What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-02-05 compared with 2020-11-06 · 175 added, 162 removed, 151 unchanged (69% of the section changed)

2 unchanged sentences

Our fiscal year ends on March 31 and, accordingly, all references to quarters refer to our fiscal quarters.

The quarter ended September 30, 2020 was the second quarter of fiscal 2021.

The quarter ended December 31, 2020 was the third quarter of fiscal 2021.

Pending Disposition of Liquid-cooled Automotive Business

On November 2, 2020, we entered into a definitive agreement to sell our liquid-cooled automotive business to Dana Incorporated.

We expect this transaction will close during the first quarter of fiscal 2022, subject to regulatory approvals and other customary closing conditions.

We do not expect significant net cash proceeds from this transaction based upon the selling price of one dollar and adjustments for cash, debt, and working capital, as defined within the definitive agreement.

We report financial results of the liquid-cooled automotive business within the Automotive segment.

We recorded a non-cash impairment charge of $132.7 million during the third quarter of fiscal 2021 related to the liquid-cooled automotive business’s long-lived assets.

We expect to record an additional loss on sale of approximately $15.0 million to $25.0 million when the sale is completed.

It is possible that the loss on sale could differ materially from this estimate.

See Note 2 of the Notes to Condensed Consolidated Financial Statements for information regarding the accounting impacts of this pending sale.

We are also evaluating strategic alternatives for the other businesses in the Automotive segment and are committed to exiting these businesses in a manner that is in the best interest of our shareholders.

As the COVID-19 pandemic continues, both the health and overall well-being of our employees and delivering quality products and services to our customers remain our top priorities.

The COVID-19 pandemic has broadly impacted the global economy and our key end markets, which were most severely impacted during the first quarter of fiscal 2021.

In response to lower market demand and in an effort to mitigate the negative impacts of COVID-19 on our financial results, we implemented actions, including, but not limited to, production staffing adjustments, furloughs, shortened work weeks, and temporary salary reductions at all levels of our organization.

In addition, we have reduced operating and administrative expenses, including travel and entertainment expenditures, and lowered the annual compensation paid to the Board of Directors.

Beginning largely in April 2020 and in an effort to mitigate the negative impacts of COVID-19 on our financial results, we implemented actions, including, but not limited to, production staffing adjustments, furloughs, shortened work weeks, and temporary salary reductions at all levels of our organization.

In addition, we reduced operating and administrative expenses, including travel and entertainment expenditures.

We have also focused on limiting capital expenditures and, where possible, have delayed certain projects and the purchase of some program-related equipment and tooling.

Our swift cost-saving actions, coupled with a slow but steady recovery in most of our key end markets, favorably impacted our financial results during the second quarter of fiscal 2021.

Looking ahead, while we are continuing to focus on cost-saving measures, we plan to reduce the level of furloughs, shortened work weeks and salary reductions.

As a result, we expect the benefit of the cost-saving actions, primarily on SG&A expenses, to be less significant in the second half of fiscal 2021.

Our swift cost-saving actions, coupled with a slow but steady recovery in most of our key end markets, have favorably impacted our financial results.

As production has generally returned to more normal levels, we reduced the extent of furloughs, shortened work weeks and salary reductions.

As a result, the benefit of the cost-saving actions, primarily on selling, general and administrative (“SG&A”) expenses, was less significant during the third quarter of fiscal 2021 compared with the first and second quarters of fiscal 2021.

The full extent of the impacts of COVID-19, which will largely depend on the length and severity of the pandemic, could have a material adverse effect on our business, results of operations, and cash flows.

Second Quarter Highlights

Net sales in the second quarter of fiscal 2021 decreased $38.8 million, or 8 percent, from the second quarter of fiscal 2020, primarily due to lower sales in our Commercial and Industrial Solutions (“CIS”), Heavy Duty Equipment (“HDE”) and Automotive segments.

Sales in each of these segments were impacted by market-driven volume declines.

Cost of sales decreased $43.9 million, or 10 percent, from the second quarter of fiscal 2020, primarily due to lower sales volume.

Third Quarter Highlights

Net sales in the third quarter of fiscal 2021 increased $10.9 million, or 2 percent, from the third quarter of fiscal 2020, primarily due to higher sales volume in the Heavy Duty Equipment (“HDE”) segment and a favorable impact of foreign currency exchange rate changes, partially offset by lower sales volume in our Commercial and Industrial Solutions (“CIS”) segment.

Cost of sales increased $1.7 million compared with the third quarter of fiscal 2020.

Gross profit increased $9.2 million and gross margin improved 160 basis points to 17.1 percent.

Selling, general and administrative (“SG&A”) expenses decreased $16.6 million, primarily due to lower project costs associated with our review of strategic alternatives for the automotive business and cost-reduction initiatives in response to the negative impacts of COVID-19.

Operating income during the second quarter of fiscal 2021 increased $22.5 million to $28.5 million, primarily due to higher earnings in our Automotive, HDE, and Building HVAC Systems (“BHVAC”) segments and lower SG&A expenses at Corporate.

SG&A expenses decreased $7.4 million, primarily due to lower project costs associated with our review of strategic alternatives for the automotive segment businesses and preparing the liquid-cooled automotive business for sale.

We recorded $134.4 million of impairment charges during the third quarter in our Automotive segment, primarily related to the pending sale of the liquid-cooled automotive business.

The operating loss of $108.7 million during the third quarter of fiscal 2021 represents a decline of $116.9 million from the prior-year operating income of $8.2 million, primarily due to the impairment charges in our Automotive segment and lower earnings in our CIS segment, partially offset by higher earnings in our HDE and Building HVAC Systems (“BHVAC”) segments.

Year-to-date Highlights

Net sales in the first six months of fiscal 2021 decreased $220.0 million, or 21 percent, from the same period last year, primarily due to lower sales in our HDE, CIS and Automotive segments.

Net sales in the first nine months of fiscal 2021 decreased $209.1 million, or 14 percent, from the same period last year, primarily due to lower sales in our HDE, CIS and Automotive segments.

Cost of sales decreased $186.1 million, or 15 percent, from the same period last year, primarily due to lower sales volume.

Gross profit decreased $23.0 million and gross margin improved 70 basis points to 16.2 percent.

SG&A expenses decreased $35.4 million, primarily due to lower project costs associated with our review of strategic alternatives for the automotive business and cost-reduction initiatives in response to the negative impacts of COVID-19.

Operating income during the first six months of fiscal 2021 increased $1.2 million to $25.3 million, primarily due to higher earnings in our BHVAC and Automotive segments and lower SG&A expenses at Corporate, partially offset by lower earnings in our HDE and CIS segments.

On November 2, 2020, we announced that we entered into a definitive agreement to sell our liquid-cooled automotive business to Dana Incorporated.

We expect this transaction to close during the first half of calendar 2021, subject to regulatory approvals and other customary closing conditions.

We do not expect significant net cash proceeds from this transaction based upon the selling price and adjustments for cash, debt, and working capital, as defined within the definitive agreement.

We report financial results of this business within the Automotive segment.

Net sales attributable to the liquid-cooled automotive business were approximately $130.0 million during the first six months of fiscal 2021 and approximately $310.0 million in fiscal 2020.

Net assets of this business were approximately $140.0 million as of September 30, 2020.

In connection with this pending sale, we expect to record a non-cash impairment charge of approximately $120.0 million to $130.0 million during the third quarter of fiscal 2021 related to the long-lived assets of the liquid-cooled automotive business.

When the transaction is completed, we expect to record an additional loss on sale related to other net assets and cumulative foreign currency translation adjustments attributable to the business, net working capital adjustments, and costs to sell.

As we have not yet finalized our analysis, the impairment charge recorded in the third quarter could differ materially from our preliminary estimate and, at this time, we cannot estimate the loss on sale to be recorded upon completion of this transaction.

We are continuing to evaluate strategic alternatives for our other automotive businesses and are committed to exiting these businesses in a manner that is in the best interest of our shareholders.

SG&A expenses decreased $42.8 million, primarily due to lower project costs associated with our review of strategic alternatives for the automotive segment businesses and preparing the liquid-cooled automotive business for sale.

In addition, SG&A expenses benefitted from cost-reduction initiatives implemented earlier in the fiscal year in response to the negative impacts of COVID-19.

The operating loss of $83.4 million during the first nine months of fiscal 2021 represents a decline of $115.7 million from the prior-year operating income of $32.3 million, primarily due to the $134.4 million of impairment charges recorded during the third quarter of fiscal 2021, partially offset by lower SG&A expenses.

CONSOLIDATED RESULTS OF OPERATIONS

The following table presents our consolidated financial results on a comparative basis for the three and six months ended September 30, 2020 and 2019:

Three months ended September 30,

Six months ended September 30,

The following table presents our consolidated financial results on a comparative basis for the three and nine months ended December 31, 2020 and 2019:

Three months ended December 31,

Nine months ended December 31,

(in millions)

2 unchanged sentences

Restructuring expenses

Operating income

Impairment charges

Gain on sale of assets

Operating (loss) income

Interest expense

Other expense – net

Earnings (loss) before income taxes

Other (expense) income – net

(Loss) earnings before income taxes

Provision for income taxes

Net earnings (loss)

Comparison of Three Months ended September 30, 2020 and 2019

Second quarter net sales of $461.4 million were $38.8 million, or 8 percent, lower than the second quarter of the prior year, primarily due to lower sales volume in our CIS, HDE, and Automotive segments.

Sales in these segments decreased $22.6 million, $21.6 million, and $5.8 million, respectively, and were impacted by market-driven volume declines.

BHVAC segment sales increased $5.9 million.

Second quarter cost of sales decreased $43.9 million, or 10 percent, primarily due to lower sales volume.

As a percentage of sales, cost of sales decreased 240 basis points to 82.5 percent, primarily due to favorable impacts of cost-reduction initiatives, which were implemented earlier in the fiscal year in response to lower end market demand, and procurement initiatives.

As a result of lower sales and lower cost of sales as a percentage of sales, second quarter gross profit increased $5.1 million and gross margin improved 240 basis points to 17.5 percent.

Second quarter SG&A expenses decreased $16.6 million.

The decrease in SG&A expenses was primarily due to lower costs recorded at Corporate associated with our review of strategic alternatives for the Automotive segment’s business operations, which decreased approximately $12.0 million, and lower compensation-related expenses, which decreased approximately $8.0 million.

The lower compensation-related expenses resulted primarily from our cost-reduction initiatives aimed to mitigate the negative impacts of COVID-19.

These favorable drivers were partially offset by $5.5 million of costs recorded at Corporate in connection with Thomas A.

Burke stepping down from his position as President and Chief Executive Officer (“CEO.”) These costs primarily consisted of severance and benefit-related expenses and costs directly associated with the search for Mr.

Burke’s successor.

Restructuring expenses totaled $1.5 million in the second quarter of fiscal 2021 and primarily consisted of severance expenses in the CIS segment related to plant consolidation activities.

Operating income of $28.5 million in the second quarter of fiscal 2021 increased $22.5 million compared with the second quarter of fiscal 2020.

The increase was primarily due to higher earnings in our Automotive, HDE, and BHVAC segments and lower SG&A expenses at Corporate.

The provision for income taxes was $13.9 million and $3.7 million in the second quarter of fiscal 2021 and 2020, respectively.

The $10.2 million increase was primarily due to a $6.6 million income tax charge for a valuation allowance on certain U.S.

deferred tax assets and higher operating earnings in the current year.

In addition, the prior year benefitted from the release of an uncertain tax position.

These factors, which caused an increase in our tax provision during the second quarter of fiscal 2021, were partially offset by a favorable impact of global intangible low taxed income compared with the prior year.

Comparison of Six Months ended September 30, 2020 and 2019

Net (loss) earnings

Comparison of Three Months ended December 31, 2020 and 2019

Third quarter net sales of $484.3 million were $10.9 million, or 2 percent, higher than the third quarter of the prior year, primarily due to higher sales volume in the HDE and BHVAC segments and an $11.2 million favorable impact of foreign currency exchange rate changes, partially offset by lower sales volume in the CIS 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.

As a percentage of sales, cost of sales decreased 160 basis points to 82.9 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 lower cost of sales as a percentage of sales, third quarter gross profit increased $9.2 million and gross margin improved 160 basis points to 17.1 percent.

Third quarter SG&A expenses decreased $7.4 million.

This favorable driver was partially offset by a $1.0 million unfavorable impact of foreign currency exchange rate changes and higher environmental charges in the HDE segment.

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 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 connection 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 lower outstanding long-term debt and, to a lesser extent, favorable changes in interest rates.

The provision for income taxes was $81.6 million and $1.7 million in the third quarter of fiscal 2021 and 2020, respectively.

The $79.9 million increase was primarily due to income tax charges totaling $116.5 million recorded in the third quarter of fiscal 2021 to increase the valuation allowances on deferred tax assets in the U.S.

and in certain foreign jurisdictions, partially offset by income tax benefits totaling $37.7 million related to the impairment charges recorded earlier in the third quarter of fiscal 2021.

Comparison of Nine Months ended December 31, 2020 and 2019

Fiscal 2021 year-to-date net sales of $1,293.5 million were $209.1 million, or 14 percent, lower than the same period last year, primarily due to lower sales in our HDE, CIS and Automotive segments.

Sales in these segments decreased $114.5 million, $68.9 million, and $57.3 million, respectively, and were significantly impacted by market-driven volume declines and temporary plant closures due to the COVID-19 pandemic.

Sales in these segments decreased $93.8 million, $87.4 million, and $53.9 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.

BHVAC segment sales increased $8.3 million.

Fiscal 2021 year-to-date cost of sales of $1,083.9 million decreased $186.1 million, or 15 percent, primarily due to lower sales volume.

As a percentage of sales, cost of sales decreased 20 basis points to 84.3 percent.

The unfavorable impact of the lower sales volume was more than offset by the benefits of cost-reduction initiatives in response to lower end market demand and procurement initiatives.

As a percentage of sales, cost of sales improved 70 basis points to 83.8 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 lower sales and lower cost of sales as a percentage of sales, fiscal 2021 year-to-date gross profit decreased $23.0 million and gross margin improved 70 basis points to 16.2 percent.

2 unchanged sentences

These favorable drivers were partially offset by $5.9 million of costs recorded at Corporate in connection with Mr.

Burke stepping down as our CEO.

Restructuring expenses of $6.1 million during the first six months of fiscal 2021 increased $2.0 million compared with the same period last year and consisted primarily of severance expenses related to plant consolidation activities and targeted headcount reductions.

Operating income of $25.3 million during the first six months of fiscal 2021 increased $1.2 million compared with the same period last year.

The increase was primarily due lower SG&A expenses at Corporate and higher earnings in our BHVAC and Automotive segments, partially offset by lower earnings in our HDE and CIS segments.

The provision for income taxes was $13.7 million and $6.6 million during the first six months of fiscal 2021 and 2020, respectively.

The $7.1 million increase was primarily due to a $6.6 million income tax charge for a valuation allowance on certain U.S.

deferred tax assets and slightly higher operating earnings in the current year.

In addition, the prior year benefitted from the release of an uncertain tax position.

These factors, which caused an increase in our tax provision during the first six months of fiscal 2021, were partially offset by a favorable impact of global intangible low taxed income compared with the prior year.

Burke stepping down from his position as President and CEO and the search for his successor.

Restructuring expenses of $7.0 million during the first nine months of fiscal 2021 increased $0.3 million compared with the same period last year, primarily due to higher restructuring expenses in the CIS segment, partially offset by lower restructuring expenses in the Automotive segment.

The fiscal 2021 year-to-date operating loss of $83.4 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 2021, primarily due to lower outstanding long-term debt and favorable changes in interest rates.

The provision for income taxes was $95.3 million and $8.3 million during the first nine months of fiscal 2021 and 2020, respectively.

The $87.0 million increase was primarily due to income tax charges totaling $123.1 million recorded during the first nine months of fiscal 2021 to increase the valuation allowances on deferred tax assets in the U.S.

and in certain foreign jurisdictions, partially offset by income tax benefits totaling $37.7 million related to the impairment charges recorded during fiscal 2021.

SEGMENT RESULTS OF OPERATIONS

5 unchanged sentences

The segment realignment had no impact on the CIS and BHVAC segments.

The following is a discussion of our segment results of operations for the three and six months ended September 30, 2020 and 2019:

The following is a discussion of our segment results of operations for the three and nine months ended December 31, 2020 and 2019:

Commercial and Industrial Solutions

Three months ended September 30,

Six months ended September 30,

Three months ended December 31,

Nine months ended December 31,

(in millions)

2 unchanged sentences

Restructuring expenses

Operating income

Comparison of Three Months ended September 30, 2020 and 2019

CIS net sales decreased $22.6 million, or 14 percent, from the second quarter of fiscal 2020 to the second quarter of fiscal 2021, primarily due to lower sales volume.

Sales to data center cooling and commercial HVAC&R customers decreased $12.3 million and $10.6 million, respectively.

CIS cost of sales decreased $19.0 million, or 14 percent, from the second quarter of fiscal 2020 to the second quarter of fiscal 2021, primarily due to lower sales volume.

As a percentage of sales, cost of sales increased 20 basis points to 85.6 percent, primarily due to the unfavorable impact of lower sales volume, partially offset by cost-reduction and procurement initiatives.

Operating (loss) income

Comparison of Three Months ended December 31, 2020 and 2019

CIS net sales decreased $18.5 million, or 13 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021, primarily due to lower sales volume of data center cooling products, partially offset by a $4.5 million favorable impact of foreign currency exchange rate changes.

Sales to data center cooling customers decreased $18.4 million, primarily due to lower sales to one individual customer.

CIS cost of sales decreased $8.4 million, or 7 percent, from the third quarter of fiscal 2020 to the third quarter of fiscal 2021, primarily due to lower sales volume, partially offset by a $4.2 million unfavorable impact of foreign currency exchange rate changes.

As a percentage of sales, cost of sales increased 560 basis points to 90.2 percent, primarily due to the impact of lower sales volume, unfavorable sales mix, and to a lesser extent, temporary operating inefficiencies associated with plant consolidation activities in China.

These negative impacts were partially offset by benefits from procurement and other cost-reduction initiatives.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.1 million and gross margin declined 560 basis points to 9.8 percent.

SG&A expenses decreased $1.8 million compared with the second 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 second quarter of fiscal 2021 totaled $1.5 million and primarily consisted of severance expenses related to plant consolidation activities in China.

Operating income of $5.6 million decreased $2.9 million during the quarter, primarily due to lower gross profit and higher restructuring expenses, partially offset by lower SG&A expenses.

Comparison of Six Months ended September 30, 2020 and 2019

CIS year-to-date net sales decreased $68.9 million, or 21 percent, from the same period last year, primarily due to lower sales volume largely associated with the impacts of the COVID-19 pandemic.

SG&A expenses increased $0.1 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 $0.5 million unfavorable impact of foreign currency exchange rate changes, partially offset by lower compensation-related expenses.

Restructuring expenses during the third quarter of fiscal 2021 totaled $0.5 million, a decrease of $0.2 million 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-year operating income of $8.3 million and was primarily due to lower gross profit.

Comparison of Nine Months ended December 31, 2020 and 2019

CIS year-to-date net sales decreased $87.4 million, or 18 percent, from the same period last year, primarily due to lower sales volume associated with the impacts of the COVID-19 pandemic.

In addition, sales in fiscal 2021 have been negatively impacted by lower sales to a significant data center customer.

Sales to commercial HVAC&R and data center cooling customers decreased $48.1 million and $41.1 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.

As a percentage of sales, cost of sales increased 100 basis points to 86.5 percent, primarily due to the unfavorable impact of lower sales volume, partially offset by cost-reduction and procurement initiatives.

As a percentage of sales, cost of sales increased 250 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.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $22.5 million and gross margin declined 250 basis points to 12.3 percent.

CIS year-to-date SG&A expenses decreased $3.7 million compared with the prior year.

The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $4.0 million.

Restructuring expenses during the first six months of fiscal 2021 increased $3.3 million and primarily consisted of severance expenses related to plant consolidation activities in China and targeted headcount reductions in North America.

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 September 30,

Six months ended September 30,

Three months ended December 31,

Nine months ended December 31,

(in millions)

2 unchanged sentences

Operating income

Comparison of Three Months ended September 30, 2020 and 2019

BHVAC net sales increased $5.9 million, or 11 percent, from the second quarter of fiscal 2020 to the second quarter of fiscal 2021, primarily due to higher sales in both the U.K.

and the U.S., which increased $5.5 million and $0.4 million, respectively.

The higher sales in the U.K.

were primarily due to higher sales of data center products.

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.

BHVAC cost of sales increased $1.9 million, or 5 percent, from the second quarter of fiscal 2020 to the second quarter of fiscal 2021, primarily due to higher sales volume.

As a percentage of sales, cost of sales decreased 340 basis points to 64.9 percent and was positively impacted by favorable customer pricing and cost-reduction initiatives.

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 decreased $0.3 million, or 190 basis points as a percentage of sales, from the prior year.

The decrease in SG&A expenses was primarily due to lower travel expenses.

Operating income of $13.1 million increased $4.3 million during the quarter, primarily due to higher gross profit and lower SG&A expenses.

Comparison of Six Months ended September 30, 2020 and 2019

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 million 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 six months of the prior year, BHVAC sales increased $7.2 million in the U.K.

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, partially offset by lower sales of air conditioning products.

were primarily due to higher sales of data center products.

The lower sales in the U.S.

resulted from the negative impacts of the COVID-19 pandemic and decreased sales of ventilation products.

BHVAC year-to-date cost of sales decreased $0.3 million from the same period last year.

As a percentage of sales, cost of sales decreased 320 basis points to 66.9 percent and was positively impacted by favorable customer pricing and cost-reduction initiatives.

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 $7.4 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 compensation-related expenses and lower travel expenses.

Operating income of $20.2 million increased $6.1 million, primarily due to higher gross profit and lower SG&A expenses.

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 September 30,

Six months ended September 30,

Three months ended December 31,

Nine months ended December 31,

(in millions)

3 unchanged sentences

Operating income

Comparison of Three Months ended September 30, 2020 and 2019

HDE net sales decreased $21.6 million, or 12 percent, from the second quarter of fiscal 2020 to the second quarter of fiscal 2021, primarily due to lower sales volume.

Sales to commercial vehicle customers decreased $14.6 million, primarily within the Americas.

In addition, sales were unfavorably impacted by $2.6 million from foreign currency exchange rate changes.

HDE cost of sales decreased $22.8 million, or 14 percent, from the second quarter of fiscal 2020 to the second quarter of fiscal 2021, primarily due to lower sales volume.

As a percentage of sales, cost of sales improved 220 basis points to 85.8 percent and was favorably impacted by improved operating efficiencies and cost savings from procurement and other cost-reduction initiatives, partially offset by the unfavorable impact of the lower sales volume.

As a result of the lower sales and lower cost of sales as a percentage of sales, gross profit increased $1.2 million and gross margin improved 220 basis points to 14.2 percent.

SG&A expenses decreased $4.6 million compared with the second 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, and cost-reduction initiatives.

Operating income of $13.3 million increased $6.2 million during the quarter, primarily due to higher gross profit and lower SG&A expenses.

Comparison of Six Months ended September 30, 2020 and 2019

HDE year-to-date net sales decreased $114.5 million, or 28 percent, from the same period last year, primarily due to lower sales volume resulting from the impacts of the COVID-19 pandemic.

Sales to commercial vehicle, automotive and light vehicle, and off-highway customers decreased $61.0 million, $16.2 million, and $15.4 million, respectively.

These sales declines, which were most significant in the Americas and Europe, largely results from weakness in the global vehicular markets.

In addition, the planned wind-downs of certain programs contributed, to a lesser extent, to the lower sales to commercial vehicle customers.

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 increased 150 basis points to 87.9 percent.

The significant unfavorable impact of the lower sales volume was partially offset by improved operating efficiencies and cost savings from procurement and other cost-reduction initiatives.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $20.0 million and gross margin declined 150 basis points to 12.1 percent.

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 expense during the first six months of fiscal 2021 totaled $1.9 million and primarily consisted of severance expenses resulting from targeted headcount reductions in North America.

Operating income of $10.8 million decreased $13.6 million, primarily due to lower gross profit, partially offset by lower SG&A expenses.

Three months ended September 30,

Six months ended September 30,

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.

Three months ended December 31,

Nine months ended December 31,

(in millions)

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Restructuring expenses

Operating income

Comparison of Three Months ended September 30, 2020 and 2019

Automotive net sales decreased $5.8 million, or 5 percent, from the second quarter of fiscal 2020 to the second quarter of fiscal 2021, primarily due to lower sales volume.

Compared with the prior year, sales decreased $7.2 million in Europe and increased $2.1 million in Asia.

Automotive cost of sales decreased $9.4 million, or 9 percent, from the second quarter of fiscal 2020 to the second quarter of fiscal 2021, primarily due to lower sales volume.

As a percentage of sales, cost of sales decreased 400 basis points to 84.8 percent and was favorably impacted by improved operating efficiencies and cost savings from procurement initiatives.

As a result of the lower sales and lower cost of sales as a percentage of sales, gross profit increased $3.6 million and gross margin improved 400 basis points to 15.2 percent.

SG&A expenses decreased $2.5 million compared with the second quarter of the prior year.

Impairment charges

Gain on sale of assets

Operating (loss) income

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.

Operating income of $8.0 million increased $7.6 million during the quarter, primarily due to higher gross profit and lower SG&A expenses and restructuring expenses.

Comparison of Six Months ended September 30, 2020 and 2019

Automotive year-to-date net sales decreased $57.3 million, or 25 percent, from the same period last year, primarily due to lower sales volume largely resulting from the impacts of the COVID-19 pandemic.

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 $53.2 million, or 26 percent, from the prior year, primarily due to lower sales volume.

As a percentage of sales, cost of sales decreased 140 basis points to 87.5 percent and was favorably impacted by improved operating efficiencies and cost savings from procurement initiatives, partially offset by the unfavorable impact of the lower sales volume.

As a result of the lower sales and lower cost of sales as a percentage of sales, gross profit decreased $4.1 million yet gross margin improved 140 basis points to 12.5 percent.

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 million unfavorable impact of foreign currency exchange rate changes.

As a percentage of sales, cost of sales decreased 280 basis points to 86.1 percent and 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 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 expenses during the first six months of fiscal 2021 totaled $0.2 million, a decrease of $2.5 million compared with the same period in the prior year, and primarily consisted of severance expenses resulting from targeted headcount reductions.

Operating income of $4.2 million increased $3.8 million, primarily due to lower SG&A and restructuring expenses, partially offset by lower gross profit.

Restructuring expenses during the first nine months of fiscal 2021 totaled $0.6 million, a decrease of $2.3 million compared with the same period in the prior year.

The decrease was primarily driven by lower severance expenses in Europe resulting from fewer targeted headcount reductions.

The Automotive operating loss of $120.7 million during the first nine months of fiscal 2021, as compared with operating income of $2.0 million during the same period last year, was significantly impacted by the large impairment charges associated with the liquid-cooled automotive business during the third quarter of fiscal 2021 and, to a much lesser extent, higher gross profit and lower SG&A expenses and restructuring charges.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents as of September 30, 2020 of $62.5 million, and an available borrowing capacity of $191.4 million under our revolving credit facility.

Given our extensive international operations, approximately $42.0 million of our cash and cash equivalents are held by our non-U.S.

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $72.9 million as of December 31, 2020, and an available borrowing capacity of $213.6 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.

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In response to the COVID-19 pandemic, we have taken actions to reduce operating and administrative expenses, conserve cash and maximize liquidity.

In addition, as described below, we have focused on reducing our capital expenditures and executed amendments to our primary credit agreements to help ensure liquidity through financial covenant flexibility during fiscal 2021 and 2022.

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 meet our obligations during the next twelve months and beyond.

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Net Cash Provided by Operating Activities

Net cash provided by operating activities for the six months ended September 30, 2020 was $87.3 million, which represents a $69.8 million increase compared with the same period in the prior year.

This increase in operating cash flow was primarily due to favorable net changes in working capital and lower payments for separation and project costs associated with our review of strategic alternatives for the automotive business.

The favorable changes in working capital during the first six months of fiscal 2021, compared with the same period in the prior year, included lower inventory levels and lower payments for incentive compensation, employee benefits, income taxes and payroll taxes.

Net cash provided by operating activities for the nine months ended December 31, 2020 was $146.5 million, which represents a $100.6 million increase compared with the same period in the prior year.

The favorable changes in working capital during the first nine months of fiscal 2021, compared with the same period in the prior year, included lower inventory levels and lower payments for incentive compensation, employee benefits, income taxes and payroll taxes.

In addition, we have deferred payments of U.S.

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Capital Expenditures

In response to the economic impacts of the COVID-19 pandemic, we are taking steps to preserve our financial liquidity.

As part of this initiative, we are focused on reducing our capital expenditures and, where possible, have delayed certain projects and the purchase of certain program-related equipment and tooling in our vehicular businesses.

Capital expenditures of $14.6 million during the six months of fiscal 2021 decreased $26.8 million compared with the same period in the prior year.

In response to the economic impacts of the COVID-19 pandemic, 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 in our vehicular businesses.

Capital expenditures of $23.7 million during the first nine months of fiscal 2021 decreased $34.5 million compared with the same period in the prior year.

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.

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Under the amended agreements, the leverage ratio covenant limit has been temporarily raised.

We believe this additional flexibility will enable us to be compliant with our debt covenants, even if the adverse effects of the COVID-19 pandemic on our business are more severe than we currently anticipate.

However, failure to comply with the debt covenants could result in an event of default, which, if not cured or waived, could result in us being required to repay borrowings before their due date.

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 our consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).

For the remainder of fiscal 2021, the leverage ratio covenant limit is 5.25 to 1 and 5.75 to 1 for the third and fourth quarters, respectively.

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 September 30, 2020, we were in compliance with our debt covenants;

As of December 31, 2020, we were in compliance with our debt covenants;

our leverage ratio and interest coverage ratio were 1.9 and 8.7, respectively.

We expect to remain in compliance with our debt covenants during fiscal 2021 and beyond.

Recent Announcement - Share Repurchase Program

We expect to remain in compliance with our debt covenants during fiscal 2021, 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.

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Our ability to effectively and efficiently reduce our cost structure in response to sales volume declines and to complete restructuring activities and realize the anticipated benefits of those activities;

Costs and other effects of the investigation and remediation of environmental contamination;

particularly when related to the actions or inactions of others and/or facilities over which we have no control;

Costs and other effects of the investigation and remediation of environmental contamination, particularly when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership and administrative functions, in light of tight global labor markets;

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Financial Risks:

Our ability to fund our global liquidity requirements efficiently for Modine’s current operations and meet our long-term commitments, particularly in light of the volatility and negative pressure in the financial markets as a result of the COVID-19 pandemic and in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

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, and of the continued uncertainty around the utilization of LIBOR or alternative reference rates;

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis