MODINE MANUFACTURING CO 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Overview Founded in 1916, Modine Manufacturing Company is a global leader in thermal management systems and components, bringing heating and cooling technology and solutions to diversified global markets. We operate on five continents, in 16 countries, and employ approximately 10,900 persons worldwide. Our primary product groups include i) heating, ventilation and air conditioning; ii) coils, coolers, and coatings; and iii) powertrain cooling and engine cooling. We provide our thermal management technology and solutions to a wide array of commercial, industrial, and building heating, ventilating, air conditioning, and refrigeration markets. In addition, our products are used in on - and off-highway original-equipment vehicular applications. 22 Table of Contents Company Strategy Fiscal 2021 presented challenges, including business disruptions and market weakness spurred by the COVID-19 pandemic. Since the onset of the pandemic, our top priorities have been, and continue to be, the health and overall well-being of our employees and delivering quality products and services to our customers. COVID-19 has broadly impacted the global economy and our key end markets. Our businesses were most severely impacted during the first quarter of fiscal 2021. In response, we swiftly implemented cost-saving actions, including, but not limited to, production staffing adjustments, furloughs, shortened work weeks, and temporary salary reductions at all levels of our organization. We withdrew most of these cost-saving actions in the third quarter of fiscal 2021 as production returned to more normal levels as markets recovered. We met the challenges presented by the COVID-19 pandemic head on and ended the year in a position of strength. By the end of fiscal 2021, we had reached separate agreements to sell the liquid- and air-cooled automotive businesses. These sale agreements represent significant progress toward our strategy of exiting the Automotive segment businesses. The sale of the air-cooled automotive business closed in April 2021 and the sale of the liquid-cooled automotive business is subject to the receipt of governmental and third-party approvals. We also completed the transition to our new President and Chief Executive Officer (“CEO”), Neil D. Brinker. Under new leadership, our teams are energized in implementing an “80/20 strategy” in order to focus our resources on products and markets with the highest growth and best returns. We are in the early stages of implementing this new strategy and are in process of examining our customer base and product portfolio by end market to identify areas of our business that we should focus more of our resources, and also areas that we should emphasize less in the future. We see opportunities to grow our businesses and are particularly focused on expanding our presence in and increasing sales to the data center and ventilation markets. We expect continued growth in the data center market related to cloud storage, digitalization and the internet of things. We also see opportunities in the ventilation market, as the COVID-19 pandemic has highlighted the need for improved indoor air quality. In addition, we are engaged with truck and bus manufacturers on solutions for alternative powertrains, including battery electric. Development of New Products and Technology Our ability to develop new products and technologies based upon our building block methodology for new and emerging markets is one of our competitive strengths. Under this methodology, we focus on creating core technologies that form the basis for multiple products and product lines across multiple business segments. Each of our business segments have a strong heritage of new product development, and our entire global technology organization benefits from mutual strengths. We own four global, state-of-the-art technology centers, dedicated to the development and testing of products and technologies. The centers are located in Racine, Wisconsin, Grenada, Mississippi, Pocenia, Italy and Bonlanden, Germany. Our reputation for providing high quality products and technologies has been a strength valued by our customers. We continue to benefit from relationships with customers that recognize the value of having us participate directly in product design, development and validation processes. This has resulted, and we expect it to continue to result, in strong, long-term customer relationships with companies that value partnerships with their suppliers. Strategic Planning and Corporate Development We employ both short-term (one-to-three year) and longer-term (five-to-seven year) strategic planning processes, which enable us to continually assess our opportunities, competitive threats, and economic market challenges. We devote significant resources to global strategic planning and development activities to strengthen our competitive position. We will continue to pursue organic- and external-growth opportunities, particularly to grow our global, market leading positions in our industrial businesses. In particular, we are focused on expanding our presence in the data center market. We are bringing together the full systems capability and established roots of our BHVAC segment in the data center space with the global manufacturing expertise and customer relationships within CIS. We are also redesigning our organizational structure to reduce complexity and to be better aligned with the markets we serve, with general managers who will be both empowered to make decisions and held accountable for results. 23 Table of Contents Operational and Fi nancial Discipline We operate in a dynamic, global marketplace; therefore, we manage our business with a disciplined focus on increasing productivity and reducing waste. The nature of the global marketplace requires us to move toward a greater manufacturing scale in order to create a more competitive cost base. In order to optimize our cost structure and improve efficiency of our operations, we have executed restructuring activities in our CIS, HDE, and Automotive segments during recent years. We have also refined our approach to the data center market by aligning the resources and capabilities of our data center businesses to increase our speed to market. In addition, as costs for materials and purchased parts may rise from time to time due to increases in commodity prices, we seek low-cost sourcing, when appropriate, and enter into contracts with some of our customers that provide for commodity price adjustments, on a lag basis. We are implementing an 80/20 methodology, intended to better focus our resources on products and markets that offer the highest growth and best returns. We are using data analytics to examine our businesses by end-market to determine areas of our business that we should focus more of our resources, and also areas that we should emphasize less in the future. Our executive management incentive compensation (annual cash incentive) plan for fiscal 2021 was based upon two performance goals: growth in consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”); and a cash flow margin metric. These performance goals drive alignment of management and shareholders’ interests in both our earnings growth and cash flow targets. In addition, we provide a long-term incentive compensation plan for officers and certain key employees to attract, retain, and motivate employees who directly impact the long-term performance of our company. The plan is comprised of stock awards, stock options, and performance-based stock or cash awards. The performance-based awards for the fiscal 2021 through 2023 performance period are based upon a target three-year average annual revenue growth and a target three-year average consolidated cash flow return on invested capital. Segment Information – Strategy, Market Conditions and Trends Each of our operating segments is managed by a vice president and has separate strategic and financial plans, and financial results, all of which are reviewed by our chief operating decision maker. These plans and results are used by management to evaluate the performance of each segment and to make decisions on the allocation of resources. Effective April 1, 2020, we began managing our automotive business separate from the previously-reported Vehicular Thermal Solutions (“VTS”) segment. The other businesses of the VTS segment, including the commercial vehicle and off-highway businesses, are being managed as the HDE segment. Building HVAC Systems (13 percent of fiscal 2021 net sales) Our BHVAC segment manufactures and distributes a variety of original equipment and aftersales HVAC products, primarily for commercial buildings and data centers in North America, the U.K., mainland Europe, the Middle East, Asia, and Africa. We sell and distribute our heating, ventilation and cooling products through wholesalers, distributors, consulting engineers, contractors and data center operators for applications such as data centers, schools, greenhouses, hotels, hospitals, restaurants, stadiums, warehouses, repair garages, residential garages, and manufacturing facilities. Our heating products include gas (natural and propane), electric, oil and hydronic unit heaters, low- and high-intensity infrared and duct furnace units. Our ventilation products include large roof-mounted direct- and indirect-fired makeup air units, single-packaged vertical units and unit ventilators used in school room applications, air-handling equipment, and rooftop packaged ventilation units used in a variety of commercial building applications. Our cooling products include precision air conditioning units used primarily for data center cooling applications, air- and water-cooled chillers, and ceiling cassettes, which are used in a variety of commercial building applications. Economic conditions, such as demand for new commercial construction, building renovations, including HVAC replacement, growth in data centers and school renovations, and higher efficiency requirements, are growth drivers for our building HVAC products. During fiscal 2021, sales increased in both the U.K. and North America, primarily driven by increased sales of data center products in the U.K. and heating products in North America. These sales were partially offset by lower sales of ventilation products, largely associated with the negative impacts of COVID-19 during the year, particularly within the hospitality sectors. We expect growth in each of the HVAC markets we serve during fiscal 2022. The markets we serve are heavily impacted by construction activity, building regulations, owner/occupant comfort requirements, and demand for digital infrastructure. Growth rates in these markets have shown increasing strength as the need for digital infrastructure expands and manufacturing, housing, and business investments increase. In fiscal 2022, we expect sales growth in our BHVAC segment through focused market share gains and the expansion of data center sales in the North American market. 24 Table of Contents Commercial and Industrial Solutions ( 29 percent of fiscal 2021 net sales) Our CIS segment provides a broad offering of thermal management products to the HVAC&R and data center markets, including solutions tailored to indoor, outdoor, and mobile climates, food storage and transport-refrigeration, and industrial processes. CIS’s primary product groups include coils, coolers, and coatings. Our coils products include custom-designed condensers, evaporators, round-tube solutions, as well as steam and water/fluid coils. Our coolers include commercial refrigeration units, which are used across the food supply chain, products for precision climate control for applications such as data center cooling, carbon dioxide and ammonia unit coolers, remote condensers, transformer oil coolers, and brine coolers. In addition, we offer proprietary coating solutions for corrosion protection, prolonging the life of heat-transfer equipment. During fiscal 2021, CIS segment sales volume decreased, primarily due to the impacts of the COVID-19 pandemic on the HVAC&R and industrial cooling markets. Sales were most severely impacted early in our fiscal year and sales volumes have been recovering since. In addition, sales in fiscal 2021 were negatively impacted by lower sales to a significant data center customer. During fiscal 2021, we transferred production from our Zhongshan, China manufacturing facility to our Wuxi, China manufacturing facility, consolidating two manufacturing locations into one. While costs incurred for our plant consolidation activities negatively impacted on our fiscal 2021 operating results, we expect to realize operating efficiencies going forward. Despite the challenging market conditions in fiscal 2021, we are proud to have supported numerous customers that produced products used in battling the COVID-pandemic and improving safety, from disinfectant application to vaccine storage. Looking ahead, we anticipate continued market recovery, with stronger recovery expected in the second half of fiscal 2022. We are poised to generate new sales in Europe, as heat pump technology is improved to address regulatory guidelines. Our CIS team is focused on improving financial results through manufacturing efficiencies, pricing strategies, and vertical integration projects. We will continue to support our customers with innovative products, such as computer room air handlers, antimicrobial coating lines, and low-VOC topcoats, which have reduced amounts of volatile organic compounds and are less harmful to the environment. In addition, we see growth opportunities with our product offerings that use alternative refrigerants, including carbon dioxide, which are more environmentally friendly. We aim to capitalize on opportunities arising from energy and environmental regulations and post-pandemic shifting consumer buying patterns. We believe we are well-positioned to be the partner of choice for our customers. Heavy Duty Equipment (37 percent of fiscal 2021 net sales) Our HDE segment provides powertrain and engine cooling products, including, but not limited to, radiators, charge air coolers, condensers, oil coolers, EGR coolers, fuel coolers, electronics cooling packages, and battery thermal management systems to OEMs in the commercial vehicle, off-highway, and automotive and light vehicle markets in North America, South America, Europe, and Asia. In addition, our HDE segment serves Brazil’s commercial vehicle and automotive aftermarkets. Sales volume in the HDE segment decreased during fiscal 2021, as compared with the prior year, primarily due to the negative impacts of the COVID-19 pandemic. The COVID-19 impacts were most severe in the Americas and Europe during the first half of fiscal 2021 and most negatively impacted sales to commercial vehicle and automotive and light vehicle customers. Looking ahead to fiscal 2022, we expect that the combination of market recovery, particularly in the Americas and Europe, and new business wins in all regions will result in increased sales in our HDE segment. In addition, we are working with numerous customers on products for alternative powertrains, including battery electric, and expect to launch exciting new products and systems related to electric trucks and buses. We are focused on controlling SG&A and operational expenses to improve the HDE segment’s profitability, while also expanding our capability and capacity in critical areas. Automotive (21 percent of fiscal 2021 net sales) Our Automotive segment provides powertrain and engine cooling products, including, but not limited to, radiators, charge air coolers, condensers, oil coolers, and EGR coolers, to OEMs primarily in the automotive and light vehicle markets in North America, Europe, and Asia. 25 Table of Contents Sales volume in the Automotive segment decreased during fiscal 2021, as compared with the prior year, primarily due to the negative impacts of the COVID-19 pandemic. In particular, sales in Europe and North America decreased significantly compared with the prior year. The decline in those regions were partially offset by increased sales in Asia. The automotive and light vehicle markets were most severely impacted by the COVID-19 pandemic early in fiscal 2021 and have been recovering since. We expect these markets will continue to recover and exhibit growth during fiscal 2022. During fiscal 2021, we signed definitive agreements to sell our liquid- and air-cooled automotive businesses. The sale of the air-cooled automotive business to Schmid Metall GmbH closed on April 30, 2021 and the sale of the liquid-cooled automotive business to Dana Incorporated is subject to the receipt of governmental and third-party approvals. We are 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. Consolidated Results of Operations Liquid- and Air-cooled Automotive Businesses On November 2, 2020, we signed a definitive agreement to sell our liquid-cooled automotive business to Dana Incorporated, subject to the receipt of governmental and third-party approvals and satisfaction of other closing conditions. We are currently working with the buyer through the regulatory approval process. At this time, we are not able to estimate the ultimate impact of the regulatory approval process or the closing date for this transaction. On February 19, 2021, we signed a definitive agreement to sell our air-cooled automotive business to Schmid Metall GmbH; this transaction closed on April 30, 2021. We report the financial results of both the liquid- and air-cooled automotive businesses within the Automotive segment. We recorded non-cash impairment charges totaling $165 million during fiscal 2021 related to the long-lived assets within these held for sale businesses. We are in the process of accounting for the sale of the air-cooled automotive business and currently expect to record a loss on sale of approximately $6 million in the first quarter of fiscal 2022. In addition, we currently estimate that we will record a loss on sale of approximately $20 million to $30 million when the sale of the liquid-cooled automotive business is completed. It is possible that the losses recorded could differ materially from our estimates. See Note 2 of the Notes to Consolidated Financial Statements for information regarding the accounting impacts of these sales. 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. COVID-19 As the COVID-19 pandemic continues, both the health and overall well-being of our employees and delivering quality products and services to our customers remain our top priorities. The COVID-19 pandemic has broadly impacted the global economy and our key end markets, which were most severely impacted during the first quarter of fiscal 2021. 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 fiscal 2021 financial results. We withdrew most of the cost-saving actions, including the temporary salary reductions, in the third quarter of fiscal 2021 as production returned to more normal levels as markets recovered. As a result, while we remain focused on controlling expenses, we expect compensation-related expenses, particularly SG&A expenses, will increase in fiscal 2022. The impacts of the COVID-19 pandemic, 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. 26 Table of Contents Fiscal 2021 Highlights Fiscal 2021 net sales decreased $167 million, or 8 percent, from the prior year, primarily due to lower sales in our CIS, HDE, and Automotive segments, partially offset by higher sales in our BHVAC segment. Foreign currency exchange rate changes favorably impacted sales in fiscal 2021 by $28 million. Cost of sales decreased $153 million, or 9 percent, from last year, primarily due to lower sales volume. Gross profit decreased $14 million and gross margin improved 60 basis points to 16.2 percent. SG&A expenses decreased $39 million, primarily due to lower costs associated with our review of strategic alternatives for our Automotive segment businesses and preparing the liquid- and air-cooled automotive businesses for sale. In addition, SG&A expenses decreased due to cost-reduction initiatives implemented early in the fiscal year in response to the negative impacts of COVID-19. The operating loss of $98 million during fiscal 2021 represents a $136 million decline from the prior-year operating income of $38 million and was primarily due to $167 million of impairment charges recorded primarily for assets of the liquid- and air-cooled automotive businesses, partially offset by lower SG&A expenses. Fiscal 2020 Highlights Fiscal 2020 net sales decreased $237 million, or 11 percent, from the prior year, primarily due to lower sales in our HDE, CIS, and Automotive segments, partially offset by higher sales in our BHVAC segment. Foreign currency exchange rate changes negatively impacted sales in fiscal 2020 by $46 million. Cost of sales decreased $179 million, or 10 percent, from the prior year, primarily due to lower sales volume. Gross profit decreased $58 million and gross margin declined 90 basis points to 15.6 percent. SG&A expenses increased $6 million, primarily due to higher costs associated with the review of strategic alternatives for our Automotive segment businesses, partially offset by lower-compensation related expenses. Operating income during fiscal 2020 decreased $72 million to $38 million, primarily due to lower gross profit and higher SG&A expenses. The following table presents our consolidated financial results on a comparative basis for fiscal years 2021, 2020 and 2019. Years ended March 31, 2021 2020 2019 (in millions) _ $’s % of sales _ $’s % of sales _ $’s % of sales Net sales $ 1,808 100.0 % $ 1,976 100.0 % $ 2,213 100.0 % Cost of sales 1,515 83.8 % 1,668 84.4 % 1,847 83.5 % Gross profit 293 16.2 % 308 15.6 % 366 16.5 % Selling, general and administrative expenses 211 11.7 % 250 12.6 % 244 11.0 % Restructuring expenses 13 0.7 % 12 0.6 % 10 0.4 % Impairment charges 167 9.2 % 9 0.4 % - - (Gain) loss on sale of assets - - (1 ) - 2 0.1 % Operating (loss) income (98 ) -5.4 % 38 1.9 % 110 5.0 % Interest expense (19 ) -1.1 % (23 ) -1.1 % (25 ) -1.1 % Other expense - net (2 ) -0.1 % (5 ) -0.2 % (4 ) -0.2 % (Loss) earnings before income taxes (119 ) -6.6 % 10 0.5 % 81 3.7 % (Provision) benefit for income taxes (90 ) -5.0 % (12 ) -0.6 % 5 0.2 % Net (loss) earnings $ (209 ) -11.6 % $ (2 ) -0.1 % $ 86 3.9 % Year Ended March 31, 2021 Compared with Year Ended March 31, 2020 Fiscal 2021 net sales of $1,808 million were $167 million, or 8 percent, lower than the prior year, primarily due to lower sales volume in the CIS, HDE, and Automotive segments, partially offset by a $28 million favorable impact of foreign currency exchange rate changes and higher sales volume in the BHVAC segment. Sales in the CIS, HDE and Automotive segments decreased $92 million, $64 million and $47 million, respectively, and were significantly impacted by market-driven volume declines and temporary plant closures early in the fiscal year due to the COVID-19 pandemic. Sales increased $20 million in our BHVAC segment. Fiscal 2021 cost of sales of $1,515 million decreased $153 million, or 9 percent, primarily due to lower sales volume. Fiscal 2021 cost of sales was negatively impacted by $24 million from foreign currency exchange rate changes. As a percentage of sales, cost of sales decreased 60 basis points to 83.8 percent. The unfavorable impacts of lower sales volume and, to a lesser extent, higher material costs, which negatively impacted cost of sales as a percentage of sales by approximately 50 basis points, were more than offset by benefits from procurement and other cost-reduction initiatives and an $8 million decrease in depreciation expense in the Automotive segment. We ceased depreciating the long-lived assets within the liquid- and air-cooled automotive businesses once they were classified as held for sale during fiscal 2021. In addition, program and equipment transfer costs to prepare the liquid-cooled automotive business for sale decreased approximately $3 million compared with the prior year. 27 Table of Contents As a result of lower sales and lower cost of sales as a percentage of sales, fiscal 2021 gross profit decreased $14 million and gross margin improved 60 basis points to 16.2 percent. Fiscal 2021 SG&A expenses decreased $39 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 businesses, which decreased approximately $30 million, and lower compensation-related expenses, which decreased approximately $13 million, largely resulting from cost-saving actions taken in response to COVID-19. These favorable drivers were partially offset by approximately $7 million of CEO transition costs recorded at Corporate and a $3 million unfavorable impact of foreign currency exchange rate changes. Restructuring expenses totaled $13 million during fiscal 2021 and increased $1 million compared with the prior year, primarily due to higher severance expenses. The fiscal 2021 restructuring expenses primarily consisted of severance expenses related to headcount reductions within the CIS, Automotive and HDE segments. During fiscal 2021, we recorded impairment charges totaling $167 million within the Automotive segment, an increase of $158 million compared with the prior year. The impairment charges during fiscal 2021 primarily related to writing-down the long-lived assets in the liquid- and air-cooled automotive businesses in connection with their pending sales. The $9 million of impairment charges recorded in fiscal 2020 primarily related to two manufacturing facilities in the Automotive segment. The operating loss of $98 million during fiscal 2021 represents a $136 million decline from the prior-year operating income of $38 million. The decline was primarily due to higher impairment charges, which increased $158 million, and lower earnings in the CIS segment, which decreased $25 million. These negative drivers were partially offset by lower costs associated with our review of strategic alternatives for the Automotive segment businesses, which decreased $33 million, and higher earnings in our BHVAC segment, which increased $11 million. The provision for income taxes was $90 million and $12 million in fiscal 2021 and 2020, respectively. The $78 million increase was primarily due to an increase in income tax charges related to valuation allowances, partially offset by income tax benefits totaling $38 million related to the impairment charges recorded during fiscal 2021. In fiscal 2021, we recorded income tax charges totaling $117 million to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions, compared with $7 million of income tax charges for valuation allowances in fiscal 2020. See Note 8 of the Notes to Consolidated Financial Statements for additional information. Year Ended March 31, 2020 Compared with Year Ended March 31, 2019 Fiscal 2020 net sales of $1,976 million were $237 million, or 11 percent, lower than the prior year, primarily due to lower sales in our HDE, CIS, and Automotive segments and a $46 million unfavorable impact of foreign currency exchange rate changes, partially offset by higher sales in our BHVAC segment. Sales decreased $126 million, $84 million, and $44 million in our HDE, CIS, and Automotive segments, respectively. Sales increased $9 million in our BHVAC segment. Fiscal 2020 cost of sales of $1,668 million decreased $179 million, or 10 percent, primarily due to lower sales volume and a $39 million favorable impact of foreign currency exchange rate changes. As a percentage of sales, cost of sales increased 90 basis points to 84.4 percent and was negatively impacted by approximately 80 basis points due to higher labor and inflationary costs and, to a lesser extent, by sales mix. These negative impacts were partially offset by favorable material costs, which impacted costs of sales by approximately 30 basis points. The favorable material costs primarily resulted from lower commodity pricing, which more than offset a negative impact from tariffs. In addition, we recorded $3 million of costs at Corporate for program and equipment transfers associated with the separation of the liquid-cooled automotive business in preparation for a potential sale. As a result of lower sales and higher cost of sales as a percentage of sales, fiscal 2020 gross profit decreased $58 million and gross margin declined 90 basis points to 15.6 percent. 28 Table of Contents Fiscal 2020 SG&A expenses increased $6 million. The increase in SG&A was primarily due to separation and project costs recorded at Corporate associated with our review of strategic alternatives for the Automotive segment businesses, which increased approximately $29 million. This increase was partially offset by lower compensation-related expenses, which decreased approximately $13 million, lower environmental charges related to previously-owned manufacturing facilities in the U.S., which decreased approximately $3 million, and a $4 million favorable impact from foreign currency exchange rate changes. Restructuring expenses totaled $12 million during fiscal 2020 and increased $2 million compared with the prior year. The fiscal 2020 restructuring expenses primarily consisted of severance expenses related to targeted headcount reductions in the HDE and Automotive segments and equipment transfer and plant consolidation costs in the CIS segment. During fiscal 2020, we recorded impairment charges totaling $9 million, primarily related to two manufacturing facilities in the Automotive segment. Operating income of $38 million during fiscal 2020 decreased $72 million compared with the prior year. This decrease was primarily due to an increase of $32 million of separation and project costs associated with our review of strategic alternatives for our automotive businesses and lower earnings in our HDE, CIS, and Automotive segments, which decreased $27 million, $20 million, and $10 million respectively, partially offset by higher earnings in our BHVAC segment, which increased $9 million. The provision for income taxes was $12 million in fiscal 2020, compared with a benefit for income taxes of $5 million in fiscal 2019. The $17 million change was primarily due to the absence of income tax benefits totaling $25 million recorded in fiscal 2019 and income tax charges totaling $10 million in fiscal 2020, partially offset by lower operating earnings in fiscal 2020. The $25 million of income tax benefits recorded in fiscal 2019 related to the recognition of tax assets for foreign tax credits and a manufacturing deduction in the U.S. and our accounting for the Tax Act. The $10 million of income tax charges in fiscal 2020 were comprised of net charges totaling $7 million resulting from adjustments of valuation allowances on certain deferred tax assets in the U.S. and in a foreign jurisdiction and $3 million associated with legal entity restructuring in preparation for a potential sale of the liquid-cooled automotive business. Segment Results of Operations Effective April 1, 2020, we began managing our global automotive business separate from the other businesses within the previously-reported VTS segment. We have been managing the automotive business as the Automotive segment as we work towards the sale or eventual exit of its underlying automotive business operations. We are managing the other businesses of the VTS segment, including the commercial vehicle and off-highway businesses, as the HDE segment. We began reporting financial results for our new segment structure beginning for fiscal 2021. Segment financial information for fiscal 2020 and 2019 has been recast to conform to the fiscal 2021 presentation. The segment realignment had no impact on the CIS and BHVAC segments. BHVAC Years ended March 31, 2021 2020 2019 (in millions) _ $’s % of sales _ $’s % of sales _ $’s % of sales Net sales $ 241 100.0 % $ 221 100.0 % $ 212 100.0 % Cost of sales 158 65.5 % 150 67.7 % 149 70.1 % Gross profit 83 34.5 % 72 32.3 % 63 29.9 % Selling, general and administrative expenses 36 14.9 % 35 15.8 % 35 16.4 % Loss on sale of assets - - - - 2 0.8 % Operating income $ 47 19.6 % $ 36 16.5 % $ 27 12.6 % Year Ended March 31, 2021 Compared with Year Ended March 31, 2020 BHVAC net sales increased $20 million, or 9 percent, in fiscal 2021 compared with the prior year, primarily due to higher sales in the U.K. and the U.S., which increased $14 million and $5 million, respectively. The higher sales in the U.K. were primarily due to higher sales of data center cooling products. The higher sales in the U.S. were primarily due to higher sales of heating products, partially offset by lower sales of ventilation products. 29 Table of Contents BHVAC cost of sales increased $8 million, or 5 percent, in fiscal 2021, primarily due to higher sales volume. As a percentage of sales, cost of sales decreased 220 basis points to 65.5 percent and was positively impacted by favorable sales mix and customer pricing. As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $11 million and gross margin improved 220 basis points to 34.5 percent. BHVAC SG&A expenses increased $1 million from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses, including commission expenses. Operating income in fiscal 2021 of $47 million increased $11 million, primarily due to higher gross profit. Year Ended March 31, 2020 Compared with Year Ended March 31, 2019 BHVAC net sales increased $9 million, or 4 percent, in fiscal 2020 compared with the prior year, primarily due to higher sales in the U.S., which increased $14 million, partially offset by lower sales in the U.K., which decreased $5 million. The higher sales in the U.S. were primarily driven by the increased sales of ventilation and heating products. The lower sales in the U.K. were primarily due to lower sales of air conditioning and ventilation products and a $3 million unfavorable impact of foreign currency exchange rate changes, partially offset by higher data center sales. BHVAC cost of sales increased $1 million, or less than 1 percent, in fiscal 2020. As a percentage of sales, cost of sales decreased 240 basis points to 67.7 percent, primarily due to favorable sales mix and favorable customer pricing. As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $9 million and gross margin improved 240 basis points to 32.3 percent. BHVAC SG&A expenses remained consistent with the prior year yet decreased 60 basis points as a percentage of sales. During fiscal 2019, we sold our business in South Africa and, as a result, recorded a loss of $2 million. Annual net sales attributable to this disposed business were less than $2 million. Operating income in fiscal 2020 of $36 million increased $9 million, primarily due to higher gross profit. CIS Years ended March 31, 2021 2020 2019 (in millions) _ $’s % of sales _ $’s % of sales _ $’s % of sales Net sales $ 532 100.0 % $ 624 100.0 % $ 708 100.0 % Cost of sales 465 87.5 % 531 85.1 % 593 83.8 % Gross profit 67 12.5 % 93 14.9 % 115 16.2 % Selling, general and administrative expenses 53 10.0 % 57 9.2 % 61 8.6 % Restructuring expenses 5 1.0 % 2 0.3 % - - Impairment charges - - 1 0.1 % - 0.1 % Operating income $ 8 1.5 % $ 33 5.3 % $ 53 7.5 % Year Ended March 31, 2021 Compared with Year Ended March 31, 2020 CIS net sales decreased $92 million, or 15 percent, in fiscal 2021 compared with the prior year, primarily due to lower sales volume associated with the impacts of the COVID-19 pandemic and lower sales to a significant data center customer, partially offset by a $13 million favorable impact of foreign currency exchange rate changes. Sales to data center cooling and commercial HVAC&R customers decreased $60 million and $43 million, respectively. 30 Table of Contents CIS cost of sales decreased $66 million, or 12 percent, primarily due to lower sales volume, partially offset by an $11 million unfavorable impact of foreign currency exchange rate changes. As a percentage of sales, cost of sales increased 240 basis points to 87.5 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 $26 million and gross margin declined 240 basis points to 12.5 percent. CIS SG&A expenses decreased $4 million compared with the prior year. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $5 million, partially offset by a $1 million unfavorable impact of foreign currency exchange rate changes. Restructuring expenses during fiscal 2021 increased $3 million, 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 in fiscal 2021 decreased $25 million to $8 million, primarily due to lower gross profit and higher restructuring expenses, partially offset by lower SG&A expenses. Year Ended March 31, 2020 Compared with Year Ended March 31, 2019 CIS net sales decreased $84 million, or 12 percent, in fiscal 2020 compared with the prior year, primarily due to lower sales volume and a $12 million unfavorable impact of foreign currency exchange rate changes. Sales to commercial HVAC&R and data center cooling customers decreased $43 million and $38 million, respectively. CIS cost of sales decreased $62 million, or 10 percent, primarily due to lower sales volume and an $11 million favorable foreign currency exchange rate impact. As a percentage of sales, cost of sales increased 130 basis points to 85.1 percent, primarily due to the unfavorable impact of lower sales volume and unfavorable sales mix. As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $22 million and gross margin declined 130 basis points to 14.9 percent. CIS SG&A expenses decreased $4 million compared with the prior year, primarily due to lower compensation-related expenses, which decreased approximately $2 million, and the favorable impact of cost-control initiatives. Restructuring expenses during fiscal 2020 increased $2 million, primarily due to higher equipment transfer and plant consolidation costs. During fiscal 2020, we recorded a $1 million asset impairment charge related to a previously-closed manufacturing facility in Austria. Operating income in fiscal 2020 decreased $20 million to $33 million, primarily due to lower gross profit, partially offset by lower SG&A expenses. 31 Table of Contents HDE Years ended March 31, 2021 2020 2019 (in millions) _ $’s % of sales _ $’s % of sales _ $’s % of sales Net sales $ 682 100.0 % $ 746 100.0 % $ 872 100.0 % Cost of sales 594 87.0 % 649 87.0 % 744 85.3 % Gross profit 88 13.0 % 97 13.0 % 128 14.7 % Selling, general and administrative expenses 49 7.1 % 56 7.4 % 62 7.1 % Restructuring expenses 3 0.4 % 3 0.4 % 1 0.1 % Operating income $ 37 5.4 % $ 38 5.1 % $ 65 7.5 % Year Ended March 31, 2021 Compared with Year Ended March 31, 2020 HDE net sales decreased $64 million, or 9 percent, in fiscal 2021 compared with the prior 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 off-highway customers increased $20 million and were offset by lower sales to commercial vehicle and automotive and light vehicle customers, which decreased $52 million and $11 million, respectively. HDE cost of sales decreased $55 million, or 8 percent, primarily due to lower sales volume. As a percentage of sales, cost of sales was consistent at 87.0 percent. Beyond the unfavorable impacts of the lower sales volume, higher material costs impacted cost of sales as a percentage of sales by approximately 100 basis points. The unfavorable materials costs primarily resulted from higher commodity pricing and tariffs on imported materials. These negative impacts were largely 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, gross profit decreased $9 million. Gross margin of 13.0 percent was consistent with the prior year. HDE SG&A expenses decreased $7 million compared with the prior year. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $6 million, and cost-reduction initiatives, including lower travel expenses. Restructuring expenses during fiscal 2021 totaled $3 million, consistent with the prior year. Fiscal 2021 restructuring expenses primarily consisted of severance expenses resulting from targeted headcount reductions in North America. Operating income in fiscal 2021 decreased $1 million to $37 million, primarily due to lower gross profit, partially offset by lower SG&A expenses. Year Ended March 31, 2020 Compared with Year Ended March 31, 2019 HDE net sales decreased $126 million, or 14 percent, in fiscal 2020 compared with the prior year, primarily due to lower sales volume, a $15 million unfavorable impact of foreign currency exchange rate changes, and, to a lesser extent, unfavorable customer pricing largely resulting from contractually-scheduled price-downs. Sales to off-highway and commercial vehicle customers decreased $57 million and $51 million, respectively. These sales declines largely resulted from weakness in global vehicular markets and the planned wind-down of certain commercial vehicle programs. HDE cost of sales decreased $95 million, or 13 percent, primarily due to lower sales volume and a $13 million favorable impact of foreign currency exchange rate changes. As a percentage of sales, cost of sales increased 170 basis points to 87.0 percent. Beyond the unfavorable impact of the lower sales volume, higher labor and inflationary costs and unfavorable customer pricing negatively impacted cost of sales as a percentage of sales by approximately 110 basis points and 80 basis points, respectively. These negative impacts were partially offset by improved operating efficiencies and cost savings from procurement initiatives. As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $31 million and gross margin declined 170 basis points to 13.0 percent. HDE SG&A expenses decreased $6 million compared with the prior year, primarily due to lower compensation-related expenses and environmental charges related to previously-owned manufacturing facilities in the U.S, which each decreased approximately $3 million. Restructuring expenses during fiscal 2020 increased $2 million, primarily due to higher severance expenses resulting from targeted headcount reductions in the Americas. Operating income in fiscal 2020 decreased $27 million to $38 million, primarily due to lower gross profit, partially offset by lower SG&A expenses. 32 Table of Contents AUTOMOTIVE Years ended March 31, 2021 2020 2019 (in millions) _ $’s % of sales _ $’s % of sales _ $’s % of sales Net sales $ 398 100.0 % $ 445 100.0 % $ 489 100.0 % Cost of sales 342 85.9 % 396 89.1 % 430 87.9 % Gross profit 56 14.1 % 48 10.9 % 59 12.1 % Selling, general and administrative expenses 36 9.1 % 45 10.1 % 51 10.5 % Restructuring expenses 4 1.0 % 6 1.5 % 8 1.7 % Impairment charges 167 41.9 % 8 1.8 % - - Gain on sale of assets - - (1 ) -0.2 % - - Operating loss $ (151 ) -37.9 % $ (10 ) -2.3 % $ - -0.1 % Year Ended March 31, 2021 Compared with Year Ended March 31, 2020 Automotive net sales decreased $47 million, or 11 percent, in fiscal 2021 compared with the prior year, primarily due to lower sales volume largely resulting from the impacts of the COVID-19 pandemic, partially offset by an $18 million favorable impact of foreign currency exchange rate changes. Sales in Europe and North America decreased $39 million and $19 million, respectively. Sales in Asia increased $12 million. Automotive cost of sales decreased $54 million, or 14 percent, compared with the prior year, primarily due to lower sales volume, partially offset by a $15 million unfavorable impact of foreign currency exchange rate changes. As a percentage of sales, cost of sales decreased 320 basis points to 85.9 percent and was favorably impacted by lower depreciation expenses of approximately $8 million, cost savings from procurement initiatives and improved operating efficiencies, partially offset by the unfavorable impact of lower sales volume. We ceased depreciating the long-lived assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale in November 2020 and February 2021, respectively. As a result of the lower sales and lower cost of sales as a percentage of sales, gross profit increased $8 million and gross margin improved 320 basis points to 14.1 percent. Automotive SG&A expenses decreased $9 million compared with the prior year. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $8 million. Restructuring expenses during fiscal 2021 totaled $4 million, a decrease of $2 million compared with the prior year. The decrease was primarily driven by lower severance expenses in Europe resulting from fewer targeted headcount reductions. Impairment charges during fiscal 2021 totaled $167 million and primarily related to assets in the liquid- and air-cooled automotive businesses. Upon classifying these businesses as held for sale, we recorded impairment charges to write-down the long-lived assets of these businesses based upon the selling prices in the agreements. The Automotive operating loss in fiscal 2021 of $151 million, as compared with an operating loss of $10 million in the prior year, was significantly impacted by the large impairment charges, which were partially offset by higher gross profit and lower SG&A and restructuring expenses. Year Ended March 31, 2020 Compared with Year Ended March 31, 2019 Automotive net sales decreased $44 million, or 9 percent, in fiscal 2020 compared with the prior year, primarily due to lower sales volume, a $16 million unfavorable impact of foreign currency exchange rate changes, and, to a lesser extent, unfavorable customer pricing largely resulting from contractually-scheduled price-downs. Sales decreased $48 million in Europe and increased $5 million in Asia. The sales declines in Europe largely resulted from general weakness in vehicular markets. 33 Table of Contents Automotive cost of sales decreased $34 million, or 8 percent, primarily due to lower sales volume and a $14 million favorable impact of foreign currency exchange rate changes. As a percentage of sales, cost of sales increased 120 basis points to 89.1 percent. Beyond the unfavorable impact of the lower sales volume, unfavorable customer pricing and higher labor and inflationary costs negatively impacted cost of sales as a percentage of sales by approximately 40 basis points and 30 basis points, respectively. Higher depreciation costs, primarily resulting from recent manufacturing capacity expansion in China and Hungary, also negatively impacted cost of sales to a lesser extent. These negative impacts were partially offset by favorable material costs, which impacted cost of sales by approximately 30 basis points, improved operating efficiencies and cost savings from procurement initiatives. The favorable material costs primarily resulted from lower commodity pricing, which more than offset the negative impacts of tariffs. As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11 million and gross margin declined 120 basis points to 10.9 percent. Automotive SG&A expenses decreased $6 million compared with the prior year, primarily due to lower compensation-related expenses, which decreased approximately $5 million, and a $2 million favorable impact of foreign currency exchange rate changes. Restructuring expenses during fiscal 2020 decreased $2 million, primarily due to lower severance expenses resulting from fewer targeted headcount reductions in Europe. During fiscal 2020, we recorded asset impairment charges totaling $8 million, primarily related to manufacturing facilities in Austria and Germany. During fiscal 2020, we completed the sale of a previously-closed manufacturing facility in Germany and, as a result, recorded a gain of $1 million. The operating loss in fiscal 2020 of $10 million represents a $10 million decline from the prior year and was primarily due to lower gross profit and higher impairment charges, partially offset by lower SG&A and restructuring expenses. Liquidity and Capital Resources Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents as of March 31, 2021 of $38 million, and an available borrowing capacity of $238 million under our revolving credit facility. Given our extensive international operations, approximately $35 million of our cash and cash equivalents are held by our non-U.S. subsidiaries. Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated. We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis. Our primary contractual obligations include pension obligations, debt and related interest payments, lease obligations, and obligations for capital expenditures. Our pension liabilities totaled $77 million as of March 31, 2021. We expect to contribute approximately $13 million to our U.S. pension plans during fiscal 2022. We are currently evaluating the provisions within the American Rescue Plan Act of 2021, which include funding relief for single-employer pension plans. We believe this recent legislation could allow for lower contributions to our pension plans during fiscal 2022. Net Cash Provided by Operating Activities Net cash provided by operating activities in fiscal 2021 was $150 million, an increase of $92 million from $58 million in the prior year. This increase in operating cash flow was primarily due to favorable net changes in working capital, including impacts from the timing of payments to vendors and receipts from customers, as compared with the prior year. The favorable changes in working capital also included lower payments for incentive compensation, employee benefits, and payroll taxes. During fiscal 2021, we deferred payments of U.S. payroll taxes totaling $7 million, as permitted by the Coronavirus Aid, Relief, and Economic Security Act. We resumed payment of these payroll taxes during the fourth quarter of fiscal 2021 and expect to pay the deferred amounts in two equal installments when required in December 2021 and 2022. Also during fiscal 2021, payments for separation and project costs associated with our review of strategic alternatives for the Automotive segment businesses and restructuring activities decreased $31 million and $5 million, respectively, compared with fiscal 2020. 34 Table of Contents Net cash provided by operating activities in fiscal 2020 was $58 million, a decrease of $45 million from $103 million in the prior year. This decrease in operating cash flow was primarily due to lower operating earnings in the current year and payments for separation and project costs associated with our strategic review of alternatives for the automotive businesses, partially offset by favorable net changes in working capital. The favorable changes in working capital, as compared with the prior year, included lower employee benefit and incentive compensation payments. Capital Expenditures Capital expenditures of $33 million during fiscal 2021 decreased $39 million compared with fiscal 2020. Similar to prior years, our capital spending in fiscal 2021 primarily occurred in the HDE and Automotive segments, which totaled $14 million and $11 million, respectively, and included tooling and equipment purchases in conjunction with new and renewal programs with customers. During fiscal 2021 and in response to the economic impacts of the COVID-19 pandemic, we reduced our capital expenditures and delayed certain projects and the purchase of certain program-related equipment and tooling in our vehicular businesses. We are currently planning to increase our capital investments in fiscal 2022, as compared with fiscal 2021. Debt Our total debt outstanding decreased $143 million to $340 million at March 31, 2021 compared with the prior year, primarily due to repayments during fiscal 2021. Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below. Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales. In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations. 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, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”). We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense. As of March 31, 2021, our leverage ratio and interest coverage ratio were 1.9 and 9.3, respectively. We expect to remain in compliance with our debt covenants during fiscal 2022 and beyond. See Note 17 of the Notes to Consolidated Financial Statements for additional information regarding our credit agreements. Critical Accounting Policies The following critical accounting policies reflect the more significant judgments and estimates used in preparing our consolidated financial statements. Application of these policies results in accounting estimates that have the greatest potential for a significant impact on our financial statements. The following discussion of these judgments and estimates is intended to supplement the significant accounting policies presented in Note 1 of the Notes to Consolidated Financial Statements. In addition, recently issued accounting pronouncements that either have or could significantly impact our financial statement are disclosed in Note 1 of the Notes to Consolidated Financial Statements. Revenue Recognition We recognize revenue based upon consideration specified in a contract and as we satisfy performance obligations by transferring control over our products to our customers, which may be at a point in time or over time. The majority of our revenue is recognized at a point in time, based upon shipment terms. A limited number of our customer contracts provide an enforceable right to payment for performance completed to date. For these contracts, we recognize revenue over time based upon our estimated progress towards the satisfaction of the contract’s performance obligations. We record an allowance for credit losses and we accrue for estim ated warranty costs at the time of sale. We base these estimates upon historical experience, current business trends and economic conditions, and risks specific to the underlying accounts receivable or warranty claims. 35 Table of Contents Impairment of Long-Lived Assets We perform impairment evaluations of long-lived assets, including property, plant and equipment and intangible assets, whenever business conditions or events indicate that those assets may be impaired. We consider factors such as operating losses, declining financial outlooks and market conditions when evaluating the necessity for an impairment analysis. When the net asset values exceed undiscounted cash flows expected to be generated by the assets, we write down the assets to fair value and record an impairment charge to current operations. We estimate fair value in various ways depending on the nature of the underlying assets. Fair value is generally based upon appraised value, estimated salvage value, or selling prices under negotiation, as applicable. The most significant long-lived assets we evaluated for impairment indicators were property, plant and equipment and intangible assets, which totaled $270 million and $101 million, respectively, at March 31, 2021. Within property, plant and equipment, the most significant assets evaluated are buildings and improvements and machinery and equipment. Our most significant intangible assets evaluated are customer relationships, trade names, and acquired technology, the majority of which are related to our CIS segment. We evaluate impairment at the lowest level of separately identifiable cash flows, which is generally at the manufacturing plant level. We monitor manufacturing plant financial performance to determine whether indicators exist that would require an impairment evaluation for the facility. This includes significant adverse changes in plant profitability metrics; substantial changes in the mix of customer products manufactured in the plant; changes in manufacturing strategy; and the shifting of programs to other facilities under a manufacturing realignment strategy. When such indicators are present, we perform an impairment evaluation. During fiscal 2021 and upon classifying the liquid- and air-cooled automotive businesses within the Automotive segment as held for sale, we evaluated the disposal groups for impairment. Based upon the selling prices of the businesses and anticipated costs to sell, we estimated implied losses in excess of the respective carrying value of each disposal group’s long-lived assets. As a result, we wrote down the carrying value of the disposal groups’ long-lived assets, which consist entirely of property, plant and equipment and right-of-use lease assets, to zero. See Note 2 of the Notes to the Consolidated Financial Statements for additional information regarding the $167 million of impairment charges that we recorded during fiscal 2021. Impairment of Goodwill We perform goodwill impairment tests annually, as of March 31, unless business events or other conditions exist that require a more frequent evaluation. We consider factors such as operating losses, declining financial and market outlooks, and market capitalization when evaluating the necessity for an interim impairment analysis. We test goodwill for impairment at a reporting unit level. Reporting units resulting from recent acquisitions generally represent the highest risk of impairment, which typically decreases as the businesses are integrated into the Company and positioned for future operating and financial performance. We test goodwill for impairment by comparing the fair value of each reporting unit with its carrying value. We determine the fair value of a reporting unit based upon the present value of estimated future cash flows. If the fair value of a reporting unit exceeds the carrying value of the reporting unit’s net assets, goodwill is not impaired. However, if the carrying value of the reporting unit’s net assets exceeds its fair value, we would conclude goodwill is impaired and would record an impairment charge equal to the amount that the reporting unit’s carrying value exceeds its fair value. Determining the fair value of a reporting unit involves judgment and the use of significant estimates and assumptions, which include assumptions regarding the revenue growth rates and operating profit margins used to calculate estimated future cash flows, risk-adjusted discount rates, business trends and market conditions. We determine the expected future revenue growth rates and operating profit margins after consideration of our historical revenue growth rates and earnings levels, our assessment of future market potential and our expectations of future business performance. The discount rates used in determining discounted cash flows are rates corresponding to our cost of capital, adjusted for country-specific risks where appropriate. While we believe the assumptions used in our goodwill impairment tests are appropriate and result in a reasonable estimate of the fair value of each reporting unit, future events or circumstances could have a potential negative effect on the estimated fair value of our reporting units. These events or circumstances include lower than forecasted revenues, market trends that fall below our current expectations, actions of key customers, increases in discount rates, and the continued economic uncertainty and impacts associated with the COVID-19 pandemic. We cannot predict the occurrence of certain events or changes in circumstances that might adversely affect the carrying value of goodwill. 36 Table of Contents At March 31, 2021, our goodwill totaled $171 million related to our CIS and BHVAC segments. Each of these segments is comprised of two reporting units. We conducted annual goodwill impairment tests as of March 31, 2021 by applying a fair value-based test and determined the fair value of each of our reporting units exceeded the respective book value. Acquisitions From time to time, we make strategic acquisitions that have a material impact on our consolidated results of operations or financial position. We allocate the purchase price of acquired businesses to the identifiable tangible and intangible assets acquired and liabilities assumed in the transaction based upon their estimated fair values as of the acquisition date. We determine the estimated fair values using information available to us and engage third-party valuation specialists when necessary. The estimates we use to determine the fair value of long-lived assets, such as intangible assets, can be complex and require significant judgments. While we use our best estimates and assumptions, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statement of operations. We also estimate the useful lives of intangible assets to determine the amount of amortization expense to record in future periods. We periodically review the estimated useful lives assigned to our intangible assets to determine whether such estimated useful lives continue to be appropriate. Warranty Costs We estimate costs related to product warranties and accrue for such costs at the time of the sale, within cost of sales. We estimate warranty costs based upon the best information available, which includes statistical and analytical analysis of both historical and current claim data. We adjust our warranty accruals, which totaled $5 million at March 31, 2021, if it is probable that expected claims will differ from previous estimates. Pension Obligations Our calculation of the expense and liabilities of our pension plans is dependent upon various assumptions. At March 31, 2021, our pension liabilities totaled $77 million. The most significant assumptions include the discount rate, long-term expected return on plan assets, and mortality rates. We base our selection of assumptions on historical trends and economic and market conditions at the time of valuation. In accordance with U.S. GAAP, actual results that differ from these assumptions are accumulated and amortized over future periods. These differences impact future pension expenses. Currently, participants in our domestic pension plans are not accruing benefits based upon their current service as the plans do not include increases in annual earnings or for future service in calculating the average annual earnings and years of credited service under the pension plan formula. For the following discussion regarding sensitivity of assumptions, all amounts presented are in reference to our domestic pension plans, since our domestic plans comprise all of our pension plan assets and the large majority of our pension plan expense. To determine the expected rate of return on pension plan assets, we consider such factors as (a) the actual return earned on plan assets, (b) historical rates of return on the various asset classes in the plan portfolio, (c) projections of returns on those asset classes, (d) the amount of active management of the assets, (e) capital market conditions and economic forecasts, and (f) administrative expenses paid with the plan assets. The long-term rate of return utilized in both fiscal 2021 and 2020 was 7.5 percent. For fiscal 2022, we have also assumed a rate of 7.5 percent. A change of 25 basis points in the expected rate of return on assets would impact our fiscal 2022 pension expense by $0.4 million. The discount rate reflects rates available on long-term, high-quality fixed-income corporate bonds on the measurement date of March 31. For fiscal 2021 and 2020, for purposes of determining pension expense, we used a discount rate of 3.4 and 4.0 percent, respectively. We determined these rates based upon a yield curve that was created following an analysis of the projected cash flows from our plans. See Note 18 of the Notes to Consolidated Financial Statements for additional information. A change in the assumed discount rate of 25 basis points would impact our fiscal 2022 pension expense by less than $1 million. 37 Table of Contents Income Taxes We operate in numerous taxing jurisdictions; therefore, we are subject to regular examinations by federal, state and non-U.S. taxing authorities. Due to the application of complex and sometimes ambiguous tax laws and rulings in the jurisdictions in which we do business, there is an inherent level of uncertainty within our worldwide tax provisions. Despite our belief that our tax return positions are consistent with applicable tax laws, it is possible that taxing authorities could challenge certain positions. Our deferred tax assets and liabilities reflect temporary differences between the amount of assets and liabilities for financial and tax reporting purposes. We adjust these amounts to reflect changes in tax rates expected to be in effect when the temporary differences reverse. We record a valuation allowance if we determine it is more likely than not that the net deferred tax assets in a particular jurisdiction will not be realized. This determination, which is made on a jurisdiction-by-jurisdiction basis, involves judgment and the use of significant estimates and assumptions, including expectations of future taxable income and tax planning strategies. We believe the assumptions that we used are appropriate and result in a reasonable determination regarding the future realizability of deferred tax assets. However, future events or circumstances, such as lower-than-expected taxable income or unfavorable changes in the financial outlook of our operations in certain jurisdictions, could cause us to record additional valuation allowances. See Note 8 of the Notes to Consolidated Financial Statements for additional information regarding income taxes. Other Loss Reserves We maintain liabilities and reserves for a number of other loss exposures, such as environmental remediation costs, self-insurance res erves, estimated credit losses associated with trade receivables, regula tory compliance matters, and litigation. Establishing loss reserves for these exposures requires the use of estimates and judgment to determine the risk exposure and ultimate potential liability. We estimate these reserve requirements by using consistent and suitable methodologies for the particular type of loss reserve being calculated. See Note 20 of the Notes to Consolidated Financial Statements for additional information regarding contingencies and litigation. Forward-Looking Statements This report, including, but not limited to, the discussion under Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains statements, including information about future financial performance, accompanied by phrases such as “believes,” “estimates,” “expects,” “plans,” “anticipates,” “intends,” and other similar “forward-looking” statements, as defined in the Private Securities Litigation Reform Act of 1995. Modine’s actual results, performance or achievements may differ materially from those expressed or implied in these statements, because of certain risks and uncertainties, including, but not limited to, those described under “Risk Factors” in Item 1A. in Part I. of this report and identified in our other public filings with the U.S. Securities and Exchange Commission. Other risks and uncertainties include, but are not limited to, the following: Market Risks: • The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers, customers, and employees; • Economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including, in particular, foreign currency exchange rate fluctuations; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); inflation; changes in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade, public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade, the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the short- and long-term implications of “Brexit”; 38 Table of Contents • The impact of potential price increases associated with raw materials, including aluminum, copper, steel and stainless steel (nickel), and other purchased component inventory including, but not limited to, increases in the underlying material cost based upon the London Metal Exchange and related premiums or fabrication costs. These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand. This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whether through our quotation process or through contract provisions for prospective price adjustments, as well as the inherent lag in timing of such contract provisions; and • The impact of current and future environmental laws and regulations on our business and the businesses of our customers, including our ability to take advantage of opportunities to supply alternative new technologies to meet environmental and/or energy standards and objectives. Operational Risks: • The overall health and continually increasing price-down focus of our vehicular customers in light of economic and market-specific factors, and the potential impact on us from any deterioration in the stability or performance of any of our major customers; • The impact of any problems with suppliers meeting our time, quantity, quality and price demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained; • Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offset or otherwise address increasing pricing pressures from competitors and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability; • The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims and delays or inefficiencies resulting from restrictions imposed in response to the COVID-19 pandemic; • The impact of any delays or modifications initiated by major customers with respect to program launches, product applications or requirements; • Our ability to consistently structure our operations in order to develop and maintain a competitive cost base with appropriately skilled and stable labor, while also positioning ourselves geographically, so that we can continue to support our customers with the technical expertise and market-leading products they demand and expect from Modine; • Our ability to effectively and efficiently reduce our cost structure in response to sales volume declines and to complete restructuring activities and realize the anticipated benefits of those activities; • Costs and other effects of the investigation and remediation of environmental contamination; particularly when related to the actions or inactions of others and/or facilities over which we have no control; • Our ability to recruit and maintain talent, including personnel in managerial, leadership and administrative functions, in light of tight global labor markets; • Our ability to protect our proprietary information and intellectual property from theft or attack by internal or external sources; • The impact of any substantial disruption or material breach of our information technology systems, and any related delays, problems or costs; • Increasingly complex and restrictive laws and regulations, including those associated with being a U.S. public company and others present in various jurisdictions in which we operate, and the costs associated with compliance therewith; 39 Table of Contents • Work stoppages or interference at our facilities or those of our major customers and/or suppliers; • The constant and increasing pressures associated with healthcare and associated insurance costs; and • Costs and other effects of litigation, claims, or other obligations. Strategic Risks: • Our ability to successfully complete the pending sale of our liquid-cooled automotive business, including the receipt of governmental and third-party approvals and the risk that the sale will not close because of a failure to satisfy one or more of the closing conditions (including governmental and third-party approvals) on a timely basis or at all, and our ability to successfully exit our other automotive businesses in a manner that is in the best interest of our shareholders; • Our ability to successfully realize anticipated benefits from our increased “industrial” market presence, with our BHVAC and CIS businesses, while maintaining appropriate focus on the market opportunities presented by our vehicular businesses; • Our ability to identify and execute growth and diversification opportunities in order to position us for long-term success; and • The potential impacts from any actions by activist shareholders, including disruption of our business and related costs. Financial Risks: • Our ability to fund our global liquidity requirements efficiently for Modine’s current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy; • The impact of potential increases in interest rates, particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations, and of the continued uncertainty around the utilization of LIBOR or alternative reference rates; • The impact of changes in federal, state or local taxes that could have the effect of increasing our income tax expense; • Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements); • The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and • Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate. Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.