $ | 15.8 | | | | 23.1 | % | | $ | 13.5 | | | | 20.8 | % | | $ | 36.0 | | | | 20.2 | % | | $ | 27.6 | | | | 16.2 | % |
Comparison of Three Months ended December 31, 2020 and 2019
BHVAC net sales increased $3.8 million, or 6 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021, primarily due to higher sales in the U.S. and the U.K., which both increased approximately $2.0 million. The higher sales in the U.S. were primarily due to higher sales of heating products, partially offset by lower sales of ventilation products. The higher sales in the U.K. were primarily due to higher sales of air conditioning and data center cooling products.
BHVAC cost of sales increased $1.2 million, or 3 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021, primarily due to higher sales volume. As a percentage of sales, cost of sales decreased 180 basis points to 62.7 percent and was positively impacted by favorable customer pricing and sales mix.
As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $2.6 million and gross margin improved 180 basis points to 37.3 percent.
SG&A expenses increased $0.3 million from the prior year, yet decreased 40 basis points as a percentage of sales. The increase in SG&A expenses was primarily due to higher compensation-related expenses, including commission expenses.
Operating income of $15.8 millionwhich increased $2.3 million during the quarter, primarily due to higher gross profit.
Comparison of Nine Months ended December 31, 2020 and 2019
BHVAC year-to-date net sales increased $8.3 million, or 5 percent, from the same period last year, primarily due to higher sales volume. Compared with the first nine months of the prior year, sales increased $9.2 million in the U.K. and decreased $0.9 million in the U.S. The higher sales in the U.K. were primarily due to higher sales of data center products. The lower sales in the U.S. resulted primarily from the negative impacts of the COVID-19 pandemic and decreased sales of ventilation products, partially offset by higher sales of heating products.
BHVAC year-to-date cost of sales increased $0.9 million from the same period last year. As a percentage of sales, cost of sales decreased 260 basis points to 65.3 percent and was positively impacted by favorable customer pricing, sales mix and cost-reduction initiatives.
As a result of higher sales and lower cost of sales as a percentage of sales, gross profit increased $7.4approximately $2.0 million, and gross margin improved 260 basis points to 34.7 percent.
BHVAC year-to-date SG&A expenses decreased $1.0 million, or 130 basis points as a percentage of sales, from the prior year. The decrease in SG&A expenses was primary due to lower travel expenses.
Operating income of $36.0 million increased $8.4 million compared with the same period last year, primarily due to higher gross profit and lower SG&A expenses.
Heavy Duty Equipment
| | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2020 | | | 2019 | | | 2020 | | | 2019 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 185.6 | | | | 100.0 | % | | $ | 164.9 | | | | 100.0 | % | | $ | 474.7 | | | | 100.0 | % | | $ | 568.5 | | | | 100.0 | % | | Cost of sales | | | 159.6 | | | | 86.0 | % | | | 148.1 | | | | 89.8 | % | | | 413.8 | | | | 87.2 | % | | | 496.8 | | | | 87.4 | % | | Gross profit | | | 26.0 | | | | 14.0 | % | | | 16.8 | | | | 10.2 | % | | | 60.9 | | | | 12.8 | % | | | 71.7 | | | | 12.6 | % | | Selling, general and administrative expenses | | | 13.2 | | | | 7.1 | % | | | 12.6 | | | | 7.7 | % | | | 35.4 | | | | 7.4 | % | | | 42.3 | | | | 7.4 | % | | Restructuring expenses | | | - | | | | - | | | | 1.4 | | | | 0.8 | % | | | 1.9 | | | | 0.4 | % | | | 2.2 | | | | 0.4 | % | | Operating income | | $ | 12.8 | | | | 6.8 | % | | $ | 2.8 | | | | 1.7 | % | | $ | 23.6 | | | | 5.0 | % | | $ | 27.2 | | | | 4.8 | % |
Comparison of Three Months ended December 31, 2020 and 2019
HDE net sales increased $20.7 million, or 13 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021, primarily due to higher sales volume to global off-highway customers. Sales to off-highway and commercial vehicle customers increased $16.7 million and $3.8 million, respectively. Geographically, sales increased most significantly in Asia.
HDE cost of sales increased $11.5 million, or 8 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021, primarily due to higher sales volume. As a percentage of sales, cost of sales decreased 380 basis points to 86.0 percent and was favorably impacted by the higher sales volume, cost savings from procurement and other cost-reduction initiatives, and, to a lesser extent, improved operating efficiencies.
As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $9.2 million and gross margin improved 380 basis points to 14.0 percent.
SG&A expenses increased $0.6 million, yet decreased 60 basis points as a percentage of sales, compared with the third quarter of the prior year. The increase in SG&A expenses was primarily due to environmental charges related to a previously-owned U.S. manufacturing facility, which increased $0.4 million.
Restructuring expenses decreased $1.4 million compared with the third quarter of fiscal 2020, primarily due to lower severance expenses related to targeted headcount reductions.
Operating income of $12.8 million increased $10.0 million during the quarter, primarily due to higher gross profit and lower restructuring expenses.
Comparison of Nine Months ended September 30, 2020 and 2019
HDE year-to-date net sales decreased $93.8 million, or 16 percent, from the same period last year, primarily due to lower sales volume resulting from the impacts of the COVID-19 pandemic, which were most severe in the Americas and Europe during the first half of the fiscal year. Sales to commercial vehicle and automotive and light vehicle customers decreased $57.2 million and $15.2 million, respectively.
HDE year-to-date cost of sales decreased $83.0 million, or 17 percent, primarily due to lower sales volume. As a percentage of sales, cost of sales decreased 20 basis points to 87.2 percent. The significant unfavorable impact of the lower sales volume was more than offset by favorable impacts from improved operating efficiencies and cost savings from procurement and other cost-reduction initiatives.
As a result of the lower sales and lower cost of sales as a percentage of sales, gross profit decreased $10.8 million and gross margin improved 20 basis points to 12.8 percent.
HDE year-to-date SG&A expenses decreased $6.9 million from the prior year. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $6.0 million, and cost-reduction initiatives, including lower travel expenses.
Restructuring expenses during the first nine months of fiscal 2021 totaled $1.9 million, a decrease of $0.3 million compared with the same period last year, and primarily consisted of severance expenses resulting from targeted headcount reductions in North America.
Operating income of $23.6 million decreased $3.6 million compared with the same period last year, primarily due to lower gross profit, partially offset by lower SG&A expenses.
Automotive
| | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2020 | | | 2019 | | | 2020 | | | 2019 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 113.9 | | | | 100.0 | % | | $ | 110.5 | | | | 100.0 | % | | $ | 285.9 | | | | 100.0 | % | | $ | 339.8 | | | | 100.0 | % | | Cost of sales | | | 95.5 | | | | 83.9 | % | | | 98.3 | | | | 89.0 | % | | | 246.1 | | | | 86.1 | % | | | 302.1 | | | | 88.9 | % | | Gross profit | | | 18.4 | | | | 16.1 | % | | | 12.2 | | | | 11.0 | % | | | 39.8 | | | | 13.9 | % | | | 37.7 | | | | 11.1 | % | | Selling, general and administrative expenses | | | 8.5 | | | | 7.4 | % | | | 11.2 | | | | 10.2 | % | | | 25.5 | | | | 8.9 | % | | | 33.6 | | | | 9.9 | % | | Restructuring expenses | | | 0.4 | | | | 0.4 | % | | | 0.2 | | | | 0.2 | % | | | 0.6 | | | | 0.2 | % | | | 2.9 | | | | 0.8 | % | | Impairment charges | | | 134.4 | | | | 118.0 | % | | | - | | | | - | | | | 134.4 | | | | 47.0 | % | | | - | | | | - | | | Gain on sale of assets | | | - | | | | - | | | | (0.8 | ) | | | -0.8 | % | | | - | | | | - | | | | (0.8 | ) | | | -0.2 | % | | Operating (loss) income | | $ | (124.9 | ) | | | -109.7 | % | | $ | 1.6 | | | | 1.4 | % | | $ | (120.7 | ) | | | -42.2 | % | | $ | 2.0 | | | | 0.6 | % |
Comparison of Three Months ended December 31, 2020 and 2019
Automotive net sales increased $3.4 million, or 3 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021, primarily due to a $6.7 million favorable impact of foreign currency exchange rate changes, partially offset by lower sales volume. Compared with the prior year, sales increased $3.8 million and $2.0 million in Europe and Asia, respectively, and decreased $2.4 million in the Americas.
Automotive cost of sales decreased $2.8 million, or 3 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021. As a percentage of sales, cost of sales decreased 510 basis points to 83.9 percent. Compared with the prior year, cost of sales was favorably impacted by lower depreciation expenses, which decreased approximately $3.0 million, cost savings from procurement and other cost-reduction initiatives, and improved operating efficiencies. The lower depreciation expenses resulted from the Company ceasing depreciation of the long-lived assets within the liquid-cooled automotive business when it was classified as held for sale in November 2020. Foreign currency exchange rate changes negatively impacted cost of sales by $5.7 million.
As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $6.2 million and gross margin improved 510 basis points to 16.1 percent.
SG&A expenses decreased $2.7 million compared with the third quarter of the prior year. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $2.0 million.
Restructuring expenses during the third quarter of fiscal 2021 totaled $0.4 million and primarily consisted of severance expenses resulting from targeted headcount reductions in Europe.
Impairment charges during the third quarter of fiscal 2021 totaled $134.4 million and primarily related to assets in the liquid-cooled automotive business. Upon classifying this business as held for sale during the third quarter, we identified an implied loss in excess of the carrying value of its long-lived assets. Accordingly, we reduced the liquid-cooled automotive business’s long-lived assets, primarily property, plant and equipment, to zero.
During the third quarter of fiscal 2020, we completed the sale of a previously-closed manufacturing facility in Germany and, as a result, recorded a gain of $0.8 million.
The Automotive operating loss of $124.9 million in the third quarter of fiscal 2021, as compared with operating income of $1.6 million in the third quarter of the prior year, was significantly impacted by the large impairment charges associated with the liquid-cooled automotive business and, to a much lesser extent, higher gross profit and lower SG&A expenses.
Comparison of Nine Months ended December 31, 2020 and 2019
Automotive year-to-date net sales decreased $53.9 million, or 16 percent, from the same period last year, primarily due to lower sales volume largely resulting from the impacts of the COVID-19 pandemic, partially offset by a $9.7 million favorable impact of foreign currency exchange rate changes. Sales in Europe and North America decreased $46.8 million and $13.0 million, respectively. Sales in Asia increased $5.9 million.
Automotive year-to-date cost of sales decreased $56.0 million, or 19 percent, from the prior year, primarily due to lower sales volume, partially offset by an $8.2$0.7 million unfavorable impact of foreign currency exchange rate changes. As a percentage
The year-to-date net impairment reversal of sales, cost$56.0 million primarily related to assets in our liquid-cooled automotive business. The $57.2 million impairment reversal during the third quarter of sales decreased 280 basis points to 86.1 percent andfiscal 2022 was favorably impacted by improved operating efficiencies, cost savings from procurement initiatives, and lower depreciation expenses of approximately $4.0 million, partially offset by the unfavorable impact$1.2 million of lower sales volume.
As a result of the lower sales and lower cost of sales as a percentage of sales, gross profit increased $2.1 million and gross margin improved 280 basis points to 13.9 percent.
Automotive year-to-date SG&A expenses decreased $8.1 million compared with the prior year. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $8.0 million.
Restructuring expensesnet impairment charges recorded during the first ninesix months of fiscal 2021 totaled $0.62022. During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’s held for sale assets. These impairment charges were partially offset by a decrease of $2.3$7.4 million compared withimpairment reversal related to certain manufacturing operations that no longer met the same periodrequirements to be classified as held for sale due to a modification in the prior year. The decrease was primarily driven by lower severance expenses in Europe resulting from fewer targeted headcount reductions.
sale perimeter during the first quarter of fiscal 2022.
The Automotive operating loss37
Operating income of $53.6 million during the first nine months of fiscal 2021, as compared with2022 represents a $174.3 million improvement from the operating incomeloss of $2.0$120.7 million duringin the same period last year, was significantly impactedyear. The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the largesignificant impairment reversal and impairment charges, associated withrespectively, related to the liquid-cooled automotive business duringbusiness. In addition, as compared with the third quarterfirst nine months of fiscal 2021, and, to a much lesser extent, higheryear-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profit and lowerhigher SG&A expenses and restructuring charges.expenses.
Liquidity and Capital Resources
Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $72.9$61.1 million as of December 31, 2020,2021 and an available borrowing capacity of $213.6$163.1 million under our revolving credit facility. Given our extensive international operations, approximately $59.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries. Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.
In response to the COVID-19 pandemic, we have taken actions to reduce operating and administrative expenses, conserve cash and maximize liquidity. In addition, as described below, we have focused on reducing our capital expenditures and executed amendments to our primary credit agreements to provide financial covenant flexibility during fiscal 2021 and 2022. We believe our sources of liquidity including cash flow from operations, our cash and cash equivalents, and access to both committed and uncommitted credit facilities, will provide sufficient cash flow to meetadequately cover our obligations during the next twelve monthsfunding needs on both a short-term and beyond. However, we are continuing to monitor the impacts of COVID-19 on our business and the credit and financial markets.long-term basis.
Net Cash Provided by Operating Activities Net cash provided by operating activities for the nine months ended December 31, 20202021 was $146.5$7.4 million, which represents a $100.6$139.1 million increasedecrease compared with the same period in the prior year. This increasedecrease in operating cash flow was primarily due to favorableunfavorable net changes in working capital, including higher inventory levels and lowerhigher payments for separationincentive compensation and project costs associated with our review of strategic alternatives for the automotive businesses. The favorable changes in working capital during the first nine months of fiscal 2021,employee benefits as compared with the same period in the prior year, included loweryear. Inventory, including amounts held for sale, increased $57.8 million from March 31, 2021 to December 31, 2021. The higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and lower payments for incentive compensation, employee benefits, income taxesstrategic safety stock builds in connection with global supply chain constraints 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.challenges.
Capital Expenditures Capital expenditures of $30.7 million during the first nine months of fiscal 2022 increased $7.0 million compared with the same period in the prior year. In response to the economic impacts of the COVID-19 pandemic,fiscal 2021, we have been focused on reducing our capital expenditures and, where possible, have delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in our vehicular businesses. Capital expenditures of $23.7 million duringresponse to the first nine months of fiscal 2021 decreased $34.5 million compared with the same period in the prior year.COVID-19 pandemic.
Debt Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below. Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales. In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.
In May 2020, we executed amendments to our primary credit agreements in the U.S. to provide additional covenant flexibility in light of the risks and uncertainties associated with the COVID-19 pandemic. Under the amended agreements, the leverage ratio covenant limit has been temporarily raised. The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, in relation to ourno more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”). The leverage ratio covenant limit is 5.75 to 1 for the fourth quarter of fiscal 2021. In fiscal 2022, the leverage ratio covenant limit is 4.75 to 1, 3.75 to 1, and 3.50 to 1 for the first, second and third quarters, respectively, and subsequently returns to 3.25 to 1 for the fourth quarter of fiscal 2022. We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.
As of December 31, 2020, we were in compliance with our debt covenants;2021, our leverage ratio and interest coverage ratio were 1.92.5 and 8.7,10.0, respectively. We expect to remain in compliance with our debt covenants during fiscal 2021,the remainder of fiscal 2022 and beyond.
Share Repurchase Program
On November 5, 2020, we announced our Board of Directors approved a two-year, $50.0 million share repurchase program, which allows us to repurchase shares of our common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as we deem appropriate. To date, we have not repurchased shares under this program. Our decision whether and to what extent to repurchase shares under this program will depend on a number of factors, including business conditions, other cash priorities, and stock price.
Forward-Looking Statements
This report, including, but not limited to, the discussion under Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains statements, including information about future financial performance, accompanied by phrases such as “believes,” “estimates,” “expects,” “plans,” “anticipates,” “intends,” and other similar “forward-looking” statements, as defined in the Private Securities Litigation Reform Act of 1995. Modine’s actual results, performance or achievements may differ materially from those expressed or implied in these statements, because of certain risks and uncertainties, including, but not limited to, those described under “Risk Factors” in Item 1A. in Part I. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2020.2021. Other risks and uncertainties include, but are not limited to, the following:
Market Risks:
The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees;
Economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including, in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; 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 or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade, the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the short- and long-term implications of “Brexit”;
The impact of potential price increases associated with raw materials, including aluminum, copper, steel and stainless steel (nickel), and other purchased componentscomponent inventory including, but not limited to, increases in the underlying material cost based upon the London Metal Exchange and related premiums, fabrication, or fabricationfreight costs. These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand. This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whether through our quotation process or through contract provisions for prospective price adjustments, as well as the inherent lag in timing of such contract provisions; and
The impact of current and future environmental laws and regulations on our business and the businesses of our customers, including our ability to take advantage of opportunities to supply alternative new technologies to meet environmental and/or energy standards and objectives.
Operational Risks:
The overall health and continually increasing price-down focus of our vehicular customers in light of economic and market-specific factors, the concentration of sales within our CIS segment attributable to one customer, and the potential impact on us from any deterioration in the stability or performance of any of our major customers;
The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our time, quantity, quality, price and pricetiming demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;
Our ability to maintain current customer programsrelationships and compete effectively for new business, including our ability to offset or otherwise address increasing pricing pressures from competitors and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;
The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims and delays or inefficiencies resulting from restrictions imposed in response to the COVID-19 pandemic;
The impact of any delays or modifications initiated by major customers with respect to program launches, product applications or requirements;
| • | The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages; |
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 reducemodify our cost structure in response to sales volume declinesincreases or decreases and to complete restructuring activities and realize the anticipated benefits of those activities;
Costs and other effects of the investigation and remediation of environmental contamination,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, operational and administrative functions, in light of tight global labor markets;
Our ability to protect our proprietary information and intellectual property from theft or attack by internal or external sources;
The impact of any substantial disruption or material breach of our information technology systems, and any related delays, problems or costs;
Increasingly complex and restrictive laws and regulations, including those associated with being a U.S. public company and others present in various jurisdictions in which we operate, and the costs associated with compliance therewith;
Work stoppages or interference at our facilities or those of our major customers and/or suppliers;
The constant and increasing pressures associated with healthcare and associated insurance costs; and
Costs and other effects of litigation, claims, or other obligations.
Strategic Risks:
Our ability to successfully complete the pending sale of our liquid-cooled automotive business, including the receipt of governmental and third-party approvals and satisfaction of other closing conditions, and our ability to successfully exit our other automotive businesses in a manner that is in the best interest of our shareholders;
| • | Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers; |
Our ability to successfully realize anticipated benefits fromidentify and execute strategies in our increased “industrial” market presence, with our CISautomotive businesses to reduce costs and BHVAC businesses, while maintaining appropriate focus on the market opportunities presented by our HDE and Automotive businesses;improve operating margins;
Our ability to identify and execute growth and diversification opportunities in order to position us for long-term success; and
The potential impacts from any actions by activist shareholders, including disruption of our business and related costs.
Financial Risks:
Our ability to fund our global liquidity requirements efficiently for Modine’s current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;
The impact of potential increases in interest rates, particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations, andobligations;
The impact of changes in federal, state or local tax regulations that could have the continued uncertainty around the utilizationeffect of LIBOR or alternative reference rates;increasing our income tax expense;
Our ability to comply with the financial covenants as amended, in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);
The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and
Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.
Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2020.2021. The Company’s market risks have not materially changed since the fiscal 20202021 Form 10-K was filed.
| Item 4. | Controls and Procedures. |
Evaluation Regarding Disclosure Controls and Procedures
As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Finance and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Finance and Chief Financial Officer have concluded that the design and operation of the Company’sCompany’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2020.2021.
Changes in Internal Control Over Financial Reporting
There have been no changes in internal control over financial reporting during the third quarter of fiscal 20212022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
ISSUER PURCHASES OF EQUITY SECURITIES
The following describes the Company’s purchases of common stock during the third quarter of fiscal 2022: Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (a) | | October 1 – October 31, 2021 | 36,644 (b)
| $11.94 | _______
| $50,000,000 | | | | | | | | November 1 – November 30, 2021 | _______
| _______
| _______
| 50,000,000 | | | | | | | | December 1 – December 31, 2021 | 4,189 (b)
| $10.20 | _______
| 50,000,000 | | | | | | | | Total | 40,833 (b)
| $11.76 | _______
| |
| (a) | Effective November 5, 2020, the Board of Directors approved a two-year, $50.0 million share repurchase program, which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate. |
| (b) | Consists of shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards. The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions. These shares are held as treasury shares. |
| Item 5. | Other Information. |
The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.
| Exhibit No. | Description | | Incorporated Herein By Reference To | Filed Herewith | | | | | | | | Securities and Asset PurchaseTermination Agreement dated as of November 2, 2020, by and between the Company and Dana Incorporated, dated as of October 25, 2021. | | Exhibit 2.1 to Registrant’s Current Report on Form 8-K dated November 2, 2020October 25, 2021 | | | | | | | | | [Corrected] OfferSeparation Letter dated as of November 10, 2020, by andAgreement between the Company and Mr. BrinkerJoel T. Casterton, dated as of October 25, 2021. | | | X | | | | | | | | FormSeparation Letter Agreement between the Company and Matthew J. McBurney, dated as of Make-Whole RSU Award Agreement with Neil Brinker | | | X | | | | | | | Form of Make-Whole Performance Cash Award Agreement with Neil BrinkerOctober 30, 2021. | | | X | | | | | | | | Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer. | | | X | | | | | | | | Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Finance and Chief Financial Officer. | | | X | | | | | | | | Section 1350 Certification of Neil D. Brinker, President and Chief Executive Officer. | | | X | | | | | | | | Section 1350 Certification of Michael B. Lucareli, Executive Vice President, Finance and Chief Financial Officer. | | | X | | | | | | | | 101.INS | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). | | | X | | | | | | | | 101.SCH | Inline XBRL Taxonomy Extension SchemaSchema. | | | X | | | | | | | | 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase DocumentDocument. | | | X | | | | | | | | 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase DocumentDocument. | | | X | | | | | | | 101.LAB10.1.LAB | Inline XBRL Taxonomy Extension Label Linkbase DocumentDocument. | | | X | | | | | | | 101.PRE10.1.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase DocumentDocument. | | | X | | | | | | | | 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101). | | | X |
* Schedules and similar attachments have been omitted pursuant to Item 601(b)(2) of Regulation S-K because they are not material and would likely cause competitive harm to the Company if publicly disclosed.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
MODINE MANUFACTURING COMPANY (Registrant)
By: /s/ Michael B. Lucareli Michael B. Lucareli, Executive Vice President, Finance and Chief Financial Officer*
Date: February 5, 20213, 2022
* Executing as both the principal financial officer and a duly authorized officer of the Company
s | | % of sales | |
Comparison of Three Months ended December 31, 20202021 and 20192020
Third quarter net sales of $484.3$502.2 million were $10.9$17.9 million, or 24 percent, higher than the third quarter of the prior year, primarily due to higher sales volume and favorable pricing adjustments in response to raw material price increases in our CIS, BHVAC, and HDE segments, partially offset by lower sales volume in our Automotive segment. Sales in the CIS, BHVAC, and HDE segments increased $23.7 million, $16.9 million, and $15.2 million, respectively. Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.
Third quarter cost of sales increased $26.0 million, or 6 percent, primarily due to higher raw material prices, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, segments and an $11.2 million favorable impactHDE segments. These drivers, which increased cost of foreign currency exchange rate changes,sales, were partially offset by lower sales volume in the CISAutomotive segment and Automotive segments. Sales in the HDE, BHVAC, and Automotive segments increased $20.7 million, $3.8 million, and $3.4 million, respectively. CIS segment sales decreased $18.5 million.
Third quarter cost of sales increased $1.7 million.improved operating efficiencies. As a percentage of sales, cost of sales decreased 160increased 220 basis points to 82.985.1 percent. The increase in cost of sales was primarily due to a $9.7 million unfavorable impact of foreign currency exchange rate changes, partially offset by the favorable impacts of procurement and other cost-reduction initiatives and a $3.0 million decrease in depreciation expense in the Automotive segment. In addition, program and equipment transfer costs to prepare the liquid-cooled automotive business for sale decreased approximately $1.0 million compared with the prior year.
As a result of higher sales and lowerhigher cost of sales as a percentage of sales, third quarter gross profit increased $9.2decreased $8.1 million and gross margin improved 160declined 220 basis points to 17.114.9 percent.
Third quarter SG&A expenses decreased $7.4 million. The decrease in SG&A expenses was primarily due to$5.8 million, primary driven by $2.6 million of lower costs recorded at Corporate associated withrelated to our review of strategic alternatives for the Automotive segment’s business operations,segment businesses and lower compensation-related expenses, which decreased approximately $10.0$2.0 million. This favorable driver was partially offset by a $1.0 million unfavorable impact of foreign currency exchange rate changes and higher environmental chargesThe lower compensation-related expenses were primarily due to lower incentive compensation expenses at Corporate in the HDE segment.current year.
Restructuring expenses of $0.9 million during the third quarter of fiscal 2021 decreased $1.7 million, primarily due to lower restructuring expenses in the HDE segment.
Impairment charges of $134.4$2.1 million in the third quarter of fiscal 2021 primarily related to the write-down of the long-lived assets in the Automotive segment’s liquid-cooled automotive business in connection2022 increased $1.2 million compared with the pending sale of that business.
The operating loss of $108.7 million represents a $116.9 million decline from the prior-year operating income of $8.2 million. The decline was primarily due to the $134.4 million of impairment charges recorded in the Automotive segment and lower earnings in the CIS segment. These negative drivers were partially offset by higher earnings in our HDE and BHVAC segments.
Interest expense decreased $1.0 million, or 18 percent, during the third quarter of fiscal 2021, primarily due to higher severance expenses in the CIS segment.
During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower outstanding long-term debtof their carrying or fair value. During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale, we recorded $134.4 million of impairment charges and reduced the carrying value of the disposal group’s long-lived assets to zero.
Operating income of $79.4 million in the third quarter of fiscal 2022 represents a lesser extent,$188.1 million improvement from the prior-year operating loss of $108.7 million. The operating income and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment. In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.
Interest expense in the third quarter of fiscal 2022 decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorable changes in interest rates.
The provision for income taxes was $81.6$0.1 million and $1.7$81.6 million in the third quarter of fiscal 20212022 and 2020,2021, respectively. The $79.9$81.5 million increasedecrease was primarily due to the absence of $109.9 million of income tax charges totaling $116.5 million recorded in the third quarter of fiscal 2021prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions. These drivers, which decreased the provision for income taxes, were partially offset by the absence of $37.7 million of income tax benefits totaling $37.7 millionrecorded during the prior year related to the Automotive segment impairment charges recorded earlier in the third quarter of fiscal 2021.charges.
Comparison of Nine Months ended December 31, 20202021 and 20192020
Fiscal 20212022 year-to-date net sales of $1,293.5$1,475.7 million were $209.1$182.2 million, or 14 percent, lowerhigher than the same period last year, primarily due to lowerhigher sales volumes and favorable pricing adjustments in response to raw material price increases in our HDE, CIS, and AutomotiveBHVAC segments. Sales in these segments decreased $93.8increased $123.7 million, $87.4$86.6 million, and $53.9$38.4 million, respectively, and were significantly impacted by market-driven volume declines and temporary plant closures earlier in the fiscal year due to the COVID-19 pandemic. BHVACrespectively. Automotive segment sales increased $8.3decreased $61.9 million.
Fiscal 20212022 year-to-date cost of sales of $1,083.9$1,261.6 million decreased $186.1increased $177.7 million, or 1516 percent, primarily due to lowerhigher raw material prices, which increased approximately $117.0 million, and higher sales volume. In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic. These factors, which caused an increase in cost of sales compared with the same period in the prior year, were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies. As a percentage of sales, cost of sales improved 70increased 170 basis points to 83.885.5 percent. The unfavorable impact of lower sales volume was more than offset by the benefits of cost-reduction initiatives implemented earlier in the fiscal year in response to lower end market demand and procurement initiatives.
As a result of lowerhigher sales and lowerhigher cost of sales as a percentage of sales, fiscal 2021 year-to-date gross profit decreased $23.0increased $4.5 million and gross margin improved 70declined 170 basis points to 16.214.5 percent.
Fiscal 20212022 year-to-date SG&A expenses decreased $42.8increased $10.0 million. The decreaseincrease in SG&A expenses was primarily due to higher compensation-related expenses, as the prior year was favorably impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19. In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million. These increases were partially offset by lower strategic reorganization costs and lower costs recorded at Corporate associated withrelated to our review of strategic alternatives for the Automotive segment’s business operations,segment businesses, which decreased approximately $29.0$2.8 million and $1.3 million, respectively. The lower compensation-relatedstrategic reorganization costs primarily resulted from lower severance expenses which decreased approximately $18.0 million. These favorable drivers were partially offset by $5.9 million of costs recorded at Corporate in connection with Mr. Burke stepping down from his position as President and CEO and the search for his successor.executive management positions.
Restructuring expenses of $7.0$3.0 million duringin the first nine months of fiscal 2021 increased $0.32022 decreased $4.0 million compared with the same period last year, primarily due to higher restructuringlower severance expenses in the CIS segment, partially offset by lower restructuring expenses in the Automotive segment.and HDE segments.
The fiscal 2021 year-to-date operating lossnet impairment reversals of $83.4$55.7 million represents a $115.7 million decline from the prior-year operating income of $32.3 million. The decline was primarily due to the $134.4 million of impairment charges recorded in the Automotive segment and lower earnings in our CIS and HDE segments. These negative drivers were partially offset by lower SG&A expenses at Corporate and higher earnings in our BHVAC segment.
Interest expense decreased $2.1 million, or 12 percent, during the first nine months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment. In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale. In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.
We sold our air-cooled automotive business on April 30, 2021. As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.
Operating income of $98.6 million during the first nine months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million. The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business. In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses. Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.
Interest expense during the first nine months of fiscal 2022 decreased $3.4 million compared with the same period last year, primarily due to lower outstanding long-term debt and favorable changes in interest rates.rates and lower debt outstanding during the current-year.
The provision for income taxes was $95.3$7.4 million and $8.3$95.3 million during the first nine months of fiscal 20212022 and 2020,2021, respectively. The $87.0$87.9 million increasedecrease was primarily due to the absence of $116.5 million of income tax charges totaling $123.1 million recorded duringin the first nine months of fiscal 2021prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions. These drivers, which decreased the provision for income taxes, were partially offset by the absence of $37.7 million of income tax benefits totaling $37.7 millionrecorded during the prior year related to the Automotive segment impairment charges recorded during fiscal 2021.charges.
SEGMENT RESULTS OF OPERATIONS
Effective AprilJuly 1, 2020,2021, we began managingaligned the data center businesses previously managed by and reported within the CIS segment under the BHVAC segment. The BHVAC segment assumed management of our global automotive business separate fromin Guadalajara, Spain and a portion of our business in Grenada, Mississippi. Through this segment change, we have aligned our data center businesses under the otherBHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies. As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the previously-reported Vehicular Thermal Solutions (“VTS”)BHVAC segment. We have been managing the automotive business as the Automotive segment as we target the sale or eventual exit of its underlying automotive business operations. We are managing the other businesses of the VTS segment, including the commercial vehicle and off-highway businesses, as the Heavy Duty Equipment segment. We began reporting financial results for our new segment structure beginning for fiscal 2021. Segment financial information for fiscal 2020 has been recast to conform to the fiscal 2021 presentation. The segment realignment had no impact on the CISHDE and BHVAC segments.Automotive segments or on our consolidated financial position, results of operations, and cash flows. Segment financial information for the prior periods has been recast to conform to the current presentation.
As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment. While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment. See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.
The following is a discussion of our segment results of operations for the three months and nine months ended December 31, 20202021 and 2019:2020:
Commercial and Industrial SolutionsBuilding HVAC Systems
| | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2020 | | | 2019 | | | 2020 | | | 2019 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 129.0 | | | | 100.0 | % | | $ | 147.5 | | | | 100.0 | % | | $ | 385.6 | | | | 100.0 | % | | $ | 473.0 | | | | 100.0 | % | | Cost of sales | | | 116.4 | | | | 90.2 | % | | | 124.8 | | | | 84.6 | % | | | 338.2 | | | | 87.7 | % | | | 403.1 | | | | 85.2 | % | | Gross profit | | | 12.6 | | | | 9.8 | % | | | 22.7 | | | | 15.4 | % | | | 47.4 | | | | 12.3 | % | | | 69.9 | | | | 14.8 | % | | Selling, general and administrative expenses | | | 13.8 | | | | 10.7 | % | | | 13.7 | | | | 9.3 | % | | | 39.1 | | | | 10.2 | % | | | 42.8 | | | | 9.1 | % | | Restructuring expenses | | | 0.5 | | | | 0.4 | % | | | 0.7 | | | | 0.5 | % | | | 4.4 | | | | 1.1 | % | | | 1.3 | | | | 0.3 | % | | Operating (loss) income | | $ | (1.7 | ) | | | -1.3 | % | | $ | 8.3 | | | | 5.6 | % | | $ | 3.9 | | | | 1.0 | % | | $ | 25.8 | | | | 5.4 | % |
| | | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2021 | | | 2020 | | | 2021 | | | 2020 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 90.6 | | | | 100.0 | % | | $ | 73.7 | | | | 100.0 | % | | $ | 234.7 | | | | 100.0 | % | | $ | 196.3 | | | | 100.0 | % | | Cost of sales | | | 63.2 | | | | 69.7 | % | | | 48.3 | | | | 65.5 | % | | | 169.5 | | | | 72.2 | % | | | 131.8 | | | | 67.1 | % | | Gross profit | | | 27.4 | | | | 30.3 | % | | | 25.4 | | | | 34.5 | % | | | 65.2 | | | | 27.8 | % | | | 64.5 | | | | 32.9 | % | | Selling, general and administrative expenses | | | 13.0 | | | | 14.4 | % | | | 10.5 | | | | 14.3 | % | | | 35.1 | | | | 15.0 | % | | | 28.9 | | | | 14.8 | % | | Operating income | | $ | 14.4 | | | | 15.9 | % | | $ | 14.9 | | | | 20.1 | % | | $ | 30.1 | | | | 12.8 | % | | $ | 35.6 | | | | 18.1 | % |
Comparison of Three Months ended December 31, 20202021 and 20192020
CISBHVAC net sales decreased $18.5increased $16.9 million, or 1323 percent, from the third quarter of fiscal 20202021 to the third quarter of fiscal 2021,2022, primarily due to lowerhigher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases. Compared with the third quarter of the prior year, BHVAC sales to data center coolingcustomers increased $11.6 million. In addition, sales to commercial HVAC customers increased $5.2 million, primarily due to higher sales of ventilation and heating products in North America.
BHVAC cost of sales increased $14.9 million, or 31 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs. As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.
As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent. While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.
SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.
Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.
Comparison of Nine Months ended December 31, 2021 and 2020
BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a $4.5lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7 million favorable impact of foreign currency exchange rate changes.rates. Sales to data center coolingcommercial HVAC customers decreased $18.4increased $24.5 million, primarily due to lowerhigher sales of heating and air conditioning products. In addition, sales to one individual customer.data center customers increased $13.0 million.
CISBHVAC year-to-date cost of sales decreased $8.4increased $37.7 million, or 729 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021,same period last year, primarily due to lowerhigher sales volume partially offsetand higher raw material prices, which increased by a $4.2approximately $12.0 million. In addition, cost of sales was unfavorably impacted by $4.8 million unfavorable impact offrom foreign currency exchange rate changes. As a percentage of sales, cost of sales increased 560510 basis points to 90.272.2 percent, primarily due to the impacthigher material costs.
As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.
BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.
Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.
Commercial and Industrial Solutions
| | | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2021 | | | 2020 | | | 2021 | | | 2020 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 148.6 | | | | 100.0 | % | | $ | 124.9 | | | | 100.0 | % | | $ | 456.2 | | | | 100.0 | % | | $ | 369.6 | | | | 100.0 | % | | Cost of sales | | | 130.9 | | | | 88.1 | % | | | 112.0 | | | | 89.7 | % | | | 399.4 | | | | 87.5 | % | | | 324.8 | | | | 87.9 | % | | Gross profit | | | 17.7 | | | | 11.9 | % | | | 12.9 | | | | 10.3 | % | | | 56.8 | | | | 12.5 | % | | | 44.8 | | | | 12.1 | % | | Selling, general and administrative expenses | | | 12.4 | | | | 8.4 | % | | | 13.1 | | | | 10.4 | % | | | 37.7 | | | | 8.3 | % | | | 36.0 | | | | 9.7 | % | | Restructuring expenses | | | 1.9 | | | | 1.3 | % | | | 0.5 | | | | 0.4 | % | | | 2.1 | | | | 0.5 | % | | | 4.4 | | | | 1.2 | % | | Impairment charge | | | - | | | | - | | | | - | | | | - | | | | 0.3 | | | | 0.1 | % | | | - | | | | - | | | Operating income (loss) | | $ | 3.4 | | | | 2.2 | % | | $ | (0.7 | ) | | | -0.5 | % | | $ | 16.7 | | | | 3.6 | % | | $ | 4.4 | | | | 1.2 | % |
Comparison of Three Months ended December 31, 2021 and 2020
CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume unfavorableand favorable product pricing adjustments in response to raw material price increases. Compared with the third quarter of the prior year, sales mix,to commercial HVAC&R customers increased $24.5 million.
CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million. As a percentage of sales, cost of sales decreased 160 basis points to 88.1 percent, primarily due to the favorable impacts of the higher sales volume and improved operating efficiencies, partially offset by higher material costs.
As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8 million and gross margin improved 160 basis points to 11.9 percent.
SG&A expenses decreased $0.7 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.
Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses. The severance expenses in the third quarter of fiscal 2022 primarily related to targeted headcount reductions in Europe and China.
Operating income of $3.4 million represents a $4.1 million improvement from the prior-year operating loss of $0.7 million and was primarily due to higher gross profit.
Comparison of Nine Months ended December 31, 2021 and 2020
CIS year-to-date net sales increased $86.6 million, or 23 percent, from the same period last year, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases. In addition, sales were favorably impacted by $5.7 million from foreign currency exchange rates. The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year. Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, compared with the same period in the prior year.
CIS year-to-date cost of sales increased $74.6 million, or 23 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0 million. In addition, cost of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes. As a percentage of sales, cost of sales decreased 40 basis points to 87.5 percent, primarily due to the favorable impacts of the higher sales volume and improved operating efficiencies, partially offset by higher material costs.
As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0 million and gross margin improved 40 basis points to 12.5 percent.
CIS year-to-date SG&A expenses increased $1.7 million, yet decreased 140 basis points as a percentage of sales, from the same period last year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.
Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3 million from the same period last year, primarily due to lower severance expenses. The severance expenses during the first nine months of fiscal 2022 primarily related to targeted headcount reductions in Europe and China. The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.
During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write down a previously-closed manufacturing facility in the U.S to fair value less costs to sell. We sold the facility and received net cash proceeds of $0.7 million during July 2021.
Operating income during the first nine months of fiscal 2022 increased $12.3 million from the same period last year, primarily due to higher gross profit and lower restructuring expenses, partially offset by higher SG&A expenses.
Heavy Duty Equipment
| | | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2021 | | | 2020 | | | 2021 | | | 2020 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 200.8 | | | | 100.0 | % | | $ | 185.6 | | | | 100.0 | % | | $ | 598.4 | | | | 100.0 | % | | $ | 474.7 | | | | 100.0 | % | | Cost of sales | | | 178.6 | | | | 88.9 | % | | | 159.6 | | | | 86.0 | % | | | 535.3 | | | | 89.5 | % | | | 413.8 | | | | 87.2 | % | | Gross profit | | | 22.2 | | | | 11.1 | % | | | 26.0 | | | | 14.0 | % | | | 63.1 | | | | 10.5 | % | | | 60.9 | | | | 12.8 | % | | Selling, general and administrative expenses | | | 11.7 | | | | 5.9 | % | | | 13.2 | | | | 7.1 | % | | | 37.4 | | | | 6.2 | % | | | 35.4 | | | | 7.4 | % | | Restructuring expenses | | | 0.2 | | | | 0.1 | % | | | - | | | | - | | | | 0.7 | | | | 0.1 | % | | | 1.9 | | | | 0.4 | % | | Operating income | | $ | 10.3 | | | | 5.1 | % | | $ | 12.8 | | | | 6.8 | % | | $ | 25.0 | | | | 4.2 | % | | $ | 23.6 | | | | 5.0 | % |
Comparison of Three Months ended December 31, 2021 and 2020
HDE net sales increased $15.2 million, or 8 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to pricing adjustments associated with raw material price increases and higher sales volume. Sales to off-highway and commercial vehicle customers increased $12.3 million and $10.7 million, respectively. Sales to automotive and light vehicle customers decreased $7.7 million.
HDE cost of sales increased $19.0 million, or 12 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher raw material prices, which increased approximately $19.0 million, and to a lesser extent, temporary operating inefficiencies associated with plant consolidation activities in China.higher sales volume. These negative impactsdrivers, which increased cost of sales, were partially offset by benefitsimproved operating efficiencies. While we have provisions within many of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs. As a percentage of sales, cost of sales increased 290 basis points to 88.9 percent, primarily due to the higher material prices.
As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit decreased $3.8 million and gross margin declined 290 basis points to 11.1 percent.
SG&A expenses decreased $1.5 million, or 120 basis points as a percentage of sales, compared with the third quarter of the prior year. The decrease in SG&A expenses was primarily due to lower development costs and environmental charges. These decreases were partially offset by higher compensation-related expenses, which increased approximately $1.0 million.
Restructuring expenses during the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.
Operating income decreased $2.5 million from procurementthe third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower gross profit, partially offset by lower SG&A expenses.
Comparison of Nine Months ended December 31, 2021 and 2020
HDE year-to-date net sales increased $123.7 million, or 26 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, pricing adjustments associated with raw material price increases. HDE sales in fiscal 2021, primarily in the first quarter, were negatively impacted by the COVID-19 pandemic. Sales to commercial vehicle and off-highway customers increased $59.0 million and $57.7 million, respectively.
HDE year-to-date cost of sales increased $121.5 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased approximately $53.0 million. As a percentage of sales, cost of sales increased 230 basis points to 89.5 percent, primarily due to the higher material prices.
As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2 million and gross margin declined 230 basis points to 10.5 percent.
HDE year-to-date SG&A expenses increased $2.0 million, but decreased 120 basis points as a percentage of sales, compared with the same period in the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other cost-reduction initiatives.administrative costs.
Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.
Operating income during the first nine months of fiscal 2022 increased $1.4 million from the same period last year, primarily due to higher gross profit and lower restructuring expenses, partially offset by higher SG&A expenses.
Automotive
| | | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2021 | | | 2020 | | | 2021 | | | 2020 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 72.4 | | | | 100.0 | % | | $ | 113.9 | | | | 100.0 | % | | $ | 224.0 | | | | 100.0 | % | | $ | 285.9 | | | | 100.0 | % | | Cost of sales | | | 64.9 | | | | 89.6 | % | | | 95.5 | | | | 83.9 | % | | | 196.1 | | | | 87.6 | % | | | 246.1 | | | | 86.1 | % | | Gross profit | | | 7.5 | | | | 10.4 | % | | | 18.4 | | | | 16.1 | % | | | 27.9 | | | | 12.4 | % | | | 39.8 | | | | 13.9 | % | | Selling, general and administrative expenses | | | 9.7 | | | | 13.4 | % | | | 8.5 | | | | 7.4 | % | | | 30.1 | | | | 13.4 | % | | | 25.5 | | | | 8.9 | % | | Restructuring expenses | | | - | | | | - | | | | 0.4 | | | | 0.4 | % | | | 0.2 | | | | 0.1 | % | | | 0.6 | | | | 0.2 | % | | Impairment charges (reversals) – net | | | (57.2 | ) | | | -79.0 | % | | | 134.4 | | | | 118.0 | % | | | (56.0 | ) | | | -25.0 | % | | | 134.4 | | | | 47.0 | % | | Operating income (loss) | | $ | 55.0 | | | | 76.0 | % | | $ | (124.9 | ) | | | -109.7 | % | | $ | 53.6 | | | | 24.0 | % | | $ | (120.7 | ) | | | -42.2 | % |
Comparison of Three Months ended December 31, 2021 and 2020
Automotive net sales decreased $41.5 million, or 36 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to the disposition of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market. The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021. Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.
Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume. This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million. As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.
As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.1$10.9 million and gross margin declined 560570 basis points to 9.810.4 percent.
SG&A expenses increased $0.1$1.2 million or 140 basis points as a percentage of sales, compared with the third quarter of the prior year. The increase in SG&A expenses was primarily due to a $0.5higher compensation-related expenses.
During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million unfavorable impact of foreign currency exchange rate changes, partially offset bypreviously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower compensation-related expenses.
Restructuring expensesof their carrying or fair value. The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.
Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million. The operating income and operating loss during the third quarters of fiscal 2022 and 2021 totaled $0.5 million, a decrease of $0.2 millionwere driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business. In addition, as compared with the third quarter of fiscal 2020, and primarily consisted of equipment transfer and plant consolidation costs in China.
The CIS operating loss of $1.7 million represents a $10.0 million decline from the prior-year2021, operating income of $8.3 million and was primarily due tounfavorably impacted by lower gross profit.profit and higher SG&A expenses.
Comparison of Nine Months ended December 31, 20202021 and 20192020
CISAutomotive year-to-date net sales decreased $87.4$61.9 million, or 1822 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes. The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year. Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market. Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.
Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume associated withand lower depreciation expenses, which decreased $9.9 million. We ceased depreciating the impactsproperty, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021. Upon reverting back to held and used classification during the COVID-19 pandemic. In addition, salesthird quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in fiscal 2021 have been negatively impactedthe liquid-cooled automotive business. These decreases were partially offset by lower sales to a significant data center customer. Sales to commercial HVAC&R and data center cooling customers decreased $48.1higher raw material prices, which increased approximately $9.0 million, and $41.1a $5.3 million respectively.
CIS year-to-date cost of sales decreased $64.9 million, or 16 percent, from the same period last year, primarily due to lower sales volume.foreign currency exchange rate changes. As a percentage of sales, cost of sales increased 250150 basis points to 87.7 percent, primarily due to the impact of lower sales volume and unfavorable sales mix, partially offset by cost-reduction and procurement initiatives.87.6 percent.
As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $22.5$11.9 million and gross margin declined 250150 basis points to 12.312.4 percent.
CISAutomotive year-to-date SG&A expenses decreased $3.7increased $4.6 million compared with the priorsame period last year. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $5.0 million, partially offset by a $0.6 million unfavorable impact of foreign currency exchange rate changes.
Restructuring expenses during the first nine months of fiscal 2021 increased $3.1 million compared with the prior year and primarily consisted of severance expenses and equipment transfer costs related to plant consolidation activities in China and targeted headcount reductions in North America.
Operating income decreased $21.9 million to $3.9 million, primarily due to lower gross profit and higher restructuring expenses, partially offset by lower SG&A expenses.
Building HVAC Systems
| | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2020 | | | 2019 | | | 2020 | | | 2019 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 68.7 | | | | 100.0 | % | | $ | 64.9 | | | | 100.0 | % | | $ | 178.2 | | | | 100.0 | % | | $ | 169.9 | | | | 100.0 | % | | Cost of sales | | | 43.0 | | | | 62.7 | % | | | 41.8 | | | | 64.5 | % | | | 116.3 | | | | 65.3 | % | | | 115.4 | | | | 67.9 | % | | Gross profit | | | 25.7 | | | | 37.3 | % | | | 23.1 | | | | 35.5 | % | | | 61.9 | | | | 34.7 | % | | | 54.5 | | | | 32.1 | % | | Selling, general and administrative expenses | | | 9.9 | | | | 14.3 | % | | | 9.6 | | | | 14.7 | % | | | 25.9 | | | | 14.5 | % | | | 26.9 | | | | 15.8 | % | | Operating income | | $ | 15.8 | | | | 23.1 | % | | $ | 13.5 | | | | 20.8 | % | | $ | 36.0 | | | | 20.2 | % | | $ | 27.6 | | | | 16.2 | % |
Comparison of Three Months ended December 31, 2020 and 2019
BHVAC net sales increased $3.8 million, or 6 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021, primarily due to higher sales in the U.S. and the U.K., which both increased approximately $2.0 million. The higher sales in the U.S. were primarily due to higher sales of heating products, partially offset by lower sales of ventilation products. The higher sales in the U.K. were primarily due to higher sales of air conditioning and data center cooling products.
BHVAC cost of sales increased $1.2 million, or 3 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021, primarily due to higher sales volume. As a percentage of sales, cost of sales decreased 180 basis points to 62.7 percent and was positively impacted by favorable customer pricing and sales mix.
As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $2.6 million and gross margin improved 180 basis points to 37.3 percent.
SG&A expenses increased $0.3 million from the prior year, yet decreased 40 basis points as a percentage of sales. The increase in SG&A expenses was primarily due to higher compensation-related expenses, including commission expenses.
Operating income of $15.8 millionwhich increased $2.3 million during the quarter, primarily due to higher gross profit.
Comparison of Nine Months ended December 31, 2020 and 2019
BHVAC year-to-date net sales increased $8.3 million, or 5 percent, from the same period last year, primarily due to higher sales volume. Compared with the first nine months of the prior year, sales increased $9.2 million in the U.K. and decreased $0.9 million in the U.S. The higher sales in the U.K. were primarily due to higher sales of data center products. The lower sales in the U.S. resulted primarily from the negative impacts of the COVID-19 pandemic and decreased sales of ventilation products, partially offset by higher sales of heating products.
BHVAC year-to-date cost of sales increased $0.9 million from the same period last year. As a percentage of sales, cost of sales decreased 260 basis points to 65.3 percent and was positively impacted by favorable customer pricing, sales mix and cost-reduction initiatives.
As a result of higher sales and lower cost of sales as a percentage of sales, gross profit increased $7.4approximately $2.0 million, and gross margin improved 260 basis points to 34.7 percent.
BHVAC year-to-date SG&A expenses decreased $1.0 million, or 130 basis points as a percentage of sales, from the prior year. The decrease in SG&A expenses was primary due to lower travel expenses.
Operating income of $36.0 million increased $8.4 million compared with the same period last year, primarily due to higher gross profit and lower SG&A expenses.
Heavy Duty Equipment
| | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2020 | | | 2019 | | | 2020 | | | 2019 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 185.6 | | | | 100.0 | % | | $ | 164.9 | | | | 100.0 | % | | $ | 474.7 | | | | 100.0 | % | | $ | 568.5 | | | | 100.0 | % | | Cost of sales | | | 159.6 | | | | 86.0 | % | | | 148.1 | | | | 89.8 | % | | | 413.8 | | | | 87.2 | % | | | 496.8 | | | | 87.4 | % | | Gross profit | | | 26.0 | | | | 14.0 | % | | | 16.8 | | | | 10.2 | % | | | 60.9 | | | | 12.8 | % | | | 71.7 | | | | 12.6 | % | | Selling, general and administrative expenses | | | 13.2 | | | | 7.1 | % | | | 12.6 | | | | 7.7 | % | | | 35.4 | | | | 7.4 | % | | | 42.3 | | | | 7.4 | % | | Restructuring expenses | | | - | | | | - | | | | 1.4 | | | | 0.8 | % | | | 1.9 | | | | 0.4 | % | | | 2.2 | | | | 0.4 | % | | Operating income | | $ | 12.8 | | | | 6.8 | % | | $ | 2.8 | | | | 1.7 | % | | $ | 23.6 | | | | 5.0 | % | | $ | 27.2 | | | | 4.8 | % |
Comparison of Three Months ended December 31, 2020 and 2019
HDE net sales increased $20.7 million, or 13 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021, primarily due to higher sales volume to global off-highway customers. Sales to off-highway and commercial vehicle customers increased $16.7 million and $3.8 million, respectively. Geographically, sales increased most significantly in Asia.
HDE cost of sales increased $11.5 million, or 8 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021, primarily due to higher sales volume. As a percentage of sales, cost of sales decreased 380 basis points to 86.0 percent and was favorably impacted by the higher sales volume, cost savings from procurement and other cost-reduction initiatives, and, to a lesser extent, improved operating efficiencies.
As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $9.2 million and gross margin improved 380 basis points to 14.0 percent.
SG&A expenses increased $0.6 million, yet decreased 60 basis points as a percentage of sales, compared with the third quarter of the prior year. The increase in SG&A expenses was primarily due to environmental charges related to a previously-owned U.S. manufacturing facility, which increased $0.4 million.
Restructuring expenses decreased $1.4 million compared with the third quarter of fiscal 2020, primarily due to lower severance expenses related to targeted headcount reductions.
Operating income of $12.8 million increased $10.0 million during the quarter, primarily due to higher gross profit and lower restructuring expenses.
Comparison of Nine Months ended September 30, 2020 and 2019
HDE year-to-date net sales decreased $93.8 million, or 16 percent, from the same period last year, primarily due to lower sales volume resulting from the impacts of the COVID-19 pandemic, which were most severe in the Americas and Europe during the first half of the fiscal year. Sales to commercial vehicle and automotive and light vehicle customers decreased $57.2 million and $15.2 million, respectively.
HDE year-to-date cost of sales decreased $83.0 million, or 17 percent, primarily due to lower sales volume. As a percentage of sales, cost of sales decreased 20 basis points to 87.2 percent. The significant unfavorable impact of the lower sales volume was more than offset by favorable impacts from improved operating efficiencies and cost savings from procurement and other cost-reduction initiatives.
As a result of the lower sales and lower cost of sales as a percentage of sales, gross profit decreased $10.8 million and gross margin improved 20 basis points to 12.8 percent.
HDE year-to-date SG&A expenses decreased $6.9 million from the prior year. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $6.0 million, and cost-reduction initiatives, including lower travel expenses.
Restructuring expenses during the first nine months of fiscal 2021 totaled $1.9 million, a decrease of $0.3 million compared with the same period last year, and primarily consisted of severance expenses resulting from targeted headcount reductions in North America.
Operating income of $23.6 million decreased $3.6 million compared with the same period last year, primarily due to lower gross profit, partially offset by lower SG&A expenses.
Automotive
| | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2020 | | | 2019 | | | 2020 | | | 2019 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 113.9 | | | | 100.0 | % | | $ | 110.5 | | | | 100.0 | % | | $ | 285.9 | | | | 100.0 | % | | $ | 339.8 | | | | 100.0 | % | | Cost of sales | | | 95.5 | | | | 83.9 | % | | | 98.3 | | | | 89.0 | % | | | 246.1 | | | | 86.1 | % | | | 302.1 | | | | 88.9 | % | | Gross profit | | | 18.4 | | | | 16.1 | % | | | 12.2 | | | | 11.0 | % | | | 39.8 | | | | 13.9 | % | | | 37.7 | | | | 11.1 | % | | Selling, general and administrative expenses | | | 8.5 | | | | 7.4 | % | | | 11.2 | | | | 10.2 | % | | | 25.5 | | | | 8.9 | % | | | 33.6 | | | | 9.9 | % | | Restructuring expenses | | | 0.4 | | | | 0.4 | % | | | 0.2 | | | | 0.2 | % | | | 0.6 | | | | 0.2 | % | | | 2.9 | | | | 0.8 | % | | Impairment charges | | | 134.4 | | | | 118.0 | % | | | - | | | | - | | | | 134.4 | | | | 47.0 | % | | | - | | | | - | | | Gain on sale of assets | | | - | | | | - | | | | (0.8 | ) | | | -0.8 | % | | | - | | | | - | | | | (0.8 | ) | | | -0.2 | % | | Operating (loss) income | | $ | (124.9 | ) | | | -109.7 | % | | $ | 1.6 | | | | 1.4 | % | | $ | (120.7 | ) | | | -42.2 | % | | $ | 2.0 | | | | 0.6 | % |
Comparison of Three Months ended December 31, 2020 and 2019
Automotive net sales increased $3.4 million, or 3 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021, primarily due to a $6.7 million favorable impact of foreign currency exchange rate changes, partially offset by lower sales volume. Compared with the prior year, sales increased $3.8 million and $2.0 million in Europe and Asia, respectively, and decreased $2.4 million in the Americas.
Automotive cost of sales decreased $2.8 million, or 3 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021. As a percentage of sales, cost of sales decreased 510 basis points to 83.9 percent. Compared with the prior year, cost of sales was favorably impacted by lower depreciation expenses, which decreased approximately $3.0 million, cost savings from procurement and other cost-reduction initiatives, and improved operating efficiencies. The lower depreciation expenses resulted from the Company ceasing depreciation of the long-lived assets within the liquid-cooled automotive business when it was classified as held for sale in November 2020. Foreign currency exchange rate changes negatively impacted cost of sales by $5.7 million.
As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $6.2 million and gross margin improved 510 basis points to 16.1 percent.
SG&A expenses decreased $2.7 million compared with the third quarter of the prior year. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $2.0 million.
Restructuring expenses during the third quarter of fiscal 2021 totaled $0.4 million and primarily consisted of severance expenses resulting from targeted headcount reductions in Europe.
Impairment charges during the third quarter of fiscal 2021 totaled $134.4 million and primarily related to assets in the liquid-cooled automotive business. Upon classifying this business as held for sale during the third quarter, we identified an implied loss in excess of the carrying value of its long-lived assets. Accordingly, we reduced the liquid-cooled automotive business’s long-lived assets, primarily property, plant and equipment, to zero.
During the third quarter of fiscal 2020, we completed the sale of a previously-closed manufacturing facility in Germany and, as a result, recorded a gain of $0.8 million.
The Automotive operating loss of $124.9 million in the third quarter of fiscal 2021, as compared with operating income of $1.6 million in the third quarter of the prior year, was significantly impacted by the large impairment charges associated with the liquid-cooled automotive business and, to a much lesser extent, higher gross profit and lower SG&A expenses.
Comparison of Nine Months ended December 31, 2020 and 2019
Automotive year-to-date net sales decreased $53.9 million, or 16 percent, from the same period last year, primarily due to lower sales volume largely resulting from the impacts of the COVID-19 pandemic, partially offset by a $9.7 million favorable impact of foreign currency exchange rate changes. Sales in Europe and North America decreased $46.8 million and $13.0 million, respectively. Sales in Asia increased $5.9 million.
Automotive year-to-date cost of sales decreased $56.0 million, or 19 percent, from the prior year, primarily due to lower sales volume, partially offset by an $8.2$0.7 million unfavorable impact of foreign currency exchange rate changes. As a percentage
The year-to-date net impairment reversal of sales, cost$56.0 million primarily related to assets in our liquid-cooled automotive business. The $57.2 million impairment reversal during the third quarter of sales decreased 280 basis points to 86.1 percent andfiscal 2022 was favorably impacted by improved operating efficiencies, cost savings from procurement initiatives, and lower depreciation expenses of approximately $4.0 million, partially offset by the unfavorable impact$1.2 million of lower sales volume.
As a result of the lower sales and lower cost of sales as a percentage of sales, gross profit increased $2.1 million and gross margin improved 280 basis points to 13.9 percent.
Automotive year-to-date SG&A expenses decreased $8.1 million compared with the prior year. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $8.0 million.
Restructuring expensesnet impairment charges recorded during the first ninesix months of fiscal 2021 totaled $0.62022. During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’s held for sale assets. These impairment charges were partially offset by a decrease of $2.3$7.4 million compared withimpairment reversal related to certain manufacturing operations that no longer met the same periodrequirements to be classified as held for sale due to a modification in the prior year. The decrease was primarily driven by lower severance expenses in Europe resulting from fewer targeted headcount reductions.
sale perimeter during the first quarter of fiscal 2022.
The Automotive operating loss37
Operating income of $53.6 million during the first nine months of fiscal 2021, as compared with2022 represents a $174.3 million improvement from the operating incomeloss of $2.0$120.7 million duringin the same period last year, was significantly impactedyear. The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the largesignificant impairment reversal and impairment charges, associated withrespectively, related to the liquid-cooled automotive business duringbusiness. In addition, as compared with the third quarterfirst nine months of fiscal 2021, and, to a much lesser extent, higheryear-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profit and lowerhigher SG&A expenses and restructuring charges.expenses.
Liquidity and Capital Resources
Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $72.9$61.1 million as of December 31, 2020,2021 and an available borrowing capacity of $213.6$163.1 million under our revolving credit facility. Given our extensive international operations, approximately $59.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries. Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.
In response to the COVID-19 pandemic, we have taken actions to reduce operating and administrative expenses, conserve cash and maximize liquidity. In addition, as described below, we have focused on reducing our capital expenditures and executed amendments to our primary credit agreements to provide financial covenant flexibility during fiscal 2021 and 2022. We believe our sources of liquidity including cash flow from operations, our cash and cash equivalents, and access to both committed and uncommitted credit facilities, will provide sufficient cash flow to meetadequately cover our obligations during the next twelve monthsfunding needs on both a short-term and beyond. However, we are continuing to monitor the impacts of COVID-19 on our business and the credit and financial markets.long-term basis.
Net Cash Provided by Operating Activities Net cash provided by operating activities for the nine months ended December 31, 20202021 was $146.5$7.4 million, which represents a $100.6$139.1 million increasedecrease compared with the same period in the prior year. This increasedecrease in operating cash flow was primarily due to favorableunfavorable net changes in working capital, including higher inventory levels and lowerhigher payments for separationincentive compensation and project costs associated with our review of strategic alternatives for the automotive businesses. The favorable changes in working capital during the first nine months of fiscal 2021,employee benefits as compared with the same period in the prior year, included loweryear. Inventory, including amounts held for sale, increased $57.8 million from March 31, 2021 to December 31, 2021. The higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and lower payments for incentive compensation, employee benefits, income taxesstrategic safety stock builds in connection with global supply chain constraints 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.challenges.
Capital Expenditures Capital expenditures of $30.7 million during the first nine months of fiscal 2022 increased $7.0 million compared with the same period in the prior year. In response to the economic impacts of the COVID-19 pandemic,fiscal 2021, we have been focused on reducing our capital expenditures and, where possible, have delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in our vehicular businesses. Capital expenditures of $23.7 million duringresponse to the first nine months of fiscal 2021 decreased $34.5 million compared with the same period in the prior year.COVID-19 pandemic.
Debt Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below. Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales. In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.
In May 2020, we executed amendments to our primary credit agreements in the U.S. to provide additional covenant flexibility in light of the risks and uncertainties associated with the COVID-19 pandemic. Under the amended agreements, the leverage ratio covenant limit has been temporarily raised. The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, in relation to ourno more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”). The leverage ratio covenant limit is 5.75 to 1 for the fourth quarter of fiscal 2021. In fiscal 2022, the leverage ratio covenant limit is 4.75 to 1, 3.75 to 1, and 3.50 to 1 for the first, second and third quarters, respectively, and subsequently returns to 3.25 to 1 for the fourth quarter of fiscal 2022. We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.
As of December 31, 2020, we were in compliance with our debt covenants;2021, our leverage ratio and interest coverage ratio were 1.92.5 and 8.7,10.0, respectively. We expect to remain in compliance with our debt covenants during fiscal 2021,the remainder of fiscal 2022 and beyond.
Share Repurchase Program
On November 5, 2020, we announced our Board of Directors approved a two-year, $50.0 million share repurchase program, which allows us to repurchase shares of our common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as we deem appropriate. To date, we have not repurchased shares under this program. Our decision whether and to what extent to repurchase shares under this program will depend on a number of factors, including business conditions, other cash priorities, and stock price.
Forward-Looking Statements
This report, including, but not limited to, the discussion under Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains statements, including information about future financial performance, accompanied by phrases such as “believes,” “estimates,” “expects,” “plans,” “anticipates,” “intends,” and other similar “forward-looking” statements, as defined in the Private Securities Litigation Reform Act of 1995. Modine’s actual results, performance or achievements may differ materially from those expressed or implied in these statements, because of certain risks and uncertainties, including, but not limited to, those described under “Risk Factors” in Item 1A. in Part I. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2020.2021. Other risks and uncertainties include, but are not limited to, the following:
Market Risks:
The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees;
Economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including, in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; 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 or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade, the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the short- and long-term implications of “Brexit”;
The impact of potential price increases associated with raw materials, including aluminum, copper, steel and stainless steel (nickel), and other purchased componentscomponent inventory including, but not limited to, increases in the underlying material cost based upon the London Metal Exchange and related premiums, fabrication, or fabricationfreight costs. These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand. This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whether through our quotation process or through contract provisions for prospective price adjustments, as well as the inherent lag in timing of such contract provisions; and
The impact of current and future environmental laws and regulations on our business and the businesses of our customers, including our ability to take advantage of opportunities to supply alternative new technologies to meet environmental and/or energy standards and objectives.
Operational Risks:
The overall health and continually increasing price-down focus of our vehicular customers in light of economic and market-specific factors, the concentration of sales within our CIS segment attributable to one customer, and the potential impact on us from any deterioration in the stability or performance of any of our major customers;
The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our time, quantity, quality, price and pricetiming demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;
Our ability to maintain current customer programsrelationships and compete effectively for new business, including our ability to offset or otherwise address increasing pricing pressures from competitors and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;
The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims and delays or inefficiencies resulting from restrictions imposed in response to the COVID-19 pandemic;
The impact of any delays or modifications initiated by major customers with respect to program launches, product applications or requirements;
| • | The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages; |
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 reducemodify our cost structure in response to sales volume declinesincreases or decreases and to complete restructuring activities and realize the anticipated benefits of those activities;
Costs and other effects of the investigation and remediation of environmental contamination,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, operational and administrative functions, in light of tight global labor markets;
Our ability to protect our proprietary information and intellectual property from theft or attack by internal or external sources;
The impact of any substantial disruption or material breach of our information technology systems, and any related delays, problems or costs;
Increasingly complex and restrictive laws and regulations, including those associated with being a U.S. public company and others present in various jurisdictions in which we operate, and the costs associated with compliance therewith;
Work stoppages or interference at our facilities or those of our major customers and/or suppliers;
The constant and increasing pressures associated with healthcare and associated insurance costs; and
Costs and other effects of litigation, claims, or other obligations.
Strategic Risks:
Our ability to successfully complete the pending sale of our liquid-cooled automotive business, including the receipt of governmental and third-party approvals and satisfaction of other closing conditions, and our ability to successfully exit our other automotive businesses in a manner that is in the best interest of our shareholders;
| • | Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers; |
Our ability to successfully realize anticipated benefits fromidentify and execute strategies in our increased “industrial” market presence, with our CISautomotive businesses to reduce costs and BHVAC businesses, while maintaining appropriate focus on the market opportunities presented by our HDE and Automotive businesses;improve operating margins;
Our ability to identify and execute growth and diversification opportunities in order to position us for long-term success; and
The potential impacts from any actions by activist shareholders, including disruption of our business and related costs.
Financial Risks:
Our ability to fund our global liquidity requirements efficiently for Modine’s current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;
The impact of potential increases in interest rates, particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations, andobligations;
The impact of changes in federal, state or local tax regulations that could have the continued uncertainty around the utilizationeffect of LIBOR or alternative reference rates;increasing our income tax expense;
Our ability to comply with the financial covenants as amended, in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);
The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and
Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.
Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2020.2021. The Company’s market risks have not materially changed since the fiscal 20202021 Form 10-K was filed.
| Item 4. | Controls and Procedures. |
Evaluation Regarding Disclosure Controls and Procedures
As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Finance and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Finance and Chief Financial Officer have concluded that the design and operation of the Company’sCompany’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2020.2021.
Changes in Internal Control Over Financial Reporting
There have been no changes in internal control over financial reporting during the third quarter of fiscal 20212022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
ISSUER PURCHASES OF EQUITY SECURITIES
The following describes the Company’s purchases of common stock during the third quarter of fiscal 2022: Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (a) | | October 1 – October 31, 2021 | 36,644 (b)
| $11.94 | _______
| $50,000,000 | | | | | | | | November 1 – November 30, 2021 | _______
| _______
| _______
| 50,000,000 | | | | | | | | December 1 – December 31, 2021 | 4,189 (b)
| $10.20 | _______
| 50,000,000 | | | | | | | | Total | 40,833 (b)
| $11.76 | _______
| |
| (a) | Effective November 5, 2020, the Board of Directors approved a two-year, $50.0 million share repurchase program, which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate. |
| (b) | Consists of shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards. The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions. These shares are held as treasury shares. |
| Item 5. | Other Information. |
The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.
| Exhibit No. | Description | | Incorporated Herein By Reference To | Filed Herewith | | | | | | | | Securities and Asset PurchaseTermination Agreement dated as of November 2, 2020, by and between the Company and Dana Incorporated, dated as of October 25, 2021. | | Exhibit 2.1 to Registrant’s Current Report on Form 8-K dated November 2, 2020October 25, 2021 | | | | | | | | | [Corrected] OfferSeparation Letter dated as of November 10, 2020, by andAgreement between the Company and Mr. BrinkerJoel T. Casterton, dated as of October 25, 2021. | | | X | | | | | | | | FormSeparation Letter Agreement between the Company and Matthew J. McBurney, dated as of Make-Whole RSU Award Agreement with Neil Brinker | | | X | | | | | | | Form of Make-Whole Performance Cash Award Agreement with Neil BrinkerOctober 30, 2021. | | | X | | | | | | | | Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer. | | | X | | | | | | | | Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Finance and Chief Financial Officer. | | | X | | | | | | | | Section 1350 Certification of Neil D. Brinker, President and Chief Executive Officer. | | | X | | | | | | | | Section 1350 Certification of Michael B. Lucareli, Executive Vice President, Finance and Chief Financial Officer. | | | X | | | | | | | | 101.INS | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). | | | X | | | | | | | | 101.SCH | Inline XBRL Taxonomy Extension SchemaSchema. | | | X | | | | | | | | 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase DocumentDocument. | | | X | | | | | | | | 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase DocumentDocument. | | | X | | | | | | | 101.LAB10.1.LAB | Inline XBRL Taxonomy Extension Label Linkbase DocumentDocument. | | | X | | | | | | | 101.PRE10.1.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase DocumentDocument. | | | X | | | | | | | | 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101). | | | X |
* Schedules and similar attachments have been omitted pursuant to Item 601(b)(2) of Regulation S-K because they are not material and would likely cause competitive harm to the Company if publicly disclosed.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
MODINE MANUFACTURING COMPANY (Registrant)
By: /s/ Michael B. Lucareli Michael B. Lucareli, Executive Vice President, Finance and Chief Financial Officer*
Date: February 5, 20213, 2022
* Executing as both the principal financial officer and a duly authorized officer of the Company
s | | % of sales | |
Comparison of Three Months ended December 31, 20202021 and 20192020
Third quarter net sales of $484.3$502.2 million were $10.9$17.9 million, or 24 percent, higher than the third quarter of the prior year, primarily due to higher sales volume and favorable pricing adjustments in response to raw material price increases in our CIS, BHVAC, and HDE segments, partially offset by lower sales volume in our Automotive segment. Sales in the CIS, BHVAC, and HDE segments increased $23.7 million, $16.9 million, and $15.2 million, respectively. Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.
Third quarter cost of sales increased $26.0 million, or 6 percent, primarily due to higher raw material prices, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, segments and an $11.2 million favorable impactHDE segments. These drivers, which increased cost of foreign currency exchange rate changes,sales, were partially offset by lower sales volume in the CISAutomotive segment and Automotive segments. Sales in the HDE, BHVAC, and Automotive segments increased $20.7 million, $3.8 million, and $3.4 million, respectively. CIS segment sales decreased $18.5 million.
Third quarter cost of sales increased $1.7 million.improved operating efficiencies. As a percentage of sales, cost of sales decreased 160increased 220 basis points to 82.985.1 percent. The increase in cost of sales was primarily due to a $9.7 million unfavorable impact of foreign currency exchange rate changes, partially offset by the favorable impacts of procurement and other cost-reduction initiatives and a $3.0 million decrease in depreciation expense in the Automotive segment. In addition, program and equipment transfer costs to prepare the liquid-cooled automotive business for sale decreased approximately $1.0 million compared with the prior year.
As a result of higher sales and lowerhigher cost of sales as a percentage of sales, third quarter gross profit increased $9.2decreased $8.1 million and gross margin improved 160declined 220 basis points to 17.114.9 percent.
Third quarter SG&A expenses decreased $7.4 million. The decrease in SG&A expenses was primarily due to$5.8 million, primary driven by $2.6 million of lower costs recorded at Corporate associated withrelated to our review of strategic alternatives for the Automotive segment’s business operations,segment businesses and lower compensation-related expenses, which decreased approximately $10.0$2.0 million. This favorable driver was partially offset by a $1.0 million unfavorable impact of foreign currency exchange rate changes and higher environmental chargesThe lower compensation-related expenses were primarily due to lower incentive compensation expenses at Corporate in the HDE segment.current year.
Restructuring expenses of $0.9 million during the third quarter of fiscal 2021 decreased $1.7 million, primarily due to lower restructuring expenses in the HDE segment.
Impairment charges of $134.4$2.1 million in the third quarter of fiscal 2021 primarily related to the write-down of the long-lived assets in the Automotive segment’s liquid-cooled automotive business in connection2022 increased $1.2 million compared with the pending sale of that business.
The operating loss of $108.7 million represents a $116.9 million decline from the prior-year operating income of $8.2 million. The decline was primarily due to the $134.4 million of impairment charges recorded in the Automotive segment and lower earnings in the CIS segment. These negative drivers were partially offset by higher earnings in our HDE and BHVAC segments.
Interest expense decreased $1.0 million, or 18 percent, during the third quarter of fiscal 2021, primarily due to higher severance expenses in the CIS segment.
During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower outstanding long-term debtof their carrying or fair value. During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale, we recorded $134.4 million of impairment charges and reduced the carrying value of the disposal group’s long-lived assets to zero.
Operating income of $79.4 million in the third quarter of fiscal 2022 represents a lesser extent,$188.1 million improvement from the prior-year operating loss of $108.7 million. The operating income and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment. In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.
Interest expense in the third quarter of fiscal 2022 decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorable changes in interest rates.
The provision for income taxes was $81.6$0.1 million and $1.7$81.6 million in the third quarter of fiscal 20212022 and 2020,2021, respectively. The $79.9$81.5 million increasedecrease was primarily due to the absence of $109.9 million of income tax charges totaling $116.5 million recorded in the third quarter of fiscal 2021prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions. These drivers, which decreased the provision for income taxes, were partially offset by the absence of $37.7 million of income tax benefits totaling $37.7 millionrecorded during the prior year related to the Automotive segment impairment charges recorded earlier in the third quarter of fiscal 2021.charges.
Comparison of Nine Months ended December 31, 20202021 and 20192020
Fiscal 20212022 year-to-date net sales of $1,293.5$1,475.7 million were $209.1$182.2 million, or 14 percent, lowerhigher than the same period last year, primarily due to lowerhigher sales volumes and favorable pricing adjustments in response to raw material price increases in our HDE, CIS, and AutomotiveBHVAC segments. Sales in these segments decreased $93.8increased $123.7 million, $87.4$86.6 million, and $53.9$38.4 million, respectively, and were significantly impacted by market-driven volume declines and temporary plant closures earlier in the fiscal year due to the COVID-19 pandemic. BHVACrespectively. Automotive segment sales increased $8.3decreased $61.9 million.
Fiscal 20212022 year-to-date cost of sales of $1,083.9$1,261.6 million decreased $186.1increased $177.7 million, or 1516 percent, primarily due to lowerhigher raw material prices, which increased approximately $117.0 million, and higher sales volume. In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic. These factors, which caused an increase in cost of sales compared with the same period in the prior year, were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies. As a percentage of sales, cost of sales improved 70increased 170 basis points to 83.885.5 percent. The unfavorable impact of lower sales volume was more than offset by the benefits of cost-reduction initiatives implemented earlier in the fiscal year in response to lower end market demand and procurement initiatives.
As a result of lowerhigher sales and lowerhigher cost of sales as a percentage of sales, fiscal 2021 year-to-date gross profit decreased $23.0increased $4.5 million and gross margin improved 70declined 170 basis points to 16.214.5 percent.
Fiscal 20212022 year-to-date SG&A expenses decreased $42.8increased $10.0 million. The decreaseincrease in SG&A expenses was primarily due to higher compensation-related expenses, as the prior year was favorably impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19. In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million. These increases were partially offset by lower strategic reorganization costs and lower costs recorded at Corporate associated withrelated to our review of strategic alternatives for the Automotive segment’s business operations,segment businesses, which decreased approximately $29.0$2.8 million and $1.3 million, respectively. The lower compensation-relatedstrategic reorganization costs primarily resulted from lower severance expenses which decreased approximately $18.0 million. These favorable drivers were partially offset by $5.9 million of costs recorded at Corporate in connection with Mr. Burke stepping down from his position as President and CEO and the search for his successor.executive management positions.
Restructuring expenses of $7.0$3.0 million duringin the first nine months of fiscal 2021 increased $0.32022 decreased $4.0 million compared with the same period last year, primarily due to higher restructuringlower severance expenses in the CIS segment, partially offset by lower restructuring expenses in the Automotive segment.and HDE segments.
The fiscal 2021 year-to-date operating lossnet impairment reversals of $83.4$55.7 million represents a $115.7 million decline from the prior-year operating income of $32.3 million. The decline was primarily due to the $134.4 million of impairment charges recorded in the Automotive segment and lower earnings in our CIS and HDE segments. These negative drivers were partially offset by lower SG&A expenses at Corporate and higher earnings in our BHVAC segment.
Interest expense decreased $2.1 million, or 12 percent, during the first nine months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment. In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale. In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.
We sold our air-cooled automotive business on April 30, 2021. As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.
Operating income of $98.6 million during the first nine months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million. The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business. In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses. Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.
Interest expense during the first nine months of fiscal 2022 decreased $3.4 million compared with the same period last year, primarily due to lower outstanding long-term debt and favorable changes in interest rates.rates and lower debt outstanding during the current-year.
The provision for income taxes was $95.3$7.4 million and $8.3$95.3 million during the first nine months of fiscal 20212022 and 2020,2021, respectively. The $87.0$87.9 million increasedecrease was primarily due to the absence of $116.5 million of income tax charges totaling $123.1 million recorded duringin the first nine months of fiscal 2021prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions. These drivers, which decreased the provision for income taxes, were partially offset by the absence of $37.7 million of income tax benefits totaling $37.7 millionrecorded during the prior year related to the Automotive segment impairment charges recorded during fiscal 2021.charges.
SEGMENT RESULTS OF OPERATIONS
Effective AprilJuly 1, 2020,2021, we began managingaligned the data center businesses previously managed by and reported within the CIS segment under the BHVAC segment. The BHVAC segment assumed management of our global automotive business separate fromin Guadalajara, Spain and a portion of our business in Grenada, Mississippi. Through this segment change, we have aligned our data center businesses under the otherBHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies. As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the previously-reported Vehicular Thermal Solutions (“VTS”)BHVAC segment. We have been managing the automotive business as the Automotive segment as we target the sale or eventual exit of its underlying automotive business operations. We are managing the other businesses of the VTS segment, including the commercial vehicle and off-highway businesses, as the Heavy Duty Equipment segment. We began reporting financial results for our new segment structure beginning for fiscal 2021. Segment financial information for fiscal 2020 has been recast to conform to the fiscal 2021 presentation. The segment realignment had no impact on the CISHDE and BHVAC segments.Automotive segments or on our consolidated financial position, results of operations, and cash flows. Segment financial information for the prior periods has been recast to conform to the current presentation.
As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment. While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment. See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.
The following is a discussion of our segment results of operations for the three months and nine months ended December 31, 20202021 and 2019:2020:
Commercial and Industrial SolutionsBuilding HVAC Systems
| | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2020 | | | 2019 | | | 2020 | | | 2019 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 129.0 | | | | 100.0 | % | | $ | 147.5 | | | | 100.0 | % | | $ | 385.6 | | | | 100.0 | % | | $ | 473.0 | | | | 100.0 | % | | Cost of sales | | | 116.4 | | | | 90.2 | % | | | 124.8 | | | | 84.6 | % | | | 338.2 | | | | 87.7 | % | | | 403.1 | | | | 85.2 | % | | Gross profit | | | 12.6 | | | | 9.8 | % | | | 22.7 | | | | 15.4 | % | | | 47.4 | | | | 12.3 | % | | | 69.9 | | | | 14.8 | % | | Selling, general and administrative expenses | | | 13.8 | | | | 10.7 | % | | | 13.7 | | | | 9.3 | % | | | 39.1 | | | | 10.2 | % | | | 42.8 | | | | 9.1 | % | | Restructuring expenses | | | 0.5 | | | | 0.4 | % | | | 0.7 | | | | 0.5 | % | | | 4.4 | | | | 1.1 | % | | | 1.3 | | | | 0.3 | % | | Operating (loss) income | | $ | (1.7 | ) | | | -1.3 | % | | $ | 8.3 | | | | 5.6 | % | | $ | 3.9 | | | | 1.0 | % | | $ | 25.8 | | | | 5.4 | % |
| | | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2021 | | | 2020 | | | 2021 | | | 2020 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 90.6 | | | | 100.0 | % | | $ | 73.7 | | | | 100.0 | % | | $ | 234.7 | | | | 100.0 | % | | $ | 196.3 | | | | 100.0 | % | | Cost of sales | | | 63.2 | | | | 69.7 | % | | | 48.3 | | | | 65.5 | % | | | 169.5 | | | | 72.2 | % | | | 131.8 | | | | 67.1 | % | | Gross profit | | | 27.4 | | | | 30.3 | % | | | 25.4 | | | | 34.5 | % | | | 65.2 | | | | 27.8 | % | | | 64.5 | | | | 32.9 | % | | Selling, general and administrative expenses | | | 13.0 | | | | 14.4 | % | | | 10.5 | | | | 14.3 | % | | | 35.1 | | | | 15.0 | % | | | 28.9 | | | | 14.8 | % | | Operating income | | $ | 14.4 | | | | 15.9 | % | | $ | 14.9 | | | | 20.1 | % | | $ | 30.1 | | | | 12.8 | % | | $ | 35.6 | | | | 18.1 | % |
Comparison of Three Months ended December 31, 20202021 and 20192020
CISBHVAC net sales decreased $18.5increased $16.9 million, or 1323 percent, from the third quarter of fiscal 20202021 to the third quarter of fiscal 2021,2022, primarily due to lowerhigher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases. Compared with the third quarter of the prior year, BHVAC sales to data center coolingcustomers increased $11.6 million. In addition, sales to commercial HVAC customers increased $5.2 million, primarily due to higher sales of ventilation and heating products in North America.
BHVAC cost of sales increased $14.9 million, or 31 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs. As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.
As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent. While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.
SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.
Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.
Comparison of Nine Months ended December 31, 2021 and 2020
BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a $4.5lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7 million favorable impact of foreign currency exchange rate changes.rates. Sales to data center coolingcommercial HVAC customers decreased $18.4increased $24.5 million, primarily due to lowerhigher sales of heating and air conditioning products. In addition, sales to one individual customer.data center customers increased $13.0 million.
CISBHVAC year-to-date cost of sales decreased $8.4increased $37.7 million, or 729 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021,same period last year, primarily due to lowerhigher sales volume partially offsetand higher raw material prices, which increased by a $4.2approximately $12.0 million. In addition, cost of sales was unfavorably impacted by $4.8 million unfavorable impact offrom foreign currency exchange rate changes. As a percentage of sales, cost of sales increased 560510 basis points to 90.272.2 percent, primarily due to the impacthigher material costs.
As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.
BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.
Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.
Commercial and Industrial Solutions
| | | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2021 | | | 2020 | | | 2021 | | | 2020 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 148.6 | | | | 100.0 | % | | $ | 124.9 | | | | 100.0 | % | | $ | 456.2 | | | | 100.0 | % | | $ | 369.6 | | | | 100.0 | % | | Cost of sales | | | 130.9 | | | | 88.1 | % | | | 112.0 | | | | 89.7 | % | | | 399.4 | | | | 87.5 | % | | | 324.8 | | | | 87.9 | % | | Gross profit | | | 17.7 | | | | 11.9 | % | | | 12.9 | | | | 10.3 | % | | | 56.8 | | | | 12.5 | % | | | 44.8 | | | | 12.1 | % | | Selling, general and administrative expenses | | | 12.4 | | | | 8.4 | % | | | 13.1 | | | | 10.4 | % | | | 37.7 | | | | 8.3 | % | | | 36.0 | | | | 9.7 | % | | Restructuring expenses | | | 1.9 | | | | 1.3 | % | | | 0.5 | | | | 0.4 | % | | | 2.1 | | | | 0.5 | % | | | 4.4 | | | | 1.2 | % | | Impairment charge | | | - | | | | - | | | | - | | | | - | | | | 0.3 | | | | 0.1 | % | | | - | | | | - | | | Operating income (loss) | | $ | 3.4 | | | | 2.2 | % | | $ | (0.7 | ) | | | -0.5 | % | | $ | 16.7 | | | | 3.6 | % | | $ | 4.4 | | | | 1.2 | % |
Comparison of Three Months ended December 31, 2021 and 2020
CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume unfavorableand favorable product pricing adjustments in response to raw material price increases. Compared with the third quarter of the prior year, sales mix,to commercial HVAC&R customers increased $24.5 million.
CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million. As a percentage of sales, cost of sales decreased 160 basis points to 88.1 percent, primarily due to the favorable impacts of the higher sales volume and improved operating efficiencies, partially offset by higher material costs.
As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8 million and gross margin improved 160 basis points to 11.9 percent.
SG&A expenses decreased $0.7 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.
Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses. The severance expenses in the third quarter of fiscal 2022 primarily related to targeted headcount reductions in Europe and China.
Operating income of $3.4 million represents a $4.1 million improvement from the prior-year operating loss of $0.7 million and was primarily due to higher gross profit.
Comparison of Nine Months ended December 31, 2021 and 2020
CIS year-to-date net sales increased $86.6 million, or 23 percent, from the same period last year, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases. In addition, sales were favorably impacted by $5.7 million from foreign currency exchange rates. The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year. Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, compared with the same period in the prior year.
CIS year-to-date cost of sales increased $74.6 million, or 23 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0 million. In addition, cost of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes. As a percentage of sales, cost of sales decreased 40 basis points to 87.5 percent, primarily due to the favorable impacts of the higher sales volume and improved operating efficiencies, partially offset by higher material costs.
As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0 million and gross margin improved 40 basis points to 12.5 percent.
CIS year-to-date SG&A expenses increased $1.7 million, yet decreased 140 basis points as a percentage of sales, from the same period last year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.
Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3 million from the same period last year, primarily due to lower severance expenses. The severance expenses during the first nine months of fiscal 2022 primarily related to targeted headcount reductions in Europe and China. The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.
During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write down a previously-closed manufacturing facility in the U.S to fair value less costs to sell. We sold the facility and received net cash proceeds of $0.7 million during July 2021.
Operating income during the first nine months of fiscal 2022 increased $12.3 million from the same period last year, primarily due to higher gross profit and lower restructuring expenses, partially offset by higher SG&A expenses.
Heavy Duty Equipment
| | | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2021 | | | 2020 | | | 2021 | | | 2020 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 200.8 | | | | 100.0 | % | | $ | 185.6 | | | | 100.0 | % | | $ | 598.4 | | | | 100.0 | % | | $ | 474.7 | | | | 100.0 | % | | Cost of sales | | | 178.6 | | | | 88.9 | % | | | 159.6 | | | | 86.0 | % | | | 535.3 | | | | 89.5 | % | | | 413.8 | | | | 87.2 | % | | Gross profit | | | 22.2 | | | | 11.1 | % | | | 26.0 | | | | 14.0 | % | | | 63.1 | | | | 10.5 | % | | | 60.9 | | | | 12.8 | % | | Selling, general and administrative expenses | | | 11.7 | | | | 5.9 | % | | | 13.2 | | | | 7.1 | % | | | 37.4 | | | | 6.2 | % | | | 35.4 | | | | 7.4 | % | | Restructuring expenses | | | 0.2 | | | | 0.1 | % | | | - | | | | - | | | | 0.7 | | | | 0.1 | % | | | 1.9 | | | | 0.4 | % | | Operating income | | $ | 10.3 | | | | 5.1 | % | | $ | 12.8 | | | | 6.8 | % | | $ | 25.0 | | | | 4.2 | % | | $ | 23.6 | | | | 5.0 | % |
Comparison of Three Months ended December 31, 2021 and 2020
HDE net sales increased $15.2 million, or 8 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to pricing adjustments associated with raw material price increases and higher sales volume. Sales to off-highway and commercial vehicle customers increased $12.3 million and $10.7 million, respectively. Sales to automotive and light vehicle customers decreased $7.7 million.
HDE cost of sales increased $19.0 million, or 12 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher raw material prices, which increased approximately $19.0 million, and to a lesser extent, temporary operating inefficiencies associated with plant consolidation activities in China.higher sales volume. These negative impactsdrivers, which increased cost of sales, were partially offset by benefitsimproved operating efficiencies. While we have provisions within many of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs. As a percentage of sales, cost of sales increased 290 basis points to 88.9 percent, primarily due to the higher material prices.
As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit decreased $3.8 million and gross margin declined 290 basis points to 11.1 percent.
SG&A expenses decreased $1.5 million, or 120 basis points as a percentage of sales, compared with the third quarter of the prior year. The decrease in SG&A expenses was primarily due to lower development costs and environmental charges. These decreases were partially offset by higher compensation-related expenses, which increased approximately $1.0 million.
Restructuring expenses during the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.
Operating income decreased $2.5 million from procurementthe third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower gross profit, partially offset by lower SG&A expenses.
Comparison of Nine Months ended December 31, 2021 and 2020
HDE year-to-date net sales increased $123.7 million, or 26 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, pricing adjustments associated with raw material price increases. HDE sales in fiscal 2021, primarily in the first quarter, were negatively impacted by the COVID-19 pandemic. Sales to commercial vehicle and off-highway customers increased $59.0 million and $57.7 million, respectively.
HDE year-to-date cost of sales increased $121.5 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased approximately $53.0 million. As a percentage of sales, cost of sales increased 230 basis points to 89.5 percent, primarily due to the higher material prices.
As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2 million and gross margin declined 230 basis points to 10.5 percent.
HDE year-to-date SG&A expenses increased $2.0 million, but decreased 120 basis points as a percentage of sales, compared with the same period in the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other cost-reduction initiatives.administrative costs.
Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.
Operating income during the first nine months of fiscal 2022 increased $1.4 million from the same period last year, primarily due to higher gross profit and lower restructuring expenses, partially offset by higher SG&A expenses.
Automotive
| | | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2021 | | | 2020 | | | 2021 | | | 2020 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 72.4 | | | | 100.0 | % | | $ | 113.9 | | | | 100.0 | % | | $ | 224.0 | | | | 100.0 | % | | $ | 285.9 | | | | 100.0 | % | | Cost of sales | | | 64.9 | | | | 89.6 | % | | | 95.5 | | | | 83.9 | % | | | 196.1 | | | | 87.6 | % | | | 246.1 | | | | 86.1 | % | | Gross profit | | | 7.5 | | | | 10.4 | % | | | 18.4 | | | | 16.1 | % | | | 27.9 | | | | 12.4 | % | | | 39.8 | | | | 13.9 | % | | Selling, general and administrative expenses | | | 9.7 | | | | 13.4 | % | | | 8.5 | | | | 7.4 | % | | | 30.1 | | | | 13.4 | % | | | 25.5 | | | | 8.9 | % | | Restructuring expenses | | | - | | | | - | | | | 0.4 | | | | 0.4 | % | | | 0.2 | | | | 0.1 | % | | | 0.6 | | | | 0.2 | % | | Impairment charges (reversals) – net | | | (57.2 | ) | | | -79.0 | % | | | 134.4 | | | | 118.0 | % | | | (56.0 | ) | | | -25.0 | % | | | 134.4 | | | | 47.0 | % | | Operating income (loss) | | $ | 55.0 | | | | 76.0 | % | | $ | (124.9 | ) | | | -109.7 | % | | $ | 53.6 | | | | 24.0 | % | | $ | (120.7 | ) | | | -42.2 | % |
Comparison of Three Months ended December 31, 2021 and 2020
Automotive net sales decreased $41.5 million, or 36 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to the disposition of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market. The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021. Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.
Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume. This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million. As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.
As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.1$10.9 million and gross margin declined 560570 basis points to 9.810.4 percent.
SG&A expenses increased $0.1$1.2 million or 140 basis points as a percentage of sales, compared with the third quarter of the prior year. The increase in SG&A expenses was primarily due to a $0.5higher compensation-related expenses.
During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million unfavorable impact of foreign currency exchange rate changes, partially offset bypreviously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower compensation-related expenses.
Restructuring expensesof their carrying or fair value. The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.
Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million. The operating income and operating loss during the third quarters of fiscal 2022 and 2021 totaled $0.5 million, a decrease of $0.2 millionwere driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business. In addition, as compared with the third quarter of fiscal 2020, and primarily consisted of equipment transfer and plant consolidation costs in China.
The CIS operating loss of $1.7 million represents a $10.0 million decline from the prior-year2021, operating income of $8.3 million and was primarily due tounfavorably impacted by lower gross profit.profit and higher SG&A expenses.
Comparison of Nine Months ended December 31, 20202021 and 20192020
CISAutomotive year-to-date net sales decreased $87.4$61.9 million, or 1822 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes. The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year. Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market. Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.
Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume associated withand lower depreciation expenses, which decreased $9.9 million. We ceased depreciating the impactsproperty, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021. Upon reverting back to held and used classification during the COVID-19 pandemic. In addition, salesthird quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in fiscal 2021 have been negatively impactedthe liquid-cooled automotive business. These decreases were partially offset by lower sales to a significant data center customer. Sales to commercial HVAC&R and data center cooling customers decreased $48.1higher raw material prices, which increased approximately $9.0 million, and $41.1a $5.3 million respectively.
CIS year-to-date cost of sales decreased $64.9 million, or 16 percent, from the same period last year, primarily due to lower sales volume.foreign currency exchange rate changes. As a percentage of sales, cost of sales increased 250150 basis points to 87.7 percent, primarily due to the impact of lower sales volume and unfavorable sales mix, partially offset by cost-reduction and procurement initiatives.87.6 percent.
As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $22.5$11.9 million and gross margin declined 250150 basis points to 12.312.4 percent.
CISAutomotive year-to-date SG&A expenses decreased $3.7increased $4.6 million compared with the priorsame period last year. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $5.0 million, partially offset by a $0.6 million unfavorable impact of foreign currency exchange rate changes.
Restructuring expenses during the first nine months of fiscal 2021 increased $3.1 million compared with the prior year and primarily consisted of severance expenses and equipment transfer costs related to plant consolidation activities in China and targeted headcount reductions in North America.
Operating income decreased $21.9 million to $3.9 million, primarily due to lower gross profit and higher restructuring expenses, partially offset by lower SG&A expenses.
Building HVAC Systems
| | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2020 | | | 2019 | | | 2020 | | | 2019 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 68.7 | | | | 100.0 | % | | $ | 64.9 | | | | 100.0 | % | | $ | 178.2 | | | | 100.0 | % | | $ | 169.9 | | | | 100.0 | % | | Cost of sales | | | 43.0 | | | | 62.7 | % | | | 41.8 | | | | 64.5 | % | | | 116.3 | | | | 65.3 | % | | | 115.4 | | | | 67.9 | % | | Gross profit | | | 25.7 | | | | 37.3 | % | | | 23.1 | | | | 35.5 | % | | | 61.9 | | | | 34.7 | % | | | 54.5 | | | | 32.1 | % | | Selling, general and administrative expenses | | | 9.9 | | | | 14.3 | % | | | 9.6 | | | | 14.7 | % | | | 25.9 | | | | 14.5 | % | | | 26.9 | | | | 15.8 | % | | Operating income | | $ | 15.8 | | | | 23.1 | % | | $ | 13.5 | | | | 20.8 | % | | $ | 36.0 | | | | 20.2 | % | | $ | 27.6 | | | | 16.2 | % |
Comparison of Three Months ended December 31, 2020 and 2019
BHVAC net sales increased $3.8 million, or 6 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021, primarily due to higher sales in the U.S. and the U.K., which both increased approximately $2.0 million. The higher sales in the U.S. were primarily due to higher sales of heating products, partially offset by lower sales of ventilation products. The higher sales in the U.K. were primarily due to higher sales of air conditioning and data center cooling products.
BHVAC cost of sales increased $1.2 million, or 3 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021, primarily due to higher sales volume. As a percentage of sales, cost of sales decreased 180 basis points to 62.7 percent and was positively impacted by favorable customer pricing and sales mix.
As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $2.6 million and gross margin improved 180 basis points to 37.3 percent.
SG&A expenses increased $0.3 million from the prior year, yet decreased 40 basis points as a percentage of sales. The increase in SG&A expenses was primarily due to higher compensation-related expenses, including commission expenses.
Operating income of $15.8 millionwhich increased $2.3 million during the quarter, primarily due to higher gross profit.
Comparison of Nine Months ended December 31, 2020 and 2019
BHVAC year-to-date net sales increased $8.3 million, or 5 percent, from the same period last year, primarily due to higher sales volume. Compared with the first nine months of the prior year, sales increased $9.2 million in the U.K. and decreased $0.9 million in the U.S. The higher sales in the U.K. were primarily due to higher sales of data center products. The lower sales in the U.S. resulted primarily from the negative impacts of the COVID-19 pandemic and decreased sales of ventilation products, partially offset by higher sales of heating products.
BHVAC year-to-date cost of sales increased $0.9 million from the same period last year. As a percentage of sales, cost of sales decreased 260 basis points to 65.3 percent and was positively impacted by favorable customer pricing, sales mix and cost-reduction initiatives.
As a result of higher sales and lower cost of sales as a percentage of sales, gross profit increased $7.4approximately $2.0 million, and gross margin improved 260 basis points to 34.7 percent.
BHVAC year-to-date SG&A expenses decreased $1.0 million, or 130 basis points as a percentage of sales, from the prior year. The decrease in SG&A expenses was primary due to lower travel expenses.
Operating income of $36.0 million increased $8.4 million compared with the same period last year, primarily due to higher gross profit and lower SG&A expenses.
Heavy Duty Equipment
| | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2020 | | | 2019 | | | 2020 | | | 2019 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 185.6 | | | | 100.0 | % | | $ | 164.9 | | | | 100.0 | % | | $ | 474.7 | | | | 100.0 | % | | $ | 568.5 | | | | 100.0 | % | | Cost of sales | | | 159.6 | | | | 86.0 | % | | | 148.1 | | | | 89.8 | % | | | 413.8 | | | | 87.2 | % | | | 496.8 | | | | 87.4 | % | | Gross profit | | | 26.0 | | | | 14.0 | % | | | 16.8 | | | | 10.2 | % | | | 60.9 | | | | 12.8 | % | | | 71.7 | | | | 12.6 | % | | Selling, general and administrative expenses | | | 13.2 | | | | 7.1 | % | | | 12.6 | | | | 7.7 | % | | | 35.4 | | | | 7.4 | % | | | 42.3 | | | | 7.4 | % | | Restructuring expenses | | | - | | | | - | | | | 1.4 | | | | 0.8 | % | | | 1.9 | | | | 0.4 | % | | | 2.2 | | | | 0.4 | % | | Operating income | | $ | 12.8 | | | | 6.8 | % | | $ | 2.8 | | | | 1.7 | % | | $ | 23.6 | | | | 5.0 | % | | $ | 27.2 | | | | 4.8 | % |
Comparison of Three Months ended December 31, 2020 and 2019
HDE net sales increased $20.7 million, or 13 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021, primarily due to higher sales volume to global off-highway customers. Sales to off-highway and commercial vehicle customers increased $16.7 million and $3.8 million, respectively. Geographically, sales increased most significantly in Asia.
HDE cost of sales increased $11.5 million, or 8 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021, primarily due to higher sales volume. As a percentage of sales, cost of sales decreased 380 basis points to 86.0 percent and was favorably impacted by the higher sales volume, cost savings from procurement and other cost-reduction initiatives, and, to a lesser extent, improved operating efficiencies.
As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $9.2 million and gross margin improved 380 basis points to 14.0 percent.
SG&A expenses increased $0.6 million, yet decreased 60 basis points as a percentage of sales, compared with the third quarter of the prior year. The increase in SG&A expenses was primarily due to environmental charges related to a previously-owned U.S. manufacturing facility, which increased $0.4 million.
Restructuring expenses decreased $1.4 million compared with the third quarter of fiscal 2020, primarily due to lower severance expenses related to targeted headcount reductions.
Operating income of $12.8 million increased $10.0 million during the quarter, primarily due to higher gross profit and lower restructuring expenses.
Comparison of Nine Months ended September 30, 2020 and 2019
HDE year-to-date net sales decreased $93.8 million, or 16 percent, from the same period last year, primarily due to lower sales volume resulting from the impacts of the COVID-19 pandemic, which were most severe in the Americas and Europe during the first half of the fiscal year. Sales to commercial vehicle and automotive and light vehicle customers decreased $57.2 million and $15.2 million, respectively.
HDE year-to-date cost of sales decreased $83.0 million, or 17 percent, primarily due to lower sales volume. As a percentage of sales, cost of sales decreased 20 basis points to 87.2 percent. The significant unfavorable impact of the lower sales volume was more than offset by favorable impacts from improved operating efficiencies and cost savings from procurement and other cost-reduction initiatives.
As a result of the lower sales and lower cost of sales as a percentage of sales, gross profit decreased $10.8 million and gross margin improved 20 basis points to 12.8 percent.
HDE year-to-date SG&A expenses decreased $6.9 million from the prior year. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $6.0 million, and cost-reduction initiatives, including lower travel expenses.
Restructuring expenses during the first nine months of fiscal 2021 totaled $1.9 million, a decrease of $0.3 million compared with the same period last year, and primarily consisted of severance expenses resulting from targeted headcount reductions in North America.
Operating income of $23.6 million decreased $3.6 million compared with the same period last year, primarily due to lower gross profit, partially offset by lower SG&A expenses.
Automotive
| | Three months ended December 31, | | | Nine months ended December 31, | | | | | 2020 | | | 2019 | | | 2020 | | | 2019 | | | (in millions) | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | $'s | | | % of sales | | | Net sales | | $ | 113.9 | | | | 100.0 | % | | $ | 110.5 | | | | 100.0 | % | | $ | 285.9 | | | | 100.0 | % | | $ | 339.8 | | | | 100.0 | % | | Cost of sales | | | 95.5 | | | | 83.9 | % | | | 98.3 | | | | 89.0 | % | | | 246.1 | | | | 86.1 | % | | | 302.1 | | | | 88.9 | % | | Gross profit | | | 18.4 | | | | 16.1 | % | | | 12.2 | | | | 11.0 | % | | | 39.8 | | | | 13.9 | % | | | 37.7 | | | | 11.1 | % | | Selling, general and administrative expenses | | | 8.5 | | | | 7.4 | % | | | 11.2 | | | | 10.2 | % | | | 25.5 | | | | 8.9 | % | | | 33.6 | | | | 9.9 | % | | Restructuring expenses | | | 0.4 | | | | 0.4 | % | | | 0.2 | | | | 0.2 | % | | | 0.6 | | | | 0.2 | % | | | 2.9 | | | | 0.8 | % | | Impairment charges | | | 134.4 | | | | 118.0 | % | | | - | | | | - | | | | 134.4 | | | | 47.0 | % | | | - | | | | - | | | Gain on sale of assets | | | - | | | | - | | | | (0.8 | ) | | | -0.8 | % | | | - | | | | - | | | | (0.8 | ) | | | -0.2 | % | | Operating (loss) income | | $ | (124.9 | ) | | | -109.7 | % | | $ | 1.6 | | | | 1.4 | % | | $ | (120.7 | ) | | | -42.2 | % | | $ | 2.0 | | | | 0.6 | % |
Comparison of Three Months ended December 31, 2020 and 2019
Automotive net sales increased $3.4 million, or 3 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021, primarily due to a $6.7 million favorable impact of foreign currency exchange rate changes, partially offset by lower sales volume. Compared with the prior year, sales increased $3.8 million and $2.0 million in Europe and Asia, respectively, and decreased $2.4 million in the Americas.
Automotive cost of sales decreased $2.8 million, or 3 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021. As a percentage of sales, cost of sales decreased 510 basis points to 83.9 percent. Compared with the prior year, cost of sales was favorably impacted by lower depreciation expenses, which decreased approximately $3.0 million, cost savings from procurement and other cost-reduction initiatives, and improved operating efficiencies. The lower depreciation expenses resulted from the Company ceasing depreciation of the long-lived assets within the liquid-cooled automotive business when it was classified as held for sale in November 2020. Foreign currency exchange rate changes negatively impacted cost of sales by $5.7 million.
As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $6.2 million and gross margin improved 510 basis points to 16.1 percent.
SG&A expenses decreased $2.7 million compared with the third quarter of the prior year. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $2.0 million.
Restructuring expenses during the third quarter of fiscal 2021 totaled $0.4 million and primarily consisted of severance expenses resulting from targeted headcount reductions in Europe.
Impairment charges during the third quarter of fiscal 2021 totaled $134.4 million and primarily related to assets in the liquid-cooled automotive business. Upon classifying this business as held for sale during the third quarter, we identified an implied loss in excess of the carrying value of its long-lived assets. Accordingly, we reduced the liquid-cooled automotive business’s long-lived assets, primarily property, plant and equipment, to zero.
During the third quarter of fiscal 2020, we completed the sale of a previously-closed manufacturing facility in Germany and, as a result, recorded a gain of $0.8 million.
The Automotive operating loss of $124.9 million in the third quarter of fiscal 2021, as compared with operating income of $1.6 million in the third quarter of the prior year, was significantly impacted by the large impairment charges associated with the liquid-cooled automotive business and, to a much lesser extent, higher gross profit and lower SG&A expenses.
Comparison of Nine Months ended December 31, 2020 and 2019
Automotive year-to-date net sales decreased $53.9 million, or 16 percent, from the same period last year, primarily due to lower sales volume largely resulting from the impacts of the COVID-19 pandemic, partially offset by a $9.7 million favorable impact of foreign currency exchange rate changes. Sales in Europe and North America decreased $46.8 million and $13.0 million, respectively. Sales in Asia increased $5.9 million.
Automotive year-to-date cost of sales decreased $56.0 million, or 19 percent, from the prior year, primarily due to lower sales volume, partially offset by an $8.2$0.7 million unfavorable impact of foreign currency exchange rate changes. As a percentage
The year-to-date net impairment reversal of sales, cost$56.0 million primarily related to assets in our liquid-cooled automotive business. The $57.2 million impairment reversal during the third quarter of sales decreased 280 basis points to 86.1 percent andfiscal 2022 was favorably impacted by improved operating efficiencies, cost savings from procurement initiatives, and lower depreciation expenses of approximately $4.0 million, partially offset by the unfavorable impact$1.2 million of lower sales volume.
As a result of the lower sales and lower cost of sales as a percentage of sales, gross profit increased $2.1 million and gross margin improved 280 basis points to 13.9 percent.
Automotive year-to-date SG&A expenses decreased $8.1 million compared with the prior year. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $8.0 million.
Restructuring expensesnet impairment charges recorded during the first ninesix months of fiscal 2021 totaled $0.62022. During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’s held for sale assets. These impairment charges were partially offset by a decrease of $2.3$7.4 million compared withimpairment reversal related to certain manufacturing operations that no longer met the same periodrequirements to be classified as held for sale due to a modification in the prior year. The decrease was primarily driven by lower severance expenses in Europe resulting from fewer targeted headcount reductions.
sale perimeter during the first quarter of fiscal 2022.
The Automotive operating loss37
Operating income of $53.6 million during the first nine months of fiscal 2021, as compared with2022 represents a $174.3 million improvement from the operating incomeloss of $2.0$120.7 million duringin the same period last year, was significantly impactedyear. The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the largesignificant impairment reversal and impairment charges, associated withrespectively, related to the liquid-cooled automotive business duringbusiness. In addition, as compared with the third quarterfirst nine months of fiscal 2021, and, to a much lesser extent, higheryear-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profit and lowerhigher SG&A expenses and restructuring charges.expenses.
Liquidity and Capital Resources
Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $72.9$61.1 million as of December 31, 2020,2021 and an available borrowing capacity of $213.6$163.1 million under our revolving credit facility. Given our extensive international operations, approximately $59.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries. Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.
In response to the COVID-19 pandemic, we have taken actions to reduce operating and administrative expenses, conserve cash and maximize liquidity. In addition, as described below, we have focused on reducing our capital expenditures and executed amendments to our primary credit agreements to provide financial covenant flexibility during fiscal 2021 and 2022. We believe our sources of liquidity including cash flow from operations, our cash and cash equivalents, and access to both committed and uncommitted credit facilities, will provide sufficient cash flow to meetadequately cover our obligations during the next twelve monthsfunding needs on both a short-term and beyond. However, we are continuing to monitor the impacts of COVID-19 on our business and the credit and financial markets.long-term basis.
Net Cash Provided by Operating Activities Net cash provided by operating activities for the nine months ended December 31, 20202021 was $146.5$7.4 million, which represents a $100.6$139.1 million increasedecrease compared with the same period in the prior year. This increasedecrease in operating cash flow was primarily due to favorableunfavorable net changes in working capital, including higher inventory levels and lowerhigher payments for separationincentive compensation and project costs associated with our review of strategic alternatives for the automotive businesses. The favorable changes in working capital during the first nine months of fiscal 2021,employee benefits as compared with the same period in the prior year, included loweryear. Inventory, including amounts held for sale, increased $57.8 million from March 31, 2021 to December 31, 2021. The higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and lower payments for incentive compensation, employee benefits, income taxesstrategic safety stock builds in connection with global supply chain constraints 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.challenges.
Capital Expenditures Capital expenditures of $30.7 million during the first nine months of fiscal 2022 increased $7.0 million compared with the same period in the prior year. In response to the economic impacts of the COVID-19 pandemic,fiscal 2021, we have been focused on reducing our capital expenditures and, where possible, have delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in our vehicular businesses. Capital expenditures of $23.7 million duringresponse to the first nine months of fiscal 2021 decreased $34.5 million compared with the same period in the prior year.COVID-19 pandemic.
Debt Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below. Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales. In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.
In May 2020, we executed amendments to our primary credit agreements in the U.S. to provide additional covenant flexibility in light of the risks and uncertainties associated with the COVID-19 pandemic. Under the amended agreements, the leverage ratio covenant limit has been temporarily raised. The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, in relation to ourno more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”). The leverage ratio covenant limit is 5.75 to 1 for the fourth quarter of fiscal 2021. In fiscal 2022, the leverage ratio covenant limit is 4.75 to 1, 3.75 to 1, and 3.50 to 1 for the first, second and third quarters, respectively, and subsequently returns to 3.25 to 1 for the fourth quarter of fiscal 2022. We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.
As of December 31, 2020, we were in compliance with our debt covenants;2021, our leverage ratio and interest coverage ratio were 1.92.5 and 8.7,10.0, respectively. We expect to remain in compliance with our debt covenants during fiscal 2021,the remainder of fiscal 2022 and beyond.
Share Repurchase Program
On November 5, 2020, we announced our Board of Directors approved a two-year, $50.0 million share repurchase program, which allows us to repurchase shares of our common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as we deem appropriate. To date, we have not repurchased shares under this program. Our decision whether and to what extent to repurchase shares under this program will depend on a number of factors, including business conditions, other cash priorities, and stock price.
Forward-Looking Statements
This report, including, but not limited to, the discussion under Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains statements, including information about future financial performance, accompanied by phrases such as “believes,” “estimates,” “expects,” “plans,” “anticipates,” “intends,” and other similar “forward-looking” statements, as defined in the Private Securities Litigation Reform Act of 1995. Modine’s actual results, performance or achievements may differ materially from those expressed or implied in these statements, because of certain risks and uncertainties, including, but not limited to, those described under “Risk Factors” in Item 1A. in Part I. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2020.2021. Other risks and uncertainties include, but are not limited to, the following:
Market Risks:
The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees;
Economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including, in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; 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 or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade, the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the short- and long-term implications of “Brexit”;
The impact of potential price increases associated with raw materials, including aluminum, copper, steel and stainless steel (nickel), and other purchased componentscomponent inventory including, but not limited to, increases in the underlying material cost based upon the London Metal Exchange and related premiums, fabrication, or fabricationfreight costs. These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand. This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whether through our quotation process or through contract provisions for prospective price adjustments, as well as the inherent lag in timing of such contract provisions; and
The impact of current and future environmental laws and regulations on our business and the businesses of our customers, including our ability to take advantage of opportunities to supply alternative new technologies to meet environmental and/or energy standards and objectives.
Operational Risks:
The overall health and continually increasing price-down focus of our vehicular customers in light of economic and market-specific factors, the concentration of sales within our CIS segment attributable to one customer, and the potential impact on us from any deterioration in the stability or performance of any of our major customers;
The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our time, quantity, quality, price and pricetiming demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;
Our ability to maintain current customer programsrelationships and compete effectively for new business, including our ability to offset or otherwise address increasing pricing pressures from competitors and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;
The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims and delays or inefficiencies resulting from restrictions imposed in response to the COVID-19 pandemic;
The impact of any delays or modifications initiated by major customers with respect to program launches, product applications or requirements;
| • | The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages; |
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 reducemodify our cost structure in response to sales volume declinesincreases or decreases and to complete restructuring activities and realize the anticipated benefits of those activities;
Costs and other effects of the investigation and remediation of environmental contamination,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, operational and administrative functions, in light of tight global labor markets;
Our ability to protect our proprietary information and intellectual property from theft or attack by internal or external sources;
The impact of any substantial disruption or material breach of our information technology systems, and any related delays, problems or costs;
Increasingly complex and restrictive laws and regulations, including those associated with being a U.S. public company and others present in various jurisdictions in which we operate, and the costs associated with compliance therewith;
Work stoppages or interference at our facilities or those of our major customers and/or suppliers;
The constant and increasing pressures associated with healthcare and associated insurance costs; and
Costs and other effects of litigation, claims, or other obligations.
Strategic Risks:
Our ability to successfully complete the pending sale of our liquid-cooled automotive business, including the receipt of governmental and third-party approvals and satisfaction of other closing conditions, and our ability to successfully exit our other automotive businesses in a manner that is in the best interest of our shareholders;
| • | Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers; |
Our ability to successfully realize anticipated benefits fromidentify and execute strategies in our increased “industrial” market presence, with our CISautomotive businesses to reduce costs and BHVAC businesses, while maintaining appropriate focus on the market opportunities presented by our HDE and Automotive businesses;improve operating margins;
Our ability to identify and execute growth and diversification opportunities in order to position us for long-term success; and
The potential impacts from any actions by activist shareholders, including disruption of our business and related costs.
Financial Risks:
Our ability to fund our global liquidity requirements efficiently for Modine’s current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;
The impact of potential increases in interest rates, particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations, andobligations;
The impact of changes in federal, state or local tax regulations that could have the continued uncertainty around the utilizationeffect of LIBOR or alternative reference rates;increasing our income tax expense;
Our ability to comply with the financial covenants as amended, in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);
The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and
Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.
Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2020.2021. The Company’s market risks have not materially changed since the fiscal 20202021 Form 10-K was filed.
| Item 4. | Controls and Procedures. |
Evaluation Regarding Disclosure Controls and Procedures
As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Finance and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Finance and Chief Financial Officer have concluded that the design and operation of the Company’sCompany’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2020.2021.
Changes in Internal Control Over Financial Reporting
There have been no changes in internal control over financial reporting during the third quarter of fiscal 20212022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
ISSUER PURCHASES OF EQUITY SECURITIES
The following describes the Company’s purchases of common stock during the third quarter of fiscal 2022: Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (a) | | October 1 – October 31, 2021 | 36,644 (b)
| $11.94 | _______
| $50,000,000 | | | | | | | | November 1 – November 30, 2021 | _______
| _______
| _______
| 50,000,000 | | | | | | | | December 1 – December 31, 2021 | 4,189 (b)
| $10.20 | _______
| 50,000,000 | | | | | | | | Total | 40,833 (b)
| $11.76 | _______
| |
| (a) | Effective November 5, 2020, the Board of Directors approved a two-year, $50.0 million share repurchase program, which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate. |
| (b) | Consists of shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards. The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions. These shares are held as treasury shares. |
| Item 5. | Other Information. |
The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.
| Exhibit No. | Description | | Incorporated Herein By Reference To | Filed Herewith | | | | | | | | Securities and Asset PurchaseTermination Agreement dated as of November 2, 2020, by and between the Company and Dana Incorporated, dated as of October 25, 2021. | | Exhibit 2.1 to Registrant’s Current Report on Form 8-K dated November 2, 2020October 25, 2021 | | | | | | | | | [Corrected] OfferSeparation Letter dated as of November 10, 2020, by andAgreement between the Company and Mr. BrinkerJoel T. Casterton, dated as of October 25, 2021. | | | X | | | | | | | | FormSeparation Letter Agreement between the Company and Matthew J. McBurney, dated as of Make-Whole RSU Award Agreement with Neil Brinker | | | X | | | | | | | Form of Make-Whole Performance Cash Award Agreement with Neil BrinkerOctober 30, 2021. | | | X | | | | | | | | Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer. | | | X | | | | | | | | Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Finance and Chief Financial Officer. | | | X | | | | | | | | Section 1350 Certification of Neil D. Brinker, President and Chief Executive Officer. | | | X | | | | | | | | Section 1350 Certification of Michael B. Lucareli, Executive Vice President, Finance and Chief Financial Officer. | | | X | | | | | | | | 101.INS | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). | | | X | | | | | | | | 101.SCH | Inline XBRL Taxonomy Extension SchemaSchema. | | | X | | | | | | | | 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase DocumentDocument. | | | X | | | | | | | | 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase DocumentDocument. | | | X | | | | | | | 101.LAB10.1.LAB | Inline XBRL Taxonomy Extension Label Linkbase DocumentDocument. | | | X | | | | | | | 101.PRE10.1.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase DocumentDocument. | | | X | | | | | | | | 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101). | | | X |
* Schedules and similar attachments have been omitted pursuant to Item 601(b)(2) of Regulation S-K because they are not material and would likely cause competitive harm to the Company if publicly disclosed.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
MODINE MANUFACTURING COMPANY (Registrant)
By: /s/ Michael B. Lucareli Michael B. Lucareli, Executive Vice President, Finance and Chief Financial Officer*
Date: February 5, 20213, 2022
* Executing as both the principal financial officer and a duly authorized officer of the Company
s | | % of sales | |