Item 1. Financial Statements
Item 1. Financial Statements.
MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and nine months ended December 31, 2020 and 2019
(In millions, except per share amounts)
(Unaudited)
Three months ended
December 31,
Nine months ended
December 31,
2020
2019
2020
2019
Net sales
$
484.3
$
473.4
$
1,293.5
$
1,502.6
Cost of sales
401.6
399.9
1,083.9
1,270.0
Gross profit
82.7
73.5
209.6
232.6
Selling, general and administrative expenses
56.1
63.5
151.6
194.4
Restructuring expenses
0.9
2.6
7.0
6.7
Impairment charges
134.4
-
134.4
-
Gain on sale of assets
-
( 0.8
)
-
( 0.8
)
Operating (loss) income
( 108.7
)
8.2
( 83.4
)
32.3
Interest expense
( 4.6
)
( 5.6
)
( 15.2
)
( 17.3
)
Other (expense) income – net
( 0.5
)
0.1
( 1.0
)
( 2.3
)
(Loss) earnings before income taxes
( 113.8
)
2.7
( 99.6
)
12.7
Provision for income taxes
( 81.6
)
( 1.7
)
( 95.3
)
( 8.3
)
Net (loss) earnings
( 195.4
)
1.0
( 194.9
)
4.4
Net (earnings) loss attributable to noncontrolling interest
( 0.3
)
0.2
( 0.8
)
0.1
Net (loss) earnings attributable to Modine
$
( 195.7
)
$
1.2
$
( 195.7
)
$
4.5
Net (loss) earnings per share attributable to Modine
Basic
$
( 3.81
)
$
0.02
$
( 3.82
)
$
0.09
Diluted
$
( 3.81
)
$
0.02
$
( 3.82
)
$
0.09
Weighted-average shares outstanding:
Basic
51.3
50.8
51.2
50.8
Diluted
51.3
51.1
51.2
51.1
The notes to condensed consolidated financial statements are an integral part of these statements.
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MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three and nine months ended December 31, 2020 and 2019
(In millions)
(Unaudited)
Three months ended
December 31,
Nine months ended
December 31,
2020
2019
2020
2019
Net (loss) earnings
$
( 195.4
)
$
1.0
$
( 194.9
)
$
4.4
Other comprehensive income (loss):
Foreign currency translation
18.4
14.0
41.2
( 3.7
)
Defined benefit plans, net of income taxes of $ 0.3 , $ 0.4 , $ 1.1 and $ 1.0 million
1.3
1.0
3.8
3.2
Cash flow hedges, net of income taxes of $ 0 , $ 0.2 , $ 0.5 and ($ 0.2 ) million
-
0.6
1.4
( 0.4
)
Total other comprehensive income (loss)
19.7
15.6
46.4
( 0.9
)
Comprehensive income (loss)
( 175.7
)
16.6
( 148.5
)
3.5
Comprehensive (income) loss attributable to noncontrolling interest
( 0.7
)
-
( 1.4
)
0.2
Comprehensive income (loss) attributable to Modine
$
( 176.4
)
$
16.6
$
( 149.9
)
$
3.7
The notes to condensed consolidated financial statements are an integral part of these statements.
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MODINE MANUFACTURING COMPANY
CONSOLIDATED BALANCE SHEETS
December 31, 2020 and March 31, 2020
(In millions, except per share amounts)
(Unaudited)
December 31, 2020
March 31, 2020
ASSETS
Cash and cash equivalents
$
72.9
$
70.9
Trade accounts receivable – net
233.5
292.5
Inventories
190.6
207.4
Assets held for sale
92.9
-
Other current assets
39.5
62.5
Total current assets
629.4
633.3
Property, plant and equipment – net
305.2
448.0
Intangible assets – net
104.5
106.3
Goodwill
172.4
166.1
Deferred income taxes
25.2
104.8
Other noncurrent assets
70.0
77.6
Total assets
$
1,306.7
$
1,536.1
LIABILITIES AND SHAREHOLDERS’ EQUITY
Short-term debt
$
0.6
$
14.8
Long-term debt – current portion
22.0
15.6
Accounts payable
200.6
227.4
Accrued compensation and employee benefits
64.9
65.0
Liabilities held for sale
83.2
-
Other current liabilities
49.7
49.2
Total current liabilities
421.0
372.0
Long-term debt
342.0
452.0
Deferred income taxes
6.1
8.1
Pensions
109.1
130.9
Other noncurrent liabilities
79.9
79.5
Total liabilities
958.1
1,042.5
Commitments and contingencies (see Note 18)
Shareholders’ equity:
Preferred stock, $ 0.025 par value, authorized 16.0 million shares, issued - none
-
-
Common stock, $ 0.625 par value, authorized 80.0 million shares, issued 53.8 million and 53.4 million shares
33.6
33.3
Additional paid-in capital
249.1
245.1
Retained earnings
274.2
469.9
Accumulated other comprehensive loss
( 177.5
)
( 223.3
)
Treasury stock, at cost, 2.7 million and 2.5 million shares
( 37.9
)
( 37.1
)
Total Modine shareholders’ equity
341.5
487.9
Noncontrolling interest
7.1
5.7
Total equity
348.6
493.6
Total liabilities and equity
$
1,306.7
$
1,536.1
The notes to condensed consolidated financial statements are an integral part of these statements.
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MODINE MANUFACTURING COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended December 31, 2020 and 2019
(In millions)
(Unaudited)
Nine months ended December 31,
2020
2019
Cash flows from operating activities:
Net (loss) earnings
$
( 194.9
)
$
4.4
Adjustments to reconcile net (loss) earnings to net cash provided by operating activities:
Depreciation and amortization
54.2
57.8
Impairment charges
134.4
-
Gain on sale of assets
-
( 0.8
)
Stock-based compensation expense
4.2
5.2
Deferred income taxes
77.5
0.2
Other – net
4.7
3.5
Changes in operating assets and liabilities:
Trade accounts receivable
24.5
52.6
Inventories
9.9
( 23.6
)
Accounts payable
1.1
( 32.4
)
Other assets and liabilities
30.9
( 21.0
)
Net cash provided by operating activities
146.5
45.9
Cash flows from investing activities:
Expenditures for property, plant and equipment
( 23.7
)
( 58.2
)
Proceeds from disposition of assets
0.7
6.5
Proceeds from sale of investment in affiliate
-
3.8
Other – net
0.6
0.8
Net cash used for investing activities
( 22.4
)
( 47.1
)
Cash flows from financing activities:
Borrowings of debt
12.0
600.1
Repayments of debt
( 134.5
)
( 601.3
)
Borrowings on bank overdraft facilities – net
3.5
5.0
Financing fees paid
( 0.8
)
( 1.1
)
Purchases of treasury stock under share repurchase program
-
( 2.4
)
Dividend paid to noncontrolling interest
-
( 1.3
)
Other – net
( 0.8
)
( 2.9
)
Net cash used for financing activities
( 120.6
)
( 3.9
)
Effect of exchange rate changes on cash
3.6
( 0.5
)
Net increase (decrease) in cash, cash equivalents, restricted cash and cash held for sale
7.1
( 5.6
)
Cash, cash equivalents, restricted cash and cash held for sale – beginning of period
71.3
42.2
Cash, cash equivalents, restricted cash and cash held for sale – end of period
$
78.4
$
36.6
The notes to condensed consolidated financial statements are an integral part of these statements.
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MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the three and nine months ended December 31, 2020 and 2019
(In millions)
(Unaudited)
_________________
Common stock
Additional
Retained
Accumulated other
Treasury stock,
Non- controlling
Shares
Amount
paid-in capital
earnings
comprehensive loss
at cost
interest
Total
Balance, March 31, 2020
53.4
$
33.3
$
245.1
$
469.9
$
( 223.3
)
$
( 37.1
)
$
5.7
$
493.6
Net loss attributable to Modine
-
-
-
( 8.6
)
-
-
-
( 8.6
)
Other comprehensive income
-
-
-
-
7.5
-
0.1
7.6
Stock options and awards
0.3
0.2
( 0.2
)
-
-
-
-
-
Purchase of treasury stock
-
-
-
-
-
( 0.8
)
-
( 0.8
)
Stock-based compensation expense
-
-
0.7
-
-
-
-
0.7
Net earnings attributable to noncontrolling interest
-
-
-
-
-
-
0.2
0.2
Balance, June 30, 2020
53.7
$
33.5
$
245.6
$
461.3
$
( 215.8
)
$
( 37.9
)
$
6.0
$
492.7
Net earnings attributable to Modine
-
-
-
8.6
-
-
-
8.6
Other comprehensive income
-
-
-
-
19.0
-
0.1
19.1
Stock options and awards
0.1
0.1
-
-
-
-
-
0.1
Stock-based compensation expense
-
-
1.4
-
-
-
-
1.4
Net earnings attributable to noncontrolling interest
-
-
-
-
-
-
0.3
0.3
Balance, September 30, 2020
53.8
$
33.6
$
247.0
$
469.9
$
( 196.8
)
$
( 37.9
)
$
6.4
$
522.2
Net loss attributable to Modine
-
-
-
( 195.7
)
-
-
-
( 195.7
)
Other comprehensive income
-
-
-
-
19.3
-
0.4
19.7
Stock-based compensation expense
-
-
2.1
-
-
-
-
2.1
Net earnings attributable to noncontrolling interest
-
-
-
-
-
-
0.3
0.3
Balance, December 31, 2020
53.8
$
33.6
$
249.1
$
274.2
$
( 177.5
)
$
( 37.9
)
$
7.1
$
348.6
Common stock
Additional
Retained
Accumulated other
Treasury stock,
Non-controlling
Shares
Amount
paid-in capital
earnings
comprehensive loss
at cost
interest
Total
Balance, March 31, 2019
52.8
$
33.0
$
238.6
$
472.1
$
( 178.4
)
$
( 31.4
)
$
7.2
$
541.1
Net earnings attributable to Modine
-
-
-
8.0
-
-
-
8.0
Other comprehensive income (loss)
-
-
-
-
2.2
-
( 0.1
)
2.1
Stock options and awards
0.5
0.2
( 0.1
)
-
-
-
-
0.1
Purchase of treasury stock
-
-
-
-
-
( 5.6
)
-
( 5.6
)
Stock-based compensation expense
-
-
1.7
-
-
-
-
1.7
Dividend paid to noncontrolling interest
-
-
-
-
-
-
( 1.3
)
( 1.3
)
Net earnings attributable to noncontrolling interest
-
-
-
-
-
-
0.2
0.2
Balance, June 30, 2019
53.3
$
33.2
$
240.2
$
480.1
$
( 176.2
)
$
( 37.0
)
$
6.0
$
546.3
Net loss attributable to Modine
-
-
-
( 4.7
)
-
-
-
( 4.7
)
Other comprehensive loss
-
-
-
-
( 18.4
)
-
( 0.2
)
( 18.6
)
Stock-based compensation expense
-
-
2.7
-
-
-
-
2.7
Net loss attributable to noncontrolling interest
-
-
-
-
-
-
( 0.1
)
( 0.1
)
Balance, September 30, 2019
53.3
$
33.2
$
242.9
$
475.4
$
( 194.6
)
$
( 37.0
)
$
5.7
$
525.6
Net earnings attributable to Modine
-
-
-
1.2
-
-
-
1.2
Other comprehensive income
-
-
-
-
15.4
-
0.2
15.6
Stock-based compensation expense
-
-
0.8
-
-
-
-
0.8
Net loss attributable to noncontrolling interest
-
-
-
-
-
-
( 0.2
)
( 0.2
)
Balance, December 31, 2019
53.3
$
33.2
$
243.7
$
476.6
$
( 179.2
)
$
( 37.0
)
$
5.7
$
543.0
The notes to condensed consolidated financial statements are an integral part of these statements.
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Table of Contents
Note 1: General
The accompanying condensed consolidated financial statements of Modine Manufacturing Company (“Modine” or the “Company”) were prepared in conformity with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes necessary for a comprehensive presentation of financial position, results of operations and cash flows required by GAAP for complete financial statements. The financial statements include all normal recurring adjustments that are, in the opinion of management, necessary for a fair statement of results for the interim periods. Results for the first nine months of fiscal 2021 are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the consolidated financial statements and related notes in Modine’s Annual Report on Form 10-K for the year ended March 31, 2020.
COVID-19
In March 2020, the World Health Organization declared the outbreak of the novel coronavirus, COVID-19, a pandemic. See Note 18 for additional information regarding the risks and uncertainties to the Company resulting from this pandemic.
Pending Disposition of Liquid-cooled Automotive Business
On November 2, 2020, the Company signed a definitive agreement to sell its liquid-cooled automotive business to Dana Incorporated. In connection with the pending sale, the Company classified the liquid-cooled automotive business as held for sale and, accordingly, is reporting the assets and liabilities of this business as held for sale on the December 31, 2020 consolidated balance sheet. See Note 2 for additional information.
Chief Executive Officer (“CEO”) Transition
In August 2020, Thomas A. Burke stepped down from his position as President and CEO. The Board of Directors subsequently conducted a search for his successor and, effective December 1, 2020, appointed Neil D. Brinker as President and CEO.
As a result of Mr. Burke's departure and in connection with the search for his successor, the Company recorded costs totaling $ 5.9 million during the nine months ended December 31, 2020 . These costs, which were recorded as selling, general and administrative (“SG&A”) expenses at Corporate, primarily consisted of severance and benefit-related expenses based upon the terms of Mr. Burke's transition and separation agreement and costs directly associated with the CEO search, partially offset by the impact of Mr. Burke's forfeited stock-based compensation awards.
Sale of facility in Germany
During the third quarter of fiscal 2020, the Company completed the sale of a previously-closed manufacturing facility in Germany for a selling price of $ 6.0 million. As a result of this transaction, the Company recorded a gain of $ 0.8 million within the Automotive segment. The Company reported this gain within the gain on sale of assets line on the consolidated statements of operations.
Sale of Nikkei Heat Exchanger Company, Ltd. (“NEX”)
During the second quarter of fiscal 2020, the Company completed the sale of its 50 percent ownership interest in NEX for a selling price of $ 3.8 million. Prior to the sale, the Company accounted for its investment in this non-consolidated affiliate using the equity method. As a result of this sale, the Company recorded a gain of $ 0.1 million, which included the write-off of accumulated foreign currency translation gains of $ 0.6 million, within other income and expense on the consolidated statements of operations.
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Table of Contents
New Accounting Guidance
In June 2016, the Financial Accounting Standards Board issued new guidance related to the accounting for credit losses for certain financial assets, including trade accounts receivable and contract assets. The new guidance modifies the credit loss model to measure and recognize credit losses based upon expected losses rather than incurred losses. The Company adopted this guidance as of April 1, 2020. The adoption did not have a material impact on the Company’s consolidated balance sheets, statements of operations or statements of cash flows.
Note 2: Assets Held for Sale
On November 2, 2020, the Company signed a definitive agreement to sell its liquid-cooled automotive business to Dana Incorporated. The Company expects this transaction will close during the first quarter of fiscal 2022, subject to regulatory approvals and other customary closing conditions. The Company does not expect significant net cash proceeds from this transaction based upon the one dollar selling price and adjustments for cash, debt, and working capital, as defined within the definitive agreement. The Company reports financial results of the liquid-cooled automotive business within its Automotive segment.
In connection with the pending sale, the Company classified the liquid-cooled automotive business (the “disposal group”) as held for sale beginning on November 2, 2020 and ceased depreciating long-lived assets in the disposal group. The Company evaluated the disposal group and determined that it did not qualify as a discontinued operation for reporting purposes under U.S. GAAP. As part of its evaluation, the Company considered anticipated future sales to automotive and light vehicle customers as well as sales to other vehicular customers with similar product offerings and using similar heat-transfer technology within the Automotive and Heavy Duty Equipment segments. In addition, the Company will continue to operate in the same major geographical areas as it does today.
Upon classification as held for sale, the Company compared the disposal group’s carrying value with its fair value, less costs to sell. Through this review and based upon the selling price, the Company identified an implied loss in excess of the carrying value of the disposal group’s long-lived assets, which consist entirely of property, plant and equipment and right of use lease assets. As a result, the Company recorded a non-cash impairment charge of $ 132.7 million during the third quarter of fiscal 2021 to reduce the net carrying value of the disposal group’s long-lived assets to zero . Also during the third quarter of fiscal 2021, the Company recorded an impairment charge of $ 1.7 million within the Automotive segment related to equipment that will not convey to the buyer as part of the sale transaction and is not expected to be used within the Company’s other businesses. These charges are reported within the impairment charges line on the consolidated statements of operations.
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Table of Contents
The Company separately classified the assets and liabilities of the liquid-cooled automotive business as held for sale on the December 31, 2020 consolidated balance sheet. The assets and liabilities held for sale are classified as current as the transaction is expected to close during the first quarter of fiscal 2022. The major classes of assets and liabilities held for sale were as follows:
December 31, 2020
ASSETS
Cash and cash equivalents
$
5.3
Trade accounts receivables - net
51.7
Inventories
17.7
Other current assets
11.6
Property, plant and equipment - net
132.0
Other noncurrent assets
7.3
Impairment of carrying value
( 132.7
)
Total assets held for sale
$
92.9
LIABILITIES
Short-term debt
$
6.0
Accounts payable
36.9
Accrued compensation and employee benefits
10.2
Other current liabilities
12.7
Pensions
12.4
Other noncurrent liabilities
5.0
Total liabilities held for sale
$
83.2
The Company will reassess the disposal group’s fair value less costs to sell at each reporting period until the transaction is completed. The Company expects to record an additional loss on sale of approximately $ 15.0 million to $ 25.0 million upon transaction completion. The loss on sale recorded will be impacted by changes in working capital, costs to sell, and net actuarial losses in accumulated other comprehensive loss related to the disposal group’s pension plans. It is possible that the loss on sale recorded could differ materially from the Company’s estimate.
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Table of Contents
Note 3: Revenue Recognition
Disaggregation of Revenue
The table below presents revenue for each of the Company’s business segments, Commercial and Industrial Solutions (“CIS”), Building HVAC Systems (“BHVAC”), Heavy Duty Equipment (“HDE”) and Automotive. Each segment’s revenue is disaggregated by primary end market, by geographic location and based upon the timing of revenue recognition, and includes inter-segment sales.
Effective April 1, 2020, the Company realigned its segment structure. The segment revenue information presented in the table below for fiscal 2020 has been recast to conform to the fiscal 2021 presentation. See Note 20 for additional information regarding the Company’s operating segments.
Three months ended December 31, 2020
Three months ended December 31, 2019
CIS
BHVAC
HDE
Automotive
Segment
Total
CIS
BHVAC
HDE
Automotive
Segment
Total
Primary end market:
Commercial HVAC&R
$
103.8
$
56.5
$
-
$
-
$
160.3
$
104.3
$
53.1
$
-
$
-
$
157.4
Data center cooling
11.8
12.2
-
-
24.0
30.2
11.2
-
-
41.4
Industrial cooling
12.0
-
-
-
12.0
10.4
-
-
-
10.4
Commercial vehicle
-
-
67.0
5.5
72.5
-
-
63.2
5.1
68.3
Off-highway
-
-
68.3
0.8
69.1
-
-
51.6
3.5
55.1
Automotive and light vehicle
-
-
28.8
105.4
134.2
-
-
27.8
98.5
126.3
Other
1.4
-
21.5
2.2
25.1
2.6
0.6
22.3
3.4
28.9
Net sales
$
129.0
$
68.7
$
185.6
$
113.9
$
497.2
$
147.5
$
64.9
$
164.9
$
110.5
$
487.8
Geographic location:
Americas
$
66.4
$
45.0
$
107.9
$
14.8
$
234.1
$
78.1
$
43.2
$
106.2
$
17.2
$
244.7
Europe
52.4
23.7
35.0
80.9
192.0
57.6
21.7
29.2
77.1
185.6
Asia
10.2
-
42.7
18.2
71.1
11.8
-
29.5
16.2
57.5
Net sales
$
129.0
$
68.7
$
185.6
$
113.9
$
497.2
$
147.5
$
64.9
$
164.9
$
110.5
$
487.8
Timing of revenue recognition:
Products transferred at a point in time
$
119.5
$
68.7
$
177.6
$
113.9
$
479.7
$
119.3
$
64.9
$
156.8
$
110.5
$
451.5
Products transferred over time
9.5
-
8.0
-
17.5
28.2
-
8.1
-
36.3
Net sales
$
129.0
$
68.7
$
185.6
$
113.9
$
497.2
$
147.5
$
64.9
$
164.9
$
110.5
$
487.8
Nine months ended December 31, 2020
Nine months ended December 31, 2019
CIS
BHVAC
HDE
Automotive
Segment
Total
CIS
BHVAC
HDE
Automotive
Segment
Total
Primary end market:
Commercial HVAC&R
$
303.0
$
137.1
$
-
$
-
$
440.1
$
351.1
$
137.2
$
-
$
-
$
488.3
Data center cooling
40.0
40.8
-
-
80.8
81.1
31.3
-
-
112.4
Industrial cooling
36.6
-
-
-
36.6
33.5
-
-
-
33.5
Commercial vehicle
-
-
174.8
11.4
186.2
-
-
232.0
16.8
248.8
Off-highway
-
-
179.8
2.3
182.1
-
-
178.5
10.1
188.6
Automotive and light vehicle
-
-
69.8
257.4
327.2
-
-
85.0
305.6
390.6
Other
6.0
0.3
50.3
14.8
71.4
7.3
1.4
73.0
7.3
89.0
Net sales
$
385.6
$
178.2
$
474.7
$
285.9
$
1,324.4
$
473.0
$
169.9
$
568.5
$
339.8
$
1,551.2
Geographic location:
Americas
$
193.9
$
109.5
$
274.4
$
39.2
$
617.0
$
261.2
$
110.4
$
369.7
$
52.2
$
793.5
Europe
156.3
68.7
91.2
195.9
512.1
173.7
59.5
107.3
242.7
583.2
Asia
35.4
-
109.1
50.8
195.3
38.1
-
91.5
44.9
174.5
Net sales
$
385.6
$
178.2
$
474.7
$
285.9
$
1,324.4
$
473.0
$
169.9
$
568.5
$
339.8
$
1,551.2
Timing of revenue recognition:
Products transferred at a point in time
$
351.7
$
178.2
$
456.3
$
285.9
$
1,272.1
$
395.6
$
169.9
$
544.4
$
339.8
$
1,449.7
Products transferred over time
33.9
-
18.4
-
52.3
77.4
-
24.1
-
101.5
Net sales
$
385.6
$
178.2
$
474.7
$
285.9
$
1,324.4
$
473.0
$
169.9
$
568.5
$
339.8
$
1,551.2
9
Table of Contents
Contract Balances
Contract assets and contract liabilities from contracts with customers were as follows:
December 31, 2020
March 31, 2020
Contract assets
$
5.1
$
21.7
Contract liabilities
6.0
5.6
Contract assets, included within other current assets in the consolidated balance sheets, primarily consist of capitalized costs related to customer-owned tooling contracts, wherein the customer has guaranteed reimbursement, and assets recorded for revenue recognized over time, which represent the Company’s rights to consideration for work completed but not yet billed. The $ 16.6 million decrease in contract assets during the first nine months of fiscal 2021 primarily resulted from a decrease in contract assets for revenue recognized over time. In addition, the March 31, 2020 balance included $ 7.2 million of contract assets of the liquid-cooled automotive business, which have since been classified as held for sale. See Note 2 for additional information regarding assets and liabilities held for sale as of December 31, 2020.
Contract liabilities, included within other current liabilities in the consolidated balance sheets, consist of payments received in advance of satisfying performance obligations under customer contracts, including contracts for customer-owned tooling. The $ 0.4 million increase in contract liabilities during the first nine months of fiscal 2021 was primarily related to customer contracts for which payment was received in advance of the Company’s satisfaction of performance obligations. The March 31, 2020 balance included $ 1.3 million of contract liabilities of the liquid-cooled automotive business, which have since been classified as held for sale.
Note 4: Fair Value Measurements
Fair value is defined as the price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. Fair value measurements are classified under the following hierarchy:
●
Level 1 – Quoted prices for identical instruments in active markets.
●
Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets.
●
Level 3 – Model-derived valuations in which one or more significant inputs are not observable.
When available, the Company uses quoted market prices to determine fair value and classifies such measurements as Level 1. In some cases, where market prices are not available, the Company uses observable market-based inputs to calculate fair value, in which case the measurements are classified as Level 2. If quoted or observable market prices are not available, the Company determines fair value based upon valuation models that use, where possible, market-based data such as interest rates, yield curves or currency rates. These measurements are classified as Level 3.
The carrying values of cash, cash equivalents, restricted cash, short-term investments, trade accounts receivable, accounts payable, and short-term debt approximate fair value due to the short-term nature of these instruments. In addition, the Company assesses the fair value of a disposal group for each reporting period it is held for sale. See Note 2 for additional information regarding assets held for sale.
The Company holds investments in deferred compensation trusts to fund obligations under certain non-qualified deferred compensation plans. The Company records the fair value of these investments within other noncurrent assets on its consolidated balance sheets. The Company classifies money market investments held by the trusts within Level 2 of the valuation hierarchy. The Company classifies all other investments held by the trusts within Level 1 of the valuation hierarchy, as it uses quoted market prices to determine the investments’ fair value. The Company’s deferred compensation obligations, which are recorded as other noncurrent liabilities, are recorded at the fair values of the investments held by the trust. At both December 31, 2020 and March 31, 2020, the fair values of the investments and obligations for the Company’s deferred compensation plans each totaled $ 3.8 million . The fair value of the Company’s long-term debt is disclosed in Note 17.
10
Table of Contents
Note 5: Pensions
Pension cost included the following components:
Three months ended
December 31,
Nine months ended
December 31,
2020
2019
2020
2019
Service cost
$
0.1
$
0.1
$
0.3
$
0.3
Interest cost
2.0
2.3
5.9
6.8
Expected return on plan assets
( 2.9
)
( 3.0
)
( 8.6
)
( 8.9
)
Amortization of unrecognized net loss
1.7
1.5
5.2
4.5
Net periodic benefit cost
$
0.9
$
0.9
$
2.8
$
2.7
During the nine months ended December 31, 2020 and 2019, the Company contributed $ 8.8 million and $ 2.6 million, respectively, to its U.S. pension plans. The Company has deferred certain contributions to its U.S. pension plans during fiscal 2021, as permitted by the Coronavirus Aid, Relief and Economic Security Act. The Company expects to contribute approximately $ 10.0 million to its U.S. pension plans during the fourth quarter of fiscal 2021.
Note 6: Stock-Based Compensation
The Company’s stock-based incentive programs consist of the following: (1) a long-term incentive plan (“LTIP”) for officers and other executives that consists of stock awards, stock options, and performance-based stock awards granted for retention and performance, (2) a discretionary equity program for other management and key employees, and (3) stock awards for non-employee directors.
The Company calculates compensation expense based upon the fair value of the instruments at the time of grant and subsequently recognizes expense ratably over the respective vesting periods of the stock-based awards. The Company recognized stock-based compensation expense of $ 2.1 million and $ 0.8 million for the three months ended December 31,2020 and 2019, respectively. The Company recognized stock-based compensation expense of $ 4.2 million and $ 5.2 million for the nine months ended Dec ember 31, 2020 and 2019 , respectively.
11
Table of Contents
The fair value of stock-based compensation awards granted during the nine months ended December 31, 2020 and 2019 were as follows:
Nine months ended December 31,
2020
2019
Shares
Fair Value
Per Award
Shares
Fair Value
Per Award
Stock options
0.4
$
3.46
0.3
$
5.56
Restricted stock awards
0.6
$
8.34
0.3
$
13.26
Performance stock awards (a)
-
-
0.3
$
13.26
Unrestricted stock awards
0.2
$
5.21
0.1
$
14.50
(a)
In lieu of performance-based stock awards, the Company granted performance cash awards to the LTIP participants in fiscal 2021. The performance metrics for the cash awards are based upon a target three-year average cash flow return on invested capital and a target three-year average revenue growth at the end of the three-year performance period ending March 31, 2023. These performance metrics are the same as the metrics for the fiscal 2020 and 2019 performance-based stock awards.
The Company used the following assumptions in determining fair value for stock options:
Nine months ended December 31,
2020
2019
Expected life of awards in years
6.1
6.3
Risk-free interest rate
0.4
%
2.2
%
Expected volatility of the Company's stock
54.1
%
39.2
%
Expected dividend yield on the Company's stock
0.0
%
0.0
%
As of December 31, 2020, unrecognized compensation expense related to non-vested stock-based compensation awards, which will be amortized over the remaining service periods, was as follows:
Unrecognized
Compensation
Expense
Weighted-Average
Remaining Service
Period in Years
Stock options
$
2.3
3.0
Restricted stock awards
8.1
2.9
Performance stock awards
0.6
1.2
Total
$
11.0
2.8
12
Table of Contents
Note 7: Restructuring Activities
During fiscal 2021, the Company transferred production from its manufacturing facility in Zhongshan, China to another CIS segment manufacturing facility in China. As a result of this plant consolidation, the Company recorded $ 3.1 million of severance expenses during the nine months ended December 31, 2020. In addition, the Company is in the process of transferring product lines to its CIS manufacturing facility in Mexico.
The Company also implemented targeted headcount reductions in fiscal 2021, the most significant of which were in North America in the HDE and CIS segments. The headcount reductions were in response to lower market demand and supported the Company’s objective of reducing operational and SG&A cost structures.
The Company’s restructuring actions during the first nine months of fiscal 2020 consisted primarily of targeted headcount reductions and plant consolidation activities. The fiscal 2020 headcount reductions were primarily in Europe within the Automotive segment and in the Americas within the HDE segment.
Restructuring and repositioning expenses were as follows:
Three months ended
December 31,
Nine months ended
December 31,
2020
2019
2020
2019
Employee severance and related benefits
$
0.5
$
2.2
$
6.2
$
5.5
Other restructuring and repositioning expenses
0.4
0.4
0.8
1.2
Total
$
0.9
$
2.6
$
7.0
$
6.7
Other restructuring and repositioning expenses primarily consist of equipment transfers and plant consolidation costs.
The Company accrues severance in accordance with its written plans, procedures, and relevant statutory requirements. Changes in accrued severance were as follows:
Three months ended December 31,
2020
2019
Beginning balance
$
5.8
$
7.4
Additions
0.5
2.2
Payments
( 2.5
)
( 5.0
)
Reclassified as held for sale
( 0.8
)
-
Effect of exchange rate changes
0.2
0.1
Ending balance
$
3.2
$
4.7
Nine months ended December 31,
2020
2019
Beginning balance
$
5.0
$
10.0
Additions
6.2
5.5
Payments
( 7.7
)
( 10.7
)
Reclassified as held for sale
( 0.8
)
-
Effect of exchange rate changes
0.5
( 0.1
)
Ending balance
$
3.2
$
4.7
In January 2021, the Company eliminated the Vice President, CIS and Chief Operating Officer senior executive position. As a result, the Company expects to record approximately $ 1.0 million of severance-related expenses during the fourth quarter of fiscal 2021.
13
Table of Contents
Note 8: Other Income and Expense
Other income and expense consisted of the following:
Three months ended
December 31,
Nine months ended
December 31,
2020
2019
2020
2019
Interest income
$
0.1
$
0.1
$
0.4
$
0.3
Foreign currency transactions (a)
0.2
0.7
0.9
( 0.7
)
Net periodic benefit cost (b)
( 0.8
)
( 0.7
)
( 2.3
)
( 2.1
)
Equity in earnings of non-consolidated affiliate (c)
-
-
-
0.2
Total other (expense) income - net
$
( 0.5
)
$
0.1
$
( 1.0
)
$
( 2.3
)
(a)
Foreign currency transactions primarily consist of foreign currency transaction gains and losses on the re-measurement or settlement of foreign currency-denominated assets and liabilities, including intercompany loans and transactions denominated in a foreign currency, along with gains and losses on certain foreign currency exchange contracts .
(b)
Net periodic benefit cost for the Company’s pension and postretirement plans is exclusive of service cost.
(c)
The Company sold its ownership interest in NEX during the second quarter of fiscal 2020. See Note 1 for additional information.
14
Table of Contents
Note 9 : Income Taxes
The Company’s effective tax rate for the three months ended December 31, 2020 and 2019 was ( 71.7 ) percent and 63.0 percent , respectively. The Company’s effective tax rate for the nine months ended December 31, 2020 and 2019 was ( 95.7 ) percent and 65.4 percent , respectively. The effective tax rates for the fiscal 2021 periods were largely driven by both significant impairment charges and income tax charges related to valuation allowances. See Note 2 for information regarding the $ 134.4 million of impairment charges recorded during the third quarter of fiscal 2021. The income tax benefits associated with these impairment charges totaled $ 24.4 million and $ 13.3 million in the U.S. and in certain foreign jurisdictions, respectively, and increased the deferred tax assets in the applicable jurisdictions. The deferred tax assets, in turn, were evaluated for realizability as of December 31, 2020, as further described below.
In the fiscal 2020 periods, the effective tax rates were negatively impacted by income tax charges recorded during the third quarter of fiscal 2020. A $ 3.0 million income tax charge was recorded related to a valuation allowance on deferred tax assets in the U.S. and a net income tax charge totaling $ 2.7 million was recorded in connection with legal entity restructuring completed in preparation of the potential sale of the liquid-cooled automotive business. Partially offsetting the negative impacts of the income tax charges, the effective tax rates for the fiscal 2020 periods were favorably impacted by the recognition of a tax incentive in Italy during the third quarter and by the release of an unrecognized tax benefit during the second quarter.
The Company records valuation allowances against its net deferred tax assets to the extent it determines it is more likely than not that such assets will not be realized in the future. Each quarter, the Company evaluates the probability that its deferred tax assets will be realized and determines whether valuation allowances or adjustments thereto are needed. This determination involves judgement and the use of significant estimates and assumptions, including expectations of future taxable income and tax planning strategies. In addition, the Company considers the duration of statutory carryforward periods and historical financial results.
Based upon its analysis as of December 31, 2020, the Company determined it was more likely than not that its deferred tax assets in the U.S. and in certain foreign jurisdictions will not be realized in the future. As a result, the Company recorded income tax charges totaling $ 116.5 million in the third quarter of fiscal 2021 to increase the valuation allowance on deferred tax assets in the U.S. ($ 103.3 million) and in certain foreign jurisdictions ($ 13.2 million). Combined with the $ 6.6 million income tax charge recorded during the second quarter of fiscal 2021, the Company has now established a full valuation allowance on its U.S. deferred tax assets. Based upon the Company’s projections of future taxable income at the time, the Company previously believed it was more likely than not that these deferred tax assets would be realized in the future. The Company’s analysis for the third quarter of fiscal 2021 included consideration of the impairment charges recorded during the quarter in connection with the pending sale of the liquid-cooled automotive business; see Note 2 for additional information. These impairment charges contributed to the Company entering into a three-year cumulative loss position in the U.S. and in certain foreign jurisdictions as of December 31, 2020. The Company also considered year-to-date taxable income, which has been negatively impacted by the COVID-19 pandemic and lower sales to data center cooling customers, and current future projections of taxable income in the relevant jurisdictions. After considering both the positive and negative evidence, the Company determined it is more likely than not that these deferred tax assets will not be realized.
As of December 31, 2020, valuation allowances against deferred tax assets in the U.S. and in certain foreign jurisdictions totaled $ 121.7 million and $ 55.5 million , respectively. The Company will maintain the valuation allowances in each applicable tax jurisdiction until it determines it is more likely than not the deferred tax assets will be realized, thereby eliminating the need for a valuation allowance.
15
Table of Contents
As further discussed in Note 18, the COVID- 19 pandemic has resulted in risks and uncertainties to our business. Future events or circumstances, such as lower taxable income or unfavorable changes in the financial outlook of the Company’s operations in certain foreign jurisdictions, could necessitate the establishment of further valuation allowances.
Accounting policies for interim reporting require the Company to adjust its effective tax rate each quarter to be consistent with its estimated annual effective tax rate. Under this methodology, the Company applies its estimated annual income tax rate to its year-to-date ordinary earnings to derive its income tax provision each quarter. The Company records the tax impacts of certain significant, unusual or infrequently occurring items in the period in which they occur. The Company excluded the impact of its operations in certain foreign locations from the overall effective tax rate methodology and recorded them discretely based upon year-to-date results because the Company anticipates net operating losses for the full fiscal year in these jurisdictions. The Company does not anticipate a significant change in unrecognized tax benefits during the remainder of fiscal 2021.
Note 10 : E arnings Per Share
The components of basic and diluted earnings per share were as follows:
Three months ended
December 31,
Nine months ended
December 31,
2020
2019
2020
2019
Net (loss) earnings attributable to Modine
$
( 195.7
)
$
1.2
$
( 195.7
)
$
4.5
Weighted-average shares outstanding - basic
51.3
50.8
51.2
50.8
Effect of dilutive securities
-
0.3
-
0.3
Weighted-average shares outstanding - diluted
51.3
51.1
51.2
51.1
(Loss) earnings per share:
Net (loss) earnings per share - basic
$
( 3.81
)
$
0.02
$
( 3.82
)
$
0.09
Net (loss) earnings per share - diluted
$
( 3.81
)
$
0.02
$
( 3.82
)
$
0.09
For the three and nine months ended December 31, 2020, the calculation of diluted earnings per share excluded 1.4 million and 1.5 million stock options, respectively, because they were anti-dilutive. In addition, the calculation for the three and nine months ended December 31, 2020 excluded 0.5 million and 0.6 million restricted stock awards, respectively, because they were anti-dilutive. For the three months and nine months ended December 31, 2020, the total number of potentially-dilutive securities was 0.2 million and 0.1 million , respectively. However, these securities were not included in the computation of diluted net loss per share since to do so would have decreased the loss per share .
For the three and nine months ended December 31, 2019, the calculation of diluted earnings per share excluded 1.2 million and 0.8 million stock options, respectively, because they were anti-dilutive. In addition, the calculation for both the three and nine months ended December 31, 2019 excluded 0.5 million restricted stock awards because they were anti-dilutive .
16
Table of Contents
Note 11: Cash, Cash Equivalents and Restricted Cash
Cash, cash equivalents and restricted cash consisted of the following:
December 31, 2020
March 31, 2020
Cash and cash equivalents
$
72.9
$
70.9
Restricted cash
0.1
0.4
Cash and restricted cash held for sale
5.4
-
Total cash, cash equivalents, restricted cash and cash held for sale
$
78.4
$
71.3
Restricted cash, which is reported within other current assets and other noncurrent assets in the consolidated balance sheets, consists primarily of deposits for contractual guarantees or commitments required for rents, import and export duties, and commercial agreements.
Note 12: Inventories
Inventories consisted of the following:
December 31, 2020
March 31, 2020
Raw materials
$
115.3
$
123.6
Work in process
35.5
34.6
Finished goods
39.8
49.2
Total inventories
$
190.6
$
207.4
Note 13: Property, Plant and Equipment
Property, plant and equipment, including depreciable lives, consisted of the following:
December 31, 2020
March 31, 2020
Land
$
20.1
$
19.7
Buildings and improvements ( 10 - 40 years)
227.4
276.7
Machinery and equipment ( 3 - 15 years)
689.2
870.3
Office equipment ( 3 - 10 years)
83.1
95.2
Construction in progress
15.7
40.5
1,035.5
1,302.4
Less: accumulated depreciation
( 730.3
)
( 854.4
)
Net property, plant and equipment
$
305.2
$
448.0
Note 14: Goodwill and Intangible Assets
Changes in the carrying amount of goodwill were as follows:
CIS
BHVAC
Total
Goodwill, March 31, 2020
$
152.6
$
13.5
$
166.1
Effect of exchange rate changes
5.2
1.1
6.3
Goodwill, December 31, 2020
$
157.8
$
14.6
$
172.4
17
Table of Contents
Intangible assets consisted of the following:
December 31, 2020
March 31, 2020
Gross
Carrying
Value
Accumulated
Amortization
Net
Intangible
Assets
Gross
Carrying
Value
Accumulated
Amortization
Net
Intangible
Assets
Customer relationships
$
64.0
$
( 16.2
)
$
47.8
$
60.8
$
( 12.6
)
$
48.2
Trade names
60.3
( 19.0
)
41.3
58.3
( 16.2
)
42.1
Acquired technology
25.1
( 9.7
)
15.4
23.6
( 7.6
)
16.0
Total intangible assets
$
149.4
$
( 44.9
)
$
104.5
$
142.7
$
( 36.4
)
$
106.3
The Company recorded amortization expense of $ 2.2 million and $ 2.3 million for the three months ended December 31, 2020 and 2019, respectively. The Company recorded amortization expense of $ 6.4 million and $ 6.7 million for the nine months ended December 31, 2020 and 2019, respectively. The Company estimates that it will record $ 2.1 million of amortization expense during the remainder of fiscal 2021 and approximately $ 8.0 million of annual amortization expense in fiscal 2022 through 2026 .
Note 15: Product Warranties
Changes in accrued warranty costs were as follows:
Three months ended December 31,
2020
2019
Beginning balance
$
9.0
$
8.1
Warranties recorded at time of sale
1.8
1.3
Adjustments to pre-existing warranties
( 0.4
)
( 0.4
)
Settlements
( 1.1
)
( 1.0
)
Reclassified as held for sale
( 1.5
)
-
Effect of exchange rate changes
0.1
0.2
Ending balance
$
7.9
$
8.2
Nine months ended December 31,
2020
2019
Beginning balance
$
7.9
$
9.2
Warranties recorded at time of sale
4.3
3.9
Adjustments to pre-existing warranties
( 0.3
)
( 1.3
)
Settlements
( 2.8
)
( 3.6
)
Reclassified as held for sale
( 1.5
)
-
Effect of exchange rate changes
0.3
-
Ending balance
$
7.9
$
8.2
18
Table of Contents
Note 16: Leases
Lease Assets and Liabilities
The following table provides a summary of leases recorded on the consolidated balance sheets.
-
Balance Sheet Location
December 31, 2020
March 31, 2020
Lease Assets
Operating lease ROU assets
Other noncurrent assets
$
56.2
$
61.4
Finance lease ROU assets (a)
Property, plant and equipment - net
8.6
8.5
Lease Liabilities
Operating lease liabilities
Other current liabilities
$
10.4
$
10.9
Operating lease liabilities
Other noncurrent liabilities
46.9
50.3
Finance lease liabilities
Long-term debt - current portion
0.4
0.4
Finance lease liabilities
Long-term debt
3.4
3.3
(a)
Finance lease right of use (“ROU”) assets were recorded net of accumulated amortization of $ 2.3 million and $ 1.8 million as of December 31 , 2020 and March 31, 2020, respectively.
Components of Lease Expense
The components of lease expense were as follows:
Three months ended
December 31,
Nine months ended
December 31,
2020
2019
2020
2019
Operating lease expense (a)
$
4.8
$
5.4
$
14.9
$
15.8
Finance lease expense:
Depreciation of ROU assets
0.2
0.2
0.4
0.4
Interest on lease liabilities
-
-
0.1
0.1
Total lease expense
$
5.0
$
5.6
$
15.4
$
16.3
(a)
F or the three and nine months ended December 31 , 2020, operating lease expense included short-term lease expense of $ 0.9 million and $ 2.7 million, respectively. For the three and nine months ended December 31 , 2019, operating lease expense included short-term lease expense of $ 1.0 million and $ 2.9 million, respectively. Variable lease expense was not significant.
19
Table of Contents
Note 17: Indebtedness
Long-term debt consisted of the following:
_
Fiscal year
of maturity
December 31, 2020
March 31, 2020
Term loans
2025
$
184.1
$
189.4
Revolving credit facility
2025
30.7
127.2
5.9 % Senior Notes
2029
100.0
100.0
5.8 % Senior Notes
2027
50.0
50.0
Other (a)
3.8
6.0
368.6
472.6
Less: current portion
( 22.0
)
( 15.6
)
Less: unamortized debt issuance costs
( 4.6
)
( 5.0
)
Total long-term debt
$
342.0
$
452.0
(a)
Other long-term debt primarily includes finance lease obligations and borrowings by foreign subsidiaries.
Long-term debt, including the current portion of long-term debt, matures as follows:
Fiscal Year
Remainder of 2021
$
3.4
2022
22.0
2023
22.0
2024
22.0
2025
180.5
2026 & beyond
118.7
Total
$
368.6
Borrowings under both the revolving credit and term loan facilities bear interest at a variable rate, based upon the applicable reference rate and including a margin percentage dependent upon the Company’s leverage ratio, as described below. At December 31 , 2020, the weighted-average interest rates for revolving credit facility borrowings and the term loans were both 2.5 percent. At December 31, 2020, the Company’s revolving credit facility borrowings totaled $ 30.7 million and domestic letters of credit totaled $ 5.7 million, resulting in available borrowings under the revolving credit facility of $ 213.6 million.
The Company also maintains credit agreements for its foreign subsidiaries, with outstanding short-term borrowings of $ 0.6 million and $ 14.8 million at December 31 , 2020 and March 31, 2020, respectively. See Note 2 for information regarding short-term borrowings classified as held for sale at December 31, 2020.
Provisions in the Company’s credit agreement, Senior Note agreements, and various foreign credit agreements require the Company to maintain compliance with various covenants and include certain cross-default clauses. Under its primary debt agreements in the U.S., the Company has provided liens on substantially all domestic assets. Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales. In addition, at the time of each incremental borrowing under the revolving credit facility, the Company is required to represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on its business, property, or results of operations.
20
Table of Contents
In May 2020, the Company executed amendments to its primary credit agreements in the U.S. Under the amended agreements, the leverage ratio covenant limit has been temporarily raised. The leverage ratio covenant requires the Company to limit the ratio of its consolidated indebtedness, less a portion of its cash balance, both as defined by the credit agreements, to its consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”). The leverage ratio covenant limit for the third quarter of fiscal 2021 was 5.25 to 1 . 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. The Company is also subject to an interest expense coverage ratio covenant, which requires the Company to maintain Adjusted EBITDA of at least three times consolidated interest expense. The Company was in compliance with its debt covenants as of December 31 , 2020.
The Company estimates the fair value of long-term debt using discounted future cash flows at rates offered to the Company for similar debt instruments of comparable maturities. As of December 31 , 2020 and March 31, 2020, the carrying value of the Company’s long-term debt approximated fair value, with the exception of the Senior Notes, which had an aggregate fair value of $ 140.4 million and $ 131.3 million, respectively. The fair value of the Company’s long-term debt is categorized as Level 2 within the fair value hierarchy. Refer to Note 4 for the definition of a Level 2 fair value measurement.
Note 18: Risks, Uncertainties, Contingencies and Litigation
COVID-19
In March 2020 , the World Health Organization declared the outbreak of the novel coronavirus, COVID -19 , a pandemic. The spread of COVID -19 and the resulting work and travel restrictions, including international border closings, have disrupted, and may continue to disrupt, global supply chains and have negatively impacted the global economy. As a result of this pandemic, the Company experienced significant impacts on its operations. Local government requirements or customer shutdowns caused the Company to suspend production at many of its manufacturing facilities in March and April 2020 . All of the temporarily-closed facilities reopened in the first or second quarter and have generally returned to more normal production levels. However, since reopening, production at certain of our plants has been negatively affected at times by employee absences due to COVID-19. The Company is continuing to focus on protecting the health and wellbeing of its employees and the communities in which it operates, while also ensuring the continuity of its business operations and timely delivery of quality products and services to its customers. Beginning largely in April 2020 and to mitigate the negative impacts of COVID -19 , the Company took actions including, but not limited to, production staffing adjustments, furloughs, shortened work weeks, and temporary salary reductions at all levels of the organization. As production has generally returned to more normal levels, the Company reduced the extent of furloughs, shortened work weeks and salary reductions during the third quarter of fiscal 2021, yet remains focused on controlling operating and administrative expenses. Based upon its current expectations, the Company believes that its sources of liquidity will generate sufficient cash flow to meet its obligations during the next twelve months.
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The Company’s consolidated financial statements reflect estimates and assumptions made by management, including assumptions regarding the future impacts of the COVID-19 pandemic, that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting periods presented. For example, assets particularly sensitive to assumptions that could be adversely impacted by the COVID-19 pandemic include goodwill and deferred tax assets. While the Company believes it used appropriate estimates and assumptions to prepare the consolidated financial statements, actual amounts could differ materially and future events or circumstances could have a potential negative effect on the assumptions used. If the Company, its suppliers, or its customers experience further shutdowns or other significant business disruptions associated with the COVID-19 pandemic, its ability to conduct business in the manner and on the timelines presently planned could be materially and negatively impacted, which could have a material adverse effect on the Company’s business, financial position, results of operations and cash flows.
Environmental
The Company has recorded environmental investigation and remediation accruals related to soil and groundwater contamination at manufacturing facilities in the U.S., one of which the Company currently owns and operates, and at its former manufacturing facility in the Netherlands, along with accruals for lesser environmental matters at certain other facilities in the U.S. These accruals generally relate to facilities where past operations followed practices and procedures that were considered acceptable under then-existing regulations, or where the Company is a successor to the obligations of prior owners, and current laws and regulations require investigative and/or remedial work to ensure sufficient environmental compliance. The accruals for these environmental matters totaled $ 18.4 million and $ 18.2 million as of December 31, 2020 and March 31, 2020 , respectively. As additional information becomes available, the Company will re-assess the liabilities related to these matters and revise the estimated accruals, if necessary. Based upon currently available information, the Company believes the ultimate outcome of these matters, individually and in the aggregate, will not have a material adverse effect on its financial position. However, these matters are subject to inherent uncertainties, and unfavorable outcomes could occur, including significant monetary damages.
Other Litigation
In the normal course of business, the Company and its subsidiaries are named as defendants in various lawsuits and enforcement proceedings by private parties, governmental agencies and/or others in which claims are asserted against Modine. The Company believes that any additional loss in excess of amounts already accrued would not have a material effect on the Company’s consolidated balance sheet, results of operations, and cash flows. In addition, management expects that the liabilities which may ultimately result from such lawsuits or proceedings, if any, would not have a material adverse effect on the Company’s financial position.
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Note 19: Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss were as follows:
Three months ended December 31, 2020
Nine months ended December 31, 2020
Foreign
Currency
Translation
Defined
Benefit Plans
Cash Flow
Hedges
Total
Foreign
Currency
Translation
Defined
Benefit Plans
Cash Flow
Hedges
Total
Beginning balance
$
( 38.8
)
$
( 158.4
)
$
0.4
$
( 196.8
)
$
( 61.4
)
$
( 160.9
)
$
( 1.0
)
$
( 223.3
)
Other comprehensive income before reclassifications
18.0
-
0.4
18.4
40.6
-
1.5
42.1
Reclassifications:
Amortization of unrecognized net loss (a)
-
1.6
-
1.6
-
4.9
-
4.9
Realized (gains) losses - net (b)
-
-
( 0.4
)
( 0.4
)
-
-
0.4
0.4
Income taxes
-
( 0.3
)
-
( 0.3
)
-
( 1.1
)
( 0.5
)
( 1.6
)
Total other comprehensive income
18.0
1.3
-
19.3
40.6
3.8
1.4
45.8
Ending balance
$
( 20.8
)
$
( 157.1
)
$
0.4
$
( 177.5
)
$
( 20.8
)
$
( 157.1
)
$
0.4
$
( 177.5
)
Three months ended December 31, 2019
Nine months ended December 31, 2019
Foreign
Currency
Translation
Defined
Benefit Plans
Cash Flow
Hedges
Total
Foreign
Currency
Translation
Defined
Benefit Plans
Cash Flow
Hedges
Total
Beginning balance
$
( 60.0
)
$
( 134.1
)
$
( 0.5
)
$
( 194.6
)
$
( 42.6
)
$
( 136.3
)
$
0.5
$
( 178.4
)
Other comprehensive income (loss) before reclassifications
13.8
-
0.3
14.1
( 3.0
)
-
( 1.3
)
( 4.3
)
Reclassifications:
Amortization of unrecognized net loss (a)
-
1.4
-
1.4
-
4.2
-
4.2
Realized losses - net (b)
-
-
0.5
0.5
-
-
0.7
0.7
Foreign currency translation gains (c)
-
-
-
-
( 0.6
)
-
-
( 0.6
)
Income taxes
-
( 0.4
)
( 0.2
)
( 0.6
)
-
( 1.0
)
0.2
( 0.8
)
Total other comprehensive income (loss)
13.8
1.0
0.6
15.4
( 3.6
)
3.2
( 0.4
)
( 0.8
)
Ending balance
$
( 46.2
)
$
( 133.1
)
$
0.1
$
( 179.2
)
$
( 46.2
)
$
( 133.1
)
$
0.1
$
( 179.2
)
(a)
Amounts are included in the calculation of net periodic benefit cost for the Company’s defined benefit plans, which include pension and other postretirement plans. Refer to Note 5 for additional information about the Company’s pension plans.
(b)
Amounts represent net gains and losses associated with cash flow hedges that were reclassified to net earnings.
(c)
As a result of the sale of its investment in NEX during the second quarter of fiscal 2020, the Company wrote off $ 0.6 million of accumulated foreign currency translation gains.
Note 20: Segment Information
Effective April 1, 2020, the Company began managing its global automotive business separate from the other businesses within the previously-reported Vehicular Thermal Solutions (“VTS”) segment. The Company is managing the automotive business as the Automotive segment as it targets the sale or eventual exit of its underlying automotive business operations. The other businesses of the VTS segment, including the commercial vehicle and off-highway businesses, are being managed as the Heavy Duty Equipment segment. The segment realignment had no impact on the CIS and BHVAC segments or on the Company’s consolidated financial position, results of operations, and cash flows. Segment financial information for fiscal 2020 has been recast to conform to the fiscal 2021 presentation.
Each operating segment is managed by a vice president and has separate financial results reviewed by the Company’s chief operating decision maker. These results are used by management in evaluating the performance of each segment and in making decisions on the allocation of resources among the Company’s various businesses.
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The following is a summary of net sales, gross profit, operating income, and total assets by segment:
Three months ended December 31,
2020
2019
External
Sales
Inter-segment
Sales
Total
External
Sales
Inter-segment
Sales
Total
Net sales:
CIS
$
128.3
$
0.7
$
129.0
$
146.3
$
1.2
$
147.5
BHVAC
68.7
-
68.7
64.3
0.6
64.9
HDE
173.7
11.9
185.6
152.8
12.1
164.9
Automotive
113.6
0.3
113.9
110.0
0.5
110.5
Segment total
484.3
12.9
497.2
473.4
14.4
487.8
Corporate and eliminations
-
( 12.9
)
( 12.9
)
-
( 14.4
)
( 14.4
)
Net sales
$
484.3
$
-
$
484.3
$
473.4
$
-
$
473.4
Nine months ended December 31,
2020
2019
External
Sales
Inter-segment
Sales
Total
External
Sales
Inter-segment
Sales
Total
Net sales:
CIS
$
382.8
$
2.8
$
385.6
$
469.9
$
3.1
$
473.0
BHVAC
178.0
0.2
178.2
168.5
1.4
169.9
HDE
449.6
25.1
474.7
526.4
42.1
568.5
Automotive
283.1
2.8
285.9
337.8
2.0
339.8
Segment total
1,293.5
30.9
1,324.4
1,502.6
48.6
1,551.2
Corporate and eliminations
-
( 30.9
)
( 30.9
)
-
( 48.6
)
( 48.6
)
Net sales
$
1,293.5
$
-
$
1,293.5
$
1,502.6
$
-
$
1,502.6
Three months ended December 31,
Nine months ended December 31,
2020
2019
2020
2019
$'s
% of sales
$'s
% of sales
$'s
% of sales
$'s
% of sales
Gross profit:
CIS
$
12.6
9.8
%
$
22.7
15.4
%
$
47.4
12.3
%
$
69.9
14.8
%
BHVAC
25.7
37.3
%
23.1
35.5
%
61.9
34.7
%
54.5
32.1
%
HDE
26.0
14.0
%
16.8
10.2
%
60.9
12.8
%
71.7
12.6
%
Automotive
18.4
16.1
%
12.2
11.0
%
39.8
13.9
%
37.7
11.1
%
Segment total
82.7
16.6
%
74.8
15.3
%
210.0
15.9
%
233.8
15.1
%
Corporate and eliminations
-
-
( 1.3
)
-
( 0.4
)
-
( 1.2
)
-
Gross profit
$
82.7
17.1
%
$
73.5
15.5
%
$
209.6
16.2
%
$
232.6
15.5
%
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Three months ended December 31,
Nine months ended December 31,
2020
2019
2020
2019
Operating income:
CIS
$
( 1.7
)
$
8.3
$
3.9
$
25.8
BHVAC
15.8
13.5
36.0
27.6
HDE
12.8
2.8
23.6
27.2
Automotive
( 124.9
)
1.6
( 120.7
)
2.0
Segment total
( 98.0
)
26.2
( 57.2
)
82.6
Corporate and eliminations
( 10.7
)
( 18.0
)
( 26.2
)
( 50.3
)
Operating (loss) income
$
( 108.7
)
$
8.2
$
( 83.4
)
$
32.3
December 31, 2020
March 31, 2020
Total assets:
CIS
$
601.8
$
617.7
BHVAC
106.7
102.3
HDE
428.3
417.4
Automotive (a)
161.2
272.5
Corporate and eliminations (b)
8.7
126.2
Total assets
$
1,306.7
$
1,536.1
(a)
During the third quarter of fiscal 2021, the Company recorded impairment charges totaling $ 134.4 million within the Automotive segment, primarily related to the property, plant and equipment of the liquid-cooled automotive business, the sale of which is pending. See Note 2 for additional information.
(b)
During the nine months ended December 31, 2020, the Company recorded income tax charges totaling $ 109.9 million to increase the valuation allowance on deferred tax assets in the U.S, which are recorded at Corporate. See Note 9 for additional information.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.