Item 8. Financial Statements and Supplementary Data
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended March 31, 2021, 2020 and 2019
(In millions, except per share amounts)
2021
2020
2019
Net sales
$
1,808.4
$
1,975.5
$
2,212.7
Cost of sales
1,515.0
1,668.0
1,847.2
Gross profit
293.4
307.5
365.5
Selling, general and administrative expenses
210.9
249.6
244.1
Restructuring expenses
13.4
12.2
9.6
Impairment charges
166.8
8.6
0.4
(Gain) loss on sale of assets
-
( 0.8
)
1.7
Operating (loss) income
( 97.7
)
37.9
109.7
Interest expense
( 19.4
)
( 22.7
)
( 24.8
)
Other expense - net
( 2.2
)
( 4.8
)
( 4.1
)
(Loss) earnings before income taxes
( 119.3
)
10.4
80.8
(Provision) benefit for income taxes
( 90.2
)
( 12.4
)
5.1
Net (loss) earnings
( 209.5
)
( 2.0
)
85.9
Net earnings attributable to noncontrolling interest
( 1.2
)
( 0.2
)
( 1.1
)
Net (loss) earnings attributable to Modine
$
( 210.7
)
$
( 2.2
)
$
84.8
Net (loss) earnings per share attributable to Modine shareholders:
Basic
$
( 4.11
)
$
( 0.04
)
$
1.67
Diluted
$
( 4.11
)
$
( 0.04
)
$
1.65
Weighted-average shares outstanding:
Basic
51.3
50.8
50.5
Diluted
51.3
50.8
51.3
The notes to consolidated financial statements are an integral part of these statements.
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MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended March 31, 2021, 2020 and 2019
(In millions)
2021
2020
2019
Net (loss) earnings
$
( 209.5
)
$
( 2.0
)
$
85.9
Other comprehensive income (loss):
Foreign currency translation
30.9
( 19.2
)
( 37.6
)
Defined benefit plans, net of income taxes of $ 10.4 , ($ 8.3 ) and ($ 0.3 ) million
30.1
( 24.6
)
( 1.4
)
Cash flow hedges, net of income taxes of $ 0.6 , ($ 0.5 ) and $ 0.1 million
1.6
( 1.5
)
0.4
Total other comprehensive income (loss)
62.6
( 45.3
)
( 38.6
)
Comprehensive income (loss)
( 146.9
)
( 47.3
)
47.3
Comprehensive (income) loss attributable to noncontrolling interest
( 1.7
)
0.2
( 0.6
)
Comprehensive income (loss) attributable to Modine
$
( 148.6
)
$
( 47.1
)
$
46.7
The notes to consolidated financial statements are an integral part of these statements.
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MODINE MANUFACTURING COMPANY
CONSOLIDATED BALANCE SHEETS
March 31, 2021 and 2020
(In millions, except per share amounts)
2021
2020
ASSETS
Cash and cash equivalents
$
37.8
$
70.9
Trade accounts receivable – net
267.9
292.5
Inventories
195.6
207.4
Assets held for sale
107.6
-
Other current assets
35.9
62.5
Total current assets
644.8
633.3
Property, plant and equipment – net
269.9
448.0
Intangible assets – net
100.6
106.3
Goodwill
170.7
166.1
Deferred income taxes
24.5
104.8
Other noncurrent assets
66.2
77.6
Total assets
$
1,276.7
$
1,536.1
LIABILITIES AND SHAREHOLDERS’ EQUITY
Short-term debt
$
1.4
$
14.8
Long-term debt – current portion
21.9
15.6
Accounts payable
233.9
227.4
Accrued compensation and employee benefits
66.5
65.0
Liabilities held for sale
103.3
-
Other current liabilities
42.2
49.2
Total current liabilities
469.2
372.0
Long-term debt
311.2
452.0
Deferred income taxes
5.9
8.1
Pensions
58.6
130.9
Other noncurrent liabilities
75.7
79.5
Total liabilities
920.6
1,042.5
Commitments and contingencies (see Note 20)
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 54.3 million and 53.4 million shares
33.9
33.3
Additional paid-in capital
255.0
245.1
Retained earnings
259.2
469.9
Accumulated other comprehensive loss
( 161.2
)
( 223.3
)
Treasury stock, at cost, 2.7 million and 2.5 million shares
( 38.2
)
( 37.1
)
Total Modine shareholders’ equity
348.7
487.9
Noncontrolling interest
7.4
5.7
Total equity
356.1
493.6
Total liabilities and equity
$
1,276.7
$
1,536.1
The notes to consolidated financial statements are an integral part of these statements.
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MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended March 31, 2021, 2020 and 2019
(In millions)
2021
2020
2019
Cash flows from operating activities:
Net (loss) earnings
$
( 209.5
)
$
( 2.0
)
$
85.9
Adjustments to reconcile net (loss) earnings to net cash provided by operating activities:
Depreciation and amortization
68.6
77.1
76.9
Impairment charges
166.8
8.6
0.4
(Gain) loss on sale of assets
-
( 0.8
)
1.7
Stock-based compensation expense
6.3
6.6
7.9
Deferred income taxes
67.9
1.0
( 4.4
)
Other – net
6.3
5.6
5.3
Changes in operating assets and liabilities:
Trade accounts receivable
( 17.1
)
36.6
( 15.3
)
Inventories
( 5.0
)
( 12.0
)
( 22.0
)
Accounts payable
44.0
( 37.7
)
16.6
Accrued compensation and employee benefits
15.7
( 15.2
)
( 10.1
)
Other assets
27.5
14.7
( 11.8
)
Other liabilities
( 21.7
)
( 24.6
)
( 27.8
)
Net cash provided by operating activities
149.8
57.9
103.3
Cash flows from investing activities:
Expenditures for property, plant and equipment
( 32.7
)
( 71.3
)
( 73.9
)
Proceeds from dispositions of assets
0.7
6.2
0.3
Proceeds from sale of investment in affiliate
-
3.8
-
Proceeds from maturities of short-term investments
3.4
4.1
4.9
Purchases of short-term investments
( 3.6
)
( 3.3
)
( 3.8
)
Other – net
0.9
-
( 0.3
)
Net cash used for investing activities
( 31.3
)
( 60.5
)
( 72.8
)
Cash flows from financing activities:
Borrowings of debt
32.7
672.0
221.3
Repayments of debt
( 183.6
)
( 630.3
)
( 241.9
)
Borrowings on bank overdraft facilities – net
3.6
1.2
( 0.1
)
Dividend paid to noncontrolling interest
-
( 1.3
)
( 1.8
)
Purchase of treasury stock under share repurchase program
-
( 2.4
)
( 0.6
)
Financing fees paid
( 0.8
)
( 2.8
)
-
Other – net
3.0
( 3.1
)
( 2.8
)
Net cash (used for) provided by financing activities
( 145.1
)
33.3
( 25.9
)
Effect of exchange rate changes on cash
1.4
( 1.6
)
( 2.7
)
Net (decrease) increase in cash, cash equivalents, restricted cash and cash held for sale
( 25.2
)
29.1
1.9
Cash, cash equivalents, restricted cash and cash held for sale - beginning of year
71.3
42.2
40.3
Cash, cash equivalents, restricted cash and cash held for sale - end of year
$
46.1
$
71.3
$
42.2
The notes to consolidated financial statements are an integral part of these statements.
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MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the years ended March 31, 2021, 2020 and 2019
(In millions)
Common stock
Additional
paid-in
Retained
Accumulated other
Treasury
stock,
Non-controlling
Shares
Amount
capital
earnings
comprehensive loss
at cost
interest
Total
Balance, March 31, 2018
52.3
$
32.7
$
229.9
$
394.9
$
( 140.3
)
$
( 27.1
)
$
8.4
$
498.5
Adoption of new accounting guidance (Note 1)
-
-
-
( 7.6
)
-
-
-
( 7.6
)
Net earnings
-
-
-
84.8
-
-
1.1
85.9
Other comprehensive loss
-
-
-
-
( 38.1
)
-
( 0.5
)
( 38.6
)
Stock options and awards
0.5
0.3
0.8
-
-
-
-
1.1
Purchase of treasury stock
-
-
-
-
-
( 4.3
)
-
( 4.3
)
Stock-based compensation expense
-
-
7.9
-
-
-
-
7.9
Dividend paid to noncontrolling interest
-
-
-
-
-
-
( 1.8
)
( 1.8
)
Balance, March 31, 2019
52.8
33.0
238.6
472.1
( 178.4
)
( 31.4
)
7.2
541.1
Net (loss) earnings
-
-
-
( 2.2
)
-
-
0.2
( 2.0
)
Other comprehensive loss
-
-
-
-
( 44.9
)
-
( 0.4
)
( 45.3
)
Stock options and awards
0.6
0.3
( 0.1
)
-
-
-
-
0.2
Purchase of treasury stock
-
-
-
-
-
( 5.7
)
-
( 5.7
)
Stock-based compensation expense
-
-
6.6
-
-
-
-
6.6
Dividend paid to noncontrolling interest
-
-
-
-
-
-
( 1.3
)
( 1.3
)
Balance, March 31, 2020
53.4
33.3
245.1
469.9
( 223.3
)
( 37.1
)
5.7
493.6
Net (loss) earnings
-
-
-
( 210.7
)
-
-
1.2
( 209.5
)
Other comprehensive income
-
-
-
-
62.1
-
0.5
62.6
Stock options and awards
0.9
0.6
3.6
-
-
-
-
4.2
Purchase of treasury stock
-
-
-
-
-
( 1.1
)
-
( 1.1
)
Stock-based compensation expense
-
-
6.3
-
-
-
-
6.3
Balance, March 31, 2021
54.3
$
33.9
$
255.0
$
259.2
$
( 161.2
)
$
( 38.2
)
$
7.4
$
356.1
The notes to consolidated financial statements are an integral part of these statements.
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 1: Significant Accounting Policies
Nature of Operations
Modine Manufacturing Company (“Modine” or the “Company”) specializes in providing innovative thermal management solutions to diversified global markets and customers. The Company is a global leader in thermal management technology and solutions for sale into a wide array of commercial, industrial, and building heating, ventilating, air conditioning, and refrigeration (“HVAC&R”) markets. In addition, the Company is a leading provider of engineered heat transfer systems and high-quality heat transfer components for use in on- and off-highway original equipment manufacturer (“OEM”) vehicular applications. The Company’s primary product groups include i) heating, ventilation and air conditioning; ii) coils, coolers, and coatings; and iii) powertrain cooling and engine cooling.
COVID -19
In March 2020 , the World Health Organization declared the outbreak of the novel coronavirus, COVID-19 , a pandemic. See Note 20 for additional information regarding the risks and uncertainties to our business resulting from this global pandemic.
Disposition of Air-cooled Automotive Business
On February 19, 2021 , the Company signed a definitive agreement to sell its air-cooled automotive business to Schmid Metall GmbH. In connection with this sale, which closed on April 30, 2021 , the Company classified the air-cooled automotive business as held for sale as of March 31, 2021 . Accordingly, the Company has reported the assets and liabilities of this business as held for sale on the March 31, 2021 consolidated balance sheet. See Note 2 for additional information.
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, has reported the assets and liabilities of this business as held for sale on the March 31, 2021 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 and transition to his successor, the Company recorded costs totaling $ 6.7 million during fiscal 2021 . 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 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 fiscal 2020 , the Company completed the sale of its 50 percent ownership interest in NEX for a selling price of $ 3.8 million. 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. Prior to its sale, the Company accounted for its investment in NEX using the equity method and reported its equity in earnings from NEX within other income and expense in the consolidated statements of operations. The Company’s share of NEX’s earnings for fiscal 2020 and 2019 was $ 0.1 million and $ 0.7 million , respectively.
Sale of AIAC Air Conditioning South Africa (Pty) Ltd.
During fiscal 2019 , the Company completed the sale of its AIAC Air Conditioning South Africa (Pty) Ltd. business, which was reported within the Building HVAC Systems segment, for a selling price of $ 0.5 million . As a result of this transaction, the Company recorded a loss of $ 1.7 million , which included the write-off of accumulated foreign currency translation losses of $ 0.8 million . The Company reported this loss within the loss on sale of assets line on the consolidated statements of operations. Annual net sales attributable to this disposed business were less than $ 2.0 million .
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Basis of Presentation
The Company prepares its consolidated financial statements in conformity with generally accepted accounting principles (“GAAP”) in the United States. These principles require management to make certain estimates and assumptions in determining assets, liabilities, revenue, expenses and related disclosures. Actual amounts could differ materially from those estimates.
Consolidation Principles
The consolidated financial statements include the accounts of Modine Manufacturing Company and its majority-owned or Modine-controlled subsidiaries. The Company eliminates intercompany transactions and balances in consolidation.
Revenue Recognition
The Company recognizes revenue based upon consideration specified in a contract and as it satisfies performance obligations by transferring control over its products to its customers, which may be at a point in time or over time. The majority of the Company’s revenue is recognized at a point in time, based upon shipment terms. A portion of the Company’s revenue is recognized over time, based upon estimated progress towards satisfaction of the contractual performance obligations. See Note 3 for additional information.
Shipping and Handling Costs
The Company records shipping and handling costs incurred upon the shipment of products to its customers in cost of sales, and related amounts billed to these customers in net sales.
Trade Accounts Receivable
The Company records trade receivables at the invoiced amount. Trade receivables do not bear interest if paid according to the original terms. The Company maintains an allowance for credit losses, representing its estimate of expected losses associated with its trade accounts receivable. The Company bases its estimate using historical loss experience and considers the aging of the receivables and risks specific to customers where appropriate. At March 31, 2021 and 2020, the allowance for credit losses was $ 1.3 million and $ 1.9 million, respectively.
The Company enters into supply chain financing programs from time to time to sell accounts receivable, without recourse, to third-party financial institutions. Sales of accounts receivable are reflected as a reduction of accounts receivable on the consolidated balance sheets and the proceeds are included in cash flows from operating activities in the consolidated statements of cash flows. During fiscal 2021, 2020, and 2019, the Company sold $ 88.7 million, $ 75.4 million, and $ 85.1 million, respectively, of accounts receivable to accelerate cash receipts. During fiscal 2021, 2020, and 2019, the Company recorded a loss on the sale of accounts receivable of $ 0.2 million, $ 0.5 million, and $ 0.6 million, respectively, in the consolidated statements of operations.
Warranty
The Company provides product warranties for specific product lines and accrues for estimated future warranty costs in the period in which the sale is recorded. The Company records warranty expense, within cost of sales, based upon historical and current claims data or based upon estimated future claims. Accrual balances, which are recorded within other current liabilities, are monitored and adjusted if it is probable that expected claims will differ from previous estimates. See Note 15 for additional information.
T ooling
The Company accounts for production tooling costs as a component of property, plant and equipment when it owns title to the tooling and amortizes the capitalized cost to cost of sales over the estimated life of the asset, which is generally three years . At March 31, 2021 and 2020 , Company-owned tooling totaled $ 14.1 million and $ 23.3 million , respectively. The decrease in Company-owned tooling during fiscal 2021 was primarily due to asset impairment charges recorded within the Automotive segment upon classification of the liquid- and air-cooled automotive businesses as held for sale. See Note 2 for additional information.
In certain instances, tooling is customer-owned. At the time customer-owned tooling is completed and customer acceptance is obtained, the Company records tooling revenue and related production costs within net sales and cost of sales, respectively, in the consolidated statements of operations. If the customer has agreed to reimburse the Company, unbilled customer-owned tooling costs are recorded as a receivable within other current assets. No significant arrangements exist where customer-owned tooling costs were not accompanied by guaranteed reimbursement. At March 31, 2021 and 2020 , customer-owned tooling receivables totaled $ 8.1 million and $ 7.8 million , respectively. Of the $ 8.1 million , $ 5.6 million was included within assets held for sale on the March 31, 2021 consolidated balance sheet.
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Stock-based Compensation
The Company recognizes stock-based compensation using the fair value method. Accordingly, compensation expense for stock options, restricted stock and performance-based stock awards is calculated based upon the fair value of the instruments at the time of grant, and is recognized as expense over the respective vesting periods. See Note 5 for additional information.
Research and Development
The Company expenses research and development costs as incurred within SG&A expenses. During fiscal 2021, 2020, and 2019, research and development costs totaled $ 46.3 million, $ 59.5 million, and $ 69.8 million, respectively.
Translation of Foreign Currencies
The Company translates assets and liabilities of foreign subsidiaries and equity investments into U.S. dollars at the period-end exchange rates, and translates income and expense items at the monthly average exchange rate for the period in which the transactions occur. The Company reports resulting translation adjustments within accumulated other comprehensive income (loss) within shareholders’ equity. The Company includes foreign currency transaction gains or losses in the statement of operations within other income and expense.
Derivative Instruments
The Company enters into derivative financial instruments from time to time to manage certain financial risks. The Company enters into forward contracts to reduce exposure to changing future purchase prices for aluminum and copper and into foreign currency exchange contracts to hedge specific foreign currency-denominated assets and liabilities as well as forecasted transactions. The Company designates certain derivative financial instruments as cash flow hedges for accounting purposes. These instruments are used to manage financial risks and are not speculative. See Note 19 for additional information.
Income Taxes
The Company determines deferred tax assets and liabilities based upon the difference between the amounts reported in the financial statements and the tax basis of assets and liabilities, using enacted tax rates in effect in the years in which the differences are expected to reverse. The Company establishes a valuation allowance if it is more likely than not that a deferred tax asset, or portion thereof, will not be realized. The Company records the tax effects of global intangible low-taxed income (“GILTI”) as a period expense in the applicable tax year. The Company uses the portfolio approach for releasing income tax effects from accumulated other comprehensive income (loss). See Note 8 for additional information.
Earnings per Share
The Company calculates basic earnings per share based upon the weighted-average number of common shares outstanding during the period, while the calculation of diluted earnings per share includes the dilutive effect of potential common shares outstanding during the period. The calculation of diluted earnings per share excludes potential common shares if their inclusion would have an anti-dilutive effect. In prior years, certain restricted stock awards provided recipients with a non-forfeitable right to receive dividends declared by the Company. These restricted stock awards have been included in computing earnings per share pursuant to the two-class method. See Note 9 for additional information.
Cash and Cash Equivalents
The Company considers all highly-liquid investments with original maturities of three months or less to be cash equivalents. Under the Company’s cash management system, cash balances at certain banks are funded when checks are presented for payment. To the extent checks issued, but not yet presented for payment, exceed the balance on hand at the specific bank against which they were written, the Company reports the amount of those checks within accounts payable in the consolidated balance sheets.
Short-term Investments
The Company invests in time deposits with original maturities of more than three months but not more than one year. The Company records these short-term investments at cost, which approximates fair value, within other current assets in the consolidated balance sheets. As of March 31, 2021 and 2020, the Company’s short-term investments totaled $ 3.7 million and $ 3.2 million, respectively.
Inventories
The Company values inventories using a first-in, first-out or weighted-average basis, at the lower of cost and net realizable value.
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Property, Plant and Equipment
The Company records property, plant and equipment at cost. For financial reporting purposes, the Company computes depreciation using the straight-line method over the expected useful lives of the assets. The Company expenses maintenance and repair costs as incurred. The Company capitalizes costs of improvements. Upon the sale or other disposition of an asset, the Company removes the cost and related accumulated depreciation from the accounts and includes the gain or loss in the consolidated statements of operations. Capital expenditures of $ 7.9 million , $ 8.7 million and $ 17.9 million were accrued at March 31, 2021, 2020 and 2019 , respectively. Of the $ 7.9 million , $ 2.7 million was included within liabilities held for sale on the March 31, 2021 consolidated balance sheet. All of the other accrued capital expenditure amounts are presented within accounts payable.
Leases
The Company’s most significant leases represent leases of real estate, such as manufacturing facilities, warehouses, and office buildings. The Company also leases certain manufacturing and IT equipment and vehicles. The Company recognizes right-of-use (“ROU”) assets and lease liabilities at the commencement date, based upon the present value of lease payments over the lease term. See Note 16 for additional information.
Goodwill
The Company does not amortize goodwill; rather, it tests for impairment annually unless conditions exist that would require a more frequent evaluation. The Company performs an assessment of the fair value of its reporting units for goodwill impairment testing based upon, among other things, the present value of expected future cash flows. The Company performed its goodwill impairment test as of March 31, 2021 and determined the fair value of each of its reporting units exceeded the respective book value. See Note 14 for additional information.
I mpairment of Held and Used Long-lived Assets
The Company reviews held and used long-lived assets, including property, plant and equipment and intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be fully recoverable. In these instances, the Company compares the undiscounted future cash flows expected to be generated from the asset with its carrying value. If the asset’s carrying value exceeds expected future cash flows, the Company measures and records an impairment loss, if any, as the amount by which the carrying value of the asset exceeds its fair value. The Company estimates fair value using a variety of valuation techniques, including discounted cash flows, market values and comparison values for similar assets.
Assets Held for Sale
The Company considers assets to be held for sale when management approves and commits to a formal plan to actively market the asset for sale at a reasonable price in relation to its fair value, the asset is available for immediate sale in its present condition, an active program to locate a buyer and other actions required to complete the sale have been initiated, the sale of the asset is expected to be completed within one year and it is unlikely that significant changes will be made to the plan. Upon designation as held for sale, the Company records the carrying value of the assets at the lower of its carrying value or its estimated fair value, less costs to sell. The Company ceases to record depreciation expense at the time of designation as held for sale. During fiscal 2021 , the Company classified the liquid- and air-cooled automotive businesses as held for sale and recorded impairment charges totaling $ 166.8 million within the Automotive segment. See Note 2 for additional information.
Deferred Compensation Trusts
The Company maintains deferred compensation trusts to fund future obligations under its non-qualified deferred compensation plans. The trusts’ investments in third-party debt and equity securities are presented within other noncurrent assets in the consolidated balance sheets.
Self-insurance Reserves
The Company retains a portion of the financial risk for certain insurance coverage, including property, general liability, workers compensation, and employee healthcare, and therefore maintains reserves that estimate the impact of unreported and under-reported claims that fall below various stop-loss limits and deductibles under its insurance policies. The Company maintains reserves for the estimated settlement cost of known claims, as well as estimates of incurred but not reported claims. The Company charges costs of claims, including the impact of changes in reserves due to claim experience and severity, to operations. The Company reviews and updates the amount of its insurance-related reserves on a quarterly basis.
Environmental Liabilities
The Company records liabilities for environmental assessments and remediation activities in the period in which its responsibility is probable and the costs can be reasonably estimated. The Company records environmental indemnification assets from third parties, including prior owners, when recovery is probable. To the extent that the required remediation procedures change, or additional contamination is identified, the Company’s estimated environmental liabilities may also change. See Note 20 for additional information.
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
S upplemental Cash Flow Information
Years ended March 31,
2021
2020
2019
Interest paid
$
17.9
$
21.4
$
22.3
Income taxes paid
19.7
18.8
22.2
See Note 16 for supplemental cash flow information related to the Company’s leases.
New Accounting Guidance Adopted in Fiscal 2021
Credit Losses
In June 2016 , the Financial Accounting Standards Board (“FASB”) 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.
New Accounting Guidance Adopted in Fiscal 2020
Leases
In February 2016 , the FASB issued new comprehensive lease accounting guidance that requires balance sheet recognition for most leases. The Company adopted this guidance effective April 1, 2019 using a modified-retrospective transition method, under which it elected not to adjust comparative periods. The Company elected the package of practical expedients permitted under the new guidance, and, as a result, the Company did not reassess the classification of existing leases or initial direct costs thereof, or whether existing contracts contain leases. In addition, the Company elected accounting policies to not record short-term leases on the balance sheet and to not separate lease and non-lease components. The Company did not elect the hindsight practical expedient.
Upon adoption of this new guidance on April 1, 2019, the Company recognized right-of-use assets for operating leases totaling $ 61.3 million and corresponding current and noncurrent operating lease liabilities of $ 12.4 million and $ 48.9 million, respectively. In addition, the Company assessed two existing build-to-suit arrangements, for which it had recorded property, plant and equipment and long-term debt on its consolidated balance sheet as of March 31, 2019. The Company determined these arrangements represent operating leases under the new accounting guidance. As a result, the Company derecognized the previously-recorded balances and recorded $ 5.2 million of operating lease right-of-use assets and corresponding lease liabilities. As a result of adopting the new guidance, there was not a significant impact on the Company’s accounting for its previously-recorded capital leases, which are now classified as finance leases under the new guidance. In addition, there was no impact to retained earnings. Also, the adoption did not have a material impact on the Company’s consolidated statement of operations or consolidated statement of cash flows. See Note 16 for additional information regarding the Company’s leases.
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
In February 2018, the FASB issued new guidance related to the accounting for certain stranded income tax effects in accumulated other comprehensive income (loss) resulting from tax reform legislation that was enacted in the U.S. in December 2017. This guidance provided companies the option to reclassify stranded income tax effects to retained earnings. The Company adopted this guidance as of April 1, 2019 and chose not to reclassify stranded income tax effects; therefore, the adoption of this guidance did not impact the Company’s consolidated financial statements.
New Accounting Guidance Adopted in Fiscal 2019
Revenue Recognition
In May 2014 , the FASB issued new guidance that outlines a comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The core principle of the new guidance is that companies are to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company adopted this new guidance for fiscal 2019 using the modified-retrospective transition method. As a result of its adoption of the new guidance, the Company recorded an increase of $ 0.7 million to retained earnings as of April 1, 2018 , along with related balance sheet reclassifications. See Note 3 for additional information regarding revenue recognition.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Income Taxes: Intra-Entity Transfers of Assets Other than Inventory
In October 2016, the FASB issued new guidance related to income tax accounting for intercompany asset transfers. This new guidance requires companies to recognize the income tax effects of intercompany asset transfers other than inventory at the transaction date. The income tax effects of these transfers were previously deferred. The Company adopted this new guidance for fiscal 2019 using the modified-retrospective transition method. Upon adoption, the Company recorded a decrease to retained earnings of $ 8.3 million as of April 1, 2018.
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, subject to the receipt of governmental and third-party approvals an d satisfaction of other closing conditions. As of March 31, 2021, the Company anticipated the transaction would close during the first quarter of fiscal 2022. However, the Company and the buyer are currently working together through the regulatory approval process. At this time, the Company is not able to estimate the ultimate impact of the regulatory approval process or the clos ing date for this transaction. 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 evaluated this disposal group and determined that it does not qualify as a discontinued operation for reporting under U.S. GAAP. As part of its discontinued operations assessment, 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 Heavy Duty Equipment and Automotive segments. In addition, the Company will continue to operate in the same major geographical areas as it does today.
On February 19, 2021, the Company signed a definitive agreement to sell its air-cooled automotive business to Schmid Metall GmbH. This transaction closed on April 30, 2021. Based upon its preliminary accounting, the Company expects to record a loss on sale of approximately $ 6.0 million during the first quarter of fiscal 2022. The estimated loss on sale includes adjustments for cash, debt, and working capital, as defined within the definitive agreement. The Company evaluated this transaction in relation to the pending sale of the liquid-cooled automotive business, described above, and concluded each represents a separate disposal group for purposes of assessing discontinued operations. The Company determined that the air-cooled disposal group did not qualify as a discontinued operation.
The Company reports financial results of both the liquid- and air-cooled automotive businesses within its Automotive segment. Once the Company entered into the sale agreements with Board of Director approval, it classified the businesses as held for sale beginning on November 2, 2020 and February 19, 2021, respectively, and ceased depreciating the long-lived assets within the disposal groups.
Upon classification as held for sale, the Company compared each disposal group’s carrying value with its fair value, less costs to sell. Based upon the selling prices for each transaction, the Company estimated implied losses in excess of the respective carrying value of each disposal group’s long-lived assets. The disposal groups’ long-lived assets consist entirely of property, plant and equipment and right-of-use lease assets. As a result, the Company recorded non-cash impairment charges totaling $ 165.1 million during fiscal 2021 to reduce the net carrying value of the disposal groups’ long-lived assets to zero . The impairment charges related to the liquid- and air-cooled automotive businesses totaled $ 138.3 million and $ 26.8 million, respectively. Also during fiscal 2021, the Company recorded an impairment charge of $ 1.7 million within the Automotive segment related to equipment that will not convey as part of the sale transactions 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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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The Company classified the assets and liabilities of the liquid- and air-cooled automotive businesses as held for sale on the March 31, 2021 consolidated balance sheet. The major classes of assets and liabilities held for sale were as follows:
March 31, 2021
ASSETS
Cash and cash equivalents
$
8.0
Trade accounts receivables - net
54.4
Inventories
24.7
Other current assets
12.8
Property, plant and equipment - net
164.0
Other noncurrent assets
8.8
Impairment of carrying value
( 165.1
)
Total assets held for sale
$
107.6
LIABILITIES
Short-term debt
$
5.0
Accounts payable
46.3
Accrued compensation and employee benefits
15.5
Other current liabilities
12.2
Pensions
17.8
Other noncurrent liabilities
6.5
Total liabilities held for sale
$
103.3
The Company will reassess the liquid-cooled disposal group’s fair value less costs to sell at each reporting period that it is held for sale until the transaction is completed. The Company expects to record a loss on sale of approximately $ 20.0 million to $ 30.0 million upon transaction completion. The loss on sale recorded will be impacted by changes in working capital, costs to sell, net actuarial losses in accumulated other comprehensive loss related to the disposal group’s pension plans, and cumulative translation adjustments. It is possible that the loss on sale recorded could differ materially from the Company’s estimate
Note 3: Revenue Recognition
The Company generates revenue from selling innovative thermal management products and solutions to diversified global markets and customers. The Company recognizes revenue based upon consideration specified in a contract and as it satisfies performance obligations by transferring control over its products to its customers, which may be at a point in time or over time. The majority of the Company’s revenue is recognized at a point in time, based upon shipment terms. The Company records an allowance for credit losses and accrues for estimated warranty costs at the time of sale. These estimates are based upon historical experience, current business trends, and current economic conditions. The Company accounts for shipping and handling activities as fulfilment costs rather than separate performance obligations, and records shipping and handling costs in cost of sales and related amounts billed to customers in net sales. The Company establishes payment terms with its customers based upon industry and regional practices, which typically do not exceed 90 days . As the Company expects to receive payment from its customers within one year from the time of sale, it disregards the effects of the time value of money in its determination of the transaction price. The Company has not disclosed the value of unsatisfied performance obligations because the revenue associated with customer contracts for which the original expected performance period is greater than one year is immaterial.
The following is a description of the Company’s principal revenue-generating activities:
Building HVAC Systems (“BHVAC”)
The BHVAC segment principally generates revenue from providing a variety of heating, ventilating, and air conditioning products, primarily for commercial buildings and data centers in North America and the U.K., as well as mainland Europe and the Middle East.
Heating products are manufactured in the U.S. and are largely sold to independent distributors, who in turn market the heating products to end customers. Because these products are sold to many different customers without contractual or practical limitations, the BHVAC segment recognizes revenue at the time control is transferred to the customer, generally the independent distributor, based upon shipping terms, which is generally upon shipment.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Ventilation and air conditioning products are highly-specified to a customer’s needs; however, the underlying sales contracts do not provide the Company with an enforceable right to payment for performance completed to date. As a result, the BHVAC segment recognizes revenue for these products at the time control is transferred to the customer based upon shipping terms, which is generally upon shipment.
Commercial and Industrial Solutions (“CIS”)
The CIS segment principally generates revenue from providing thermal management products, including customized coils and coolers, to the heating, ventilating, air conditioning, and refrigeration (“HVAC&R”) markets in North America, Europe, and Asia. In addition, the segment applies corrosion protection solutions, which are referred to as coatings, to heat-transfer equipment.
For the sale of coils and coolers, individual customer purchase orders generally represent the Company’s contract with its customers. With the exception of a small number of customers, the applicable customer contracts do not provide the Company with an enforceable right to payment for performance completed to date. As a result, the CIS segment recognizes revenue for its sale of coils and coolers primarily at the time control is transferred to the customer based upon shipping terms, which is generally upon shipment.
For both sales to customers whose contract cancellation terms provide an enforceable right to payment and sales from the coatings businesses, in which the customers control the heat-transfer equipment being enhanced by the coating application, the CIS segment recognizes revenue over time based upon its estimated progress towards satisfaction of the performance obligations. The segment measures progress by evaluating the production status towards completion of ordered products or services not yet shipped to its customers.
Heavy Duty Equipment (“HDE”) and Automotive
The HDE and Automotive segments principally generate revenue from providing engineered heat transfer systems and components for use in on- and off-highway original equipment. These segments provide powertrain and engine cooling products, including, but not limited to, radiators, charge air coolers, condensers, oil coolers, EGR coolers, and fuel coolers, to original equipment manufacturers (“OEMs”) in the commercial vehicle, off-highway and automotive and light vehicle markets in the Americas, Europe, and Asia regions. In addition, the segments design customer-owned tooling for OEMs. The HDE segment also serves Brazil’s commercial vehicle and automotive aftermarkets.
While the segments provide customized production and service parts to customers under multi-year programs, these programs typically do not contain contractually-guaranteed volumes to be purchased by the customer. As a result, individual purchase orders typically represent the quantities ordered by the customer. With the exception of a small number of HDE customers, the terms within the customer agreement, purchase order, or customer-owned tooling contract do not provide the Company with an enforceable right to payment for performance completed to date. As a result, both the HDE and Automotive segments recognize revenue primarily at the time control is transferred to the customer based upon shipping terms, which is generally upon shipment.
In regard to the HDE customers with contractual cancellation terms that provide an enforceable right to payment for performance completed to date, the Company recognizes revenue over time based upon its estimated progress towards satisfaction of the performance obligations. The HDE segment measures progress by evaluating the production status of ordered products not yet shipped to the customer.
For certain customer programs, the Company agrees to provide annual price reductions based upon contract terms. For these scheduled price reductions, the Company evaluates whether the provisions represent a material right to the customer, and if so, defers associated revenue as a result.
At times, the Company makes up-front incentive payments to certain customers related to future sales under multi-year programs. The Company capitalizes these incentive payments, which it expects to recover through future sales, and amortizes the assets as a reduction to revenue when the related products are sold to customers.
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Disaggregation of Revenue
The tables below present revenue to external customers for each of the Company’s business segments by primary end market, geographic location, and based upon the timing of revenue recognition:
Year ended March 31, 2021
BHVAC
CIS
HDE
Automotive
Segment
Total
Primary end market:
Commercial HVAC&R
$
181.6
$
420.6
$
-
$
-
$
602.2
Data center cooling
58.7
47.3
-
-
106.0
Industrial cooling
-
55.4
-
-
55.4
Commercial vehicle
-
-
250.4
14.4
264.8
Off-highway
-
-
260.7
3.4
264.1
Automotive and light vehicle
-
-
97.9
357.8
455.7
Other
0.3
8.7
73.1
22.7
104.8
Net sales
$
240.6
$
532.0
$
682.1
$
398.3
$
1,853.0
Geographic location:
Americas
$
144.2
$
267.7
$
388.2
$
51.0
$
851.1
Europe
96.4
219.8
133.2
282.0
731.4
Asia
-
44.5
160.7
65.3
270.5
Net sales
$
240.6
$
532.0
$
682.1
$
398.3
$
1,853.0
Timing of revenue recognition:
Products transferred at a point in time
$
240.6
$
486.3
$
655.2
$
398.3
$
1,780.4
Products transferred over time
-
45.7
26.9
-
72.6
Net sales
$
240.6
$
532.0
$
682.1
$
398.3
$
1,853.0
Year ended March 31, 2020
BHVAC
CIS
HDE
Automotive
Segment
Total
Primary end market:
Commercial HVAC&R
$
176.6
$
463.1
$
-
$
-
$
639.7
Data center cooling
42.7
107.5
-
-
150.2
Industrial cooling
-
43.5
-
-
43.5
Commercial vehicle
-
-
302.1
21.6
323.7
Off-highway
-
-
240.8
13.1
253.9
Automotive and light vehicle
-
-
108.4
400.4
508.8
Other
1.8
9.8
94.6
9.8
116.0
Net sales
$
221.1
$
623.9
$
745.9
$
444.9
$
2,035.8
Geographic location:
Americas
$
139.1
$
345.9
$
484.5
$
70.3
$
1,039.8
Europe
82.0
232.6
141.2
321.0
776.8
Asia
-
45.4
120.2
53.6
219.2
Net sales
$
221.1
$
623.9
$
745.9
$
444.9
$
2,035.8
Timing of revenue recognition:
Products transferred at a point in time
$
221.1
$
518.2
$
715.1
$
444.9
$
1,899.3
Products transferred over time
-
105.7
30.8
-
136.5
Net sales
$
221.1
$
623.9
$
745.9
$
444.9
$
2,035.8
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Year ended March 31, 2019
BHVAC
CIS
HDE
Automotive
Segment
Total
Primary end market:
Commercial HVAC&R
$
167.7
$
506.3
$
-
$
-
$
674.0
Data center cooling
41.3
145.7
-
-
187.0
Industrial cooling
-
47.8
-
-
47.8
Commercial vehicle
-
-
352.6
35.0
387.6
Off-highway
-
-
298.1
16.0
314.1
Automotive and light vehicle
-
-
116.7
426.1
542.8
Other
3.4
7.8
104.9
11.8
127.9
Net sales
$
212.4
$
707.6
$
872.3
$
488.9
$
2,281.2
Geographic location:
Americas
$
124.9
$
413.6
$
543.0
$
71.0
$
1,152.5
Europe
87.5
244.8
177.4
369.4
879.1
Asia
-
49.2
151.9
48.5
249.6
Net sales
$
212.4
$
707.6
$
872.3
$
488.9
$
2,281.2
Timing of revenue recognition:
Products transferred at a point in time
$
212.4
$
571.1
$
829.1
$
488.9
$
2,101.5
Products transferred over time
-
136.5
43.2
-
179.7
Net sales
$
212.4
$
707.6
$
872.3
$
488.9
$
2,281.2
Contract Balances
Contract assets and contract liabilities from contracts with customers were as follows:
March 31, 2021
March 31, 2020
Contract assets
$
5.7
$
21.7
Contract liabilities
5.6
5.6
At March 31, 2021, contract assets and contract liabilities exclude amounts classified as held for sale. See Note 2 for additional information.
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 $ 16.0 million decrease in contract assets during fiscal 2021 primarily resulted from a decrease in contract assets for revenue recognized over time and $ 7.1 million of contract assets within the liquid- and air-cooled automotive businesses that have been classified as held for sale on the March 31, 2021 consolidated balance sheet.
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. During fiscal 2021, increases related to customer contracts for which payment was received in advance of the Company’s satisfaction of performance obligations was offset by $ 2.9 million of contract liabilities within the liquid- and air-cooled automotive businesses that have been classified as held for sale on the March 31, 2021 consolidated balance sheet.
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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
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 and liabilities held for sale. The fair value of the Company’s long-term debt is disclosed in Note 17.
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 March 31, 2021 and 2020, the fair values of the investments and obligations for the Company’s deferred compensation plans each totaled $ 2.8 million and $ 3.8 million, respectively. The $ 1.0 million decrease in the fair value of the investments since March 31, 2020 was primarily due to participant withdrawals during fiscal 2021.
Plan assets related to the Company’s pension plans were classified as follows:
March 31, 2021
Level 1
Level 2
Total
Money market investments
$
-
$
2.5
$
2.5
Fixed income securities
-
8.9
8.9
Pooled equity funds
37.3
-
37.3
U.S. government and agency securities
-
14.5
14.5
Other
0.1
1.0
1.1
Fair value excluding investments measured at net asset value
37.4
26.9
64.3
Investments measured at net asset value
119.0
Total fair value
$
183.3
March 31, 2020
Level 1
Level 2
Total
Money market investments
$
-
$
2.4
$
2.4
Fixed income securities
-
8.7
8.7
Pooled equity funds
17.9
-
17.9
U.S. government and agency securities
-
13.1
13.1
Other
0.1
0.7
0.8
Fair value excluding investment measured at net asset value
18.0
24.9
42.9
Investments measured at net asset value
88.2
Total fair value
$
131.1
The Company determined the fair value of money market investments to approximate their net asset values, without discounts for credit quality or liquidity restrictions, and classified them within Level 2 of the valuation hierarchy. The Company determined the fair value of pooled equity funds based upon quoted prices from active markets and classified them within Level 1 of the valuation hierarchy. The Company determined the fair value of fixed income securities and U.S. government and agency securities based upon recent bid prices or the average of recent bid and asking prices when available and, if not available, the Company valued them through matrix pricing models developed by sources considered by management to be reliable. The Company classified these assets within Level 2 of the valuation hierarchy. As of March 31, 2021 and 2020, the Company held no Level 3 assets within its pension plans.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
As a practical expedient, the Company valued certain investments, including pooled equity, fixed income and a real estate fund, using their net asset value (“NAV”) per unit, and therefore, has not classified these investments within the fair value hierarchy. The terms and conditions for redemptions vary for the investments valued at NAV. The real estate and fixed income investment funds may be redeemed quarterly and monthly, respectively, with a 90-day and 60-day notice period, respectively. Other investments valued at NAV do not have significantly-restrictive redemption frequency or notice period requirements. The Company does not intend to sell or otherwise dispose of these investments at prices different than the NAV per unit.
Note 5 : 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’s Board of Directors and the Human Capital and Compensation Committee, as applicable, have discretionary authority to set the terms of the stock-based awards. Grants to employees during fiscal 2021 were issued under the Company’s 2020 Incentive Compensation Plan. In lieu of performance-based stock awards, the Company granted performance cash awards to the LTIP participants in fiscal 2021. At present, the Company accomplishes the fulfillment of equity-based grants through the issuance of new common shares. As of March 31, 2021, approximately 1.7 million shares authorized under the 2020 Incentive Compensation Plan remain available for future grants. Employee participants have the opportunity to deliver back to the Company the number of shares from the vesting of stock awards sufficient to satisfy the individual’s minimum tax withholding obligations. These shares are held as treasury shares. The Company recorded stock-based compensation expense of $ 6.3 million , $ 6.6 million , and $ 7.9 million in fiscal 2021, 2020, and 2019, respectively.
Stock Options
The Company recorded $ 0.9 million , $ 1.3 million , and $ 1.2 million of compensation expense related to stock options in fiscal 2021, 2020, and 2019, respectively. The fair value of stock options that vested during fiscal 2021, 2020, and 2019, was $ 1.3 million , $ 1.2 million , and $ 1.2 million , respectively. As of March 31, 2021, the total compensation expense not yet recognized related to non-vested stock options was $ 1.8 million and the weighted-average period in which the remaining expense is expected to be recognized was 2.8 years.
The Company estimated the fair value of option awards on the date of grant using the Black-Scholes option valuation model and the following assumptions:
Years ended March 31,
2021
2020
2019
Fair value of options
$
3.46
$
5.56
$
7.81
Expected life of awards in years
6.1
6.3
6.3
Risk-free interest rate
0.4
%
2.2
%
2.8
%
Expected volatility of the Company’s stock
54.1
%
39.2
%
39.7
%
Expected dividend yield on the Company’s stock
0.0
%
0.0
%
0.0
%
Stock options expire no later than 10 years after the grant date and have an exercise price equal to the fair market value of Modine’s common stock on the date of grant. The risk-free interest rate was based upon yields of U.S. Treasury zero-coupon issues with a term corresponding to the expected life of the options. The expected volatility assumption was based upon changes in the Company’s historical common stock prices over the same time period as the expected life of the awards. The expected dividend yield is zero, as the Company currently does not anticipate paying dividends over the expected life of the options. The expected lives of the awards are based upon historical patterns and the terms of the options. Outstanding options granted vest 25 percent annually for four years .
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
A summary of stock option activity for fiscal 2021 was as follows:
Shares
Weighted-average
exercise price
Weighted-average
remaining contractual
term (years)
Aggregate
intrinsic value
Outstanding, beginning
1.4
$
12.49
Granted
0.4
6.88
Exercised
( 0.4
)
10.56
Forfeited or expired
( 0.3
)
10.94
Outstanding, ending
1.1
$
11.63
7.1
$
3.9
Exercisable, March 31, 2021
0.5
$
13.80
5.1
$
0.9
The aggregate intrinsic value represents the difference between the closing price of Modine’s common shares on the last trading day of fiscal 2021 over the exercise price of the stock options, multiplied by the number of options outstanding or exercisable. The aggregate intrinsic value is not recorded for financial statement purposes, and this value will change based upon daily changes in the price of Modine’s common shares.
Additional information related to stock options exercised is as follows:
Years ended March 31,
2021
2020
2019
Intrinsic value of stock options exercised
$
1.4
$
0.1
$
0.7
Proceeds from stock options exercised
4.1
0.1
1.1
Restricted Stock
The Company recorded $ 4.3 million, $ 4.5 million, and $ 4.3 million of compensation expense related to restricted stock in fiscal 2021, 2020, and 2019, respectively. The fair value of restricted stock awards that vested during fiscal 2021, 2020, and 2019 was $ 4.5 million, $ 4.4 million, and $ 4.3 million, respectively. At March 31, 2021, the Company had $ 6.1 million of unrecognized compensation expense related to non-vested restricted stock, which it expects to recognize over a weighted-average period of 2.7 years. The Company values restricted stock awards using the closing market price of its common shares on the date of grant. The restricted stock awards granted annually vest 25 percent per year for four years , with the exception of awards to non-employee directors, which fully vest upon grant.
A summary of restricted stock activity for fiscal 2021 was as follows:
Shares
Weighted-average
price
Non-vested balance, beginning
0.5
$
14.48
Granted
0.8
7.53
Vested
( 0.5
)
9.64
Forfeited
( 0.1
)
13.40
Non-vested balance, ending
0.7
$
10.05
Restricted Stock – Performance-Based Shares
The Company recorded $ 1.1 million, $ 0.8 million, and $ 2.4 million of compensation expense related to performance-based stock awards in fiscal 2021, 2020, and 2019, respectively. At March 31, 2021, the Company had $ 0.5 million of unrecognized compensation expense related to non-vested performance-based stock awards, which is expected to be recognized over one year . The Company values performance-based stock awards using the closing market price of its common shares on the date of grant.
Shares are earned under the performance portion of the restricted stock award program based upon the attainment of certain financial goals over a three-year period and are awarded after the end of that three-year performance period, if the performance targets have been achieved. The performance metrics for the performance-based stock awards granted in fiscal 2020 and 2019 are based upon both a target three-year average consolidated cash flow return on invested capital and a target three-year average annual revenue growth at the end of a three-year performance period, commencing with the fiscal year of grant. As noted above, the Company granted performance cash awards in fiscal 2021 in lieu of performance-based stock awards. The performance metrics for these cash awards are the same as the metrics for the fiscal 2020 and 2019 performance-based stock awards.
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 6 : Restructuring Activities
During fiscal 2021, restructuring actions consisted primarily of targeted headcount reductions and plant consolidation activities. The targeted headcount reductions were primarily in Europe within the Automotive segment and in the Americas within the HDE segment. In addition, the Company eliminated the Vice President, CIS and Chief Operating Officer senior executive position and, as a result, recorded $ 1.3 million of severance-related expenses. These headcount reductions support the Company’s objective of reducing operational and SG&A cost structures.
Also 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 $ 3.7 million of severance expenses during fiscal 2021. The Company is also in the process of transferring product lines to its CIS manufacturing facility in Mexico. These plant consolidation activities support the Company’s objective of achieving operational improvements and organizational efficiencies.
During fiscal 2020 and 2019, restructuring actions consisted primarily of targeted headcount reductions and plant consolidation activities. The headcount reductions were primarily in Europe within the Automotive segment and in the Americas within the HDE segment. The plant consolidation activities included transferring product lines to the Company’s CIS manufacturing facility in Mexico.
Restructuring and repositioning expenses were as follows:
Years ended March 31,
2021
2020
2019
Employee severance and related benefits
$
11.7
$
10.2
$
8.7
Other restructuring and repositioning expenses
1.7
2.0
0.9
Total
$
13.4
$
12.2
$
9.6
Other restructuring and repositioning expenses primarily consist of equipment transfer 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:
Years ended March 31,
2021
2020
Beginning balance
$
5.0
$
10.0
Additions
11.7
10.2
Payments
( 10.5
)
( 15.1
)
Reclassified as held for sale
( 2.5
)
-
Effect of exchange rate changes
0.3
( 0.1
)
Ending balance
$
4.0
$
5.0
During fiscal 2021, the Company recorded asset impairment charges totaling $ 166.8 million within its Automotive segment. See Note 2 for additional information.
During fiscal 2020, the Company recorded asset impairment charges totaling $ 7.5 million within its Automotive segment to write down property and equipment assets in Austria and Germany to estimated fair value.
Also during fiscal 2020, the Company recorded a $ 0.6 million impairment charge to reduce the carrying value of the previously-closed CIS Austrian facility to its estimated fair value, less costs to sell. During fiscal 2019, the Company recorded asset impairment charges of $ 0.4 million related to this closed facility.
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 7 : Other Income and Expense
Other income and expense consisted of the following:
Years ended March 31,
2021
2020
2019
Interest income
$
0.5
$
0.4
$
0.4
Foreign currency transactions (a)
0.6
( 2.4
)
( 2.3
)
Net periodic benefit cost (b)
( 3.3
)
( 3.0
)
( 2.9
)
Equity in earnings of non-consolidated affiliate (c)
-
0.2
0.7
Total other expense - net
$
( 2.2
)
$
( 4.8
)
$
( 4.1
)
(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 foreign currency exchange contracts.
(b)
Net periodic benefit cost for the Company’s pension and postretirement plans is exclusive of service cost .
(c)
During fiscal 2020, the Company sold its ownership interest in Nikkei Heat Exchanger Company, Ltd. As a result of the sale, the Company recorded a gain of $ 0.1 million , which is included within the fiscal 2020 amount. See Note 1 for additional information.
Note 8: Income Taxes
The U.S. and foreign components of loss or earnings before income taxes and the provision or benefit for income taxes consisted of the following:
Years ended March 31,
2021
2020
2019
Components of (loss) earnings before income taxes:
United States
$
( 48.7
)
$
( 26.1
)
$
22.4
Foreign
( 70.6
)
36.5
58.4
Total (loss) earnings before income taxes
$
( 119.3
)
$
10.4
$
80.8
Income tax provision (benefit):
Federal:
Current
$
( 0.1
)
$
( 3.4
)
$
( 20.4
)
Deferred
58.3
( 1.7
)
( 4.2
)
State:
Current
0.4
( 0.1
)
0.7
Deferred
9.2
( 2.3
)
1.9
Foreign:
Current
22.0
14.9
19.0
Deferred
0.4
5.0
( 2.1
)
Total income tax provision (benefit)
$
90.2
$
12.4
$
( 5.1
)
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Act. The Tax Act included a new provision designed to tax global intangible low taxed income (“GILTI”) starting in fiscal 2019. The Company elected to record the tax effects of the GILTI provision as a period expense in the applicable tax year. To determine whether its net operating loss carryforward deferred tax assets are expected to be realized, the Company considers the applicable tax law ordering. Based upon this approach, net operating loss carryforwards are deemed to be realizable if they will reduce the expected tax liability when utilized, regardless of whether the 50% GILTI deduction or applicable tax credits may have been available.
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The Company’s accounting policy is to allocate the income tax provision between net earnings and other comprehensive income. The Company applies its accounting for income taxes by tax jurisdiction, and in periods in which there is a loss before income taxes and pre-tax income in other comprehensive income, it first allocates the income tax provision to other comprehensive income, and then records a related tax benefit in the income tax provision.
The reconciliation between the U.S. federal statutory rate and the Company’s effective tax rate was as follows:
Years ended March 31,
2021
2020
2019
Statutory federal tax
21.0
%
21.0
%
21.0
%
State taxes, net of federal benefit
0.9
( 12.0
)
3.6
Taxes on non-U.S. earnings and losses
( 9.1
)
32.9
3.9
Valuation allowances
( 92.9
)
156.9
4.0
Tax credits
2.2
( 36.7
)
( 26.1
)
Compensation
( 1.3
)
4.0
( 0.1
)
Tax rate or law changes
( 0.2
)
3.6
( 12.0
)
Uncertain tax positions, net of settlements
0.1
( 37.9
)
0.4
Notional interest deductions
1.3
( 12.5
)
( 2.5
)
Dividends and taxable foreign inclusions
3.0
( 11.0
)
1.6
Other
( 0.6
)
10.9
( 0.1
)
Effective tax rate
( 75.6
%)
119.2
%
( 6.3
%)
During fiscal 2021, the Company’s effective tax rate was largely driven by both significant impairment charges and income tax charges related to valuation allowances. See Note 2 for information regarding the impairment charges recorded during 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 further described below.
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 analyses during fiscal 2021, 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 to increase the valuation allowance on deferred tax assets in the U.S. ($ 103.3 million) and in certain foreign jurisdictions ($ 13.2 million). The majority of the U.S. tax charge was recorded in the third quarter of fiscal 2021, which established a full valuation on the U.S. deferred tax assets. The Company’s analyses in the third quarter of fiscal 2021 included consideration of the impairment charges recorded 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’s analyses as of December 31, 2020 also considered year-to-date taxable income, which had been negatively impacted by the COVID-19 pandemic and lower sales to data center cooling customers, and 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. Also during fiscal 2021, the Company recorded a net increase of deferred tax asset valuation allowances totaling $ 22.0 million and recorded a $( 9.3 ) million income tax benefit resulting from the allocation of the income tax provision between net earnings and other comprehensive income, in accordance with the Company’s accounting policy described above.
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
During fiscal 2020, the Company recorded net income tax charges totaling $ 2.9 million as a result of legal entity restructuring completed in preparation of a potential sale of the liquid-cooled automotive business and a $ 1.4 million income tax benefit resulting from the recognition of a tax incentive in Italy. Also in fiscal 2020, the Company changed its determination of whether it was more likely than not certain deferred tax assets in the U.S. and in a foreign jurisdiction would be realized and, as a result, adjusted the respective valuation allowances and recorded an income tax charge of $ 8.4 million and an income tax benefit of $ 1.3 million, respectively. In addition, the Company recorded a net increase of deferred tax asset valuation allowances totaling $ 9.2 million and recorded a $ 4.5 million income tax benefit associated with the reduction in unrecognized tax benefits resulting from a lapse in statutes of limitations and settlements.
During fiscal 2019, the Company recorded income tax benefits totaling $ 14.5 million as a result of amending previous-year tax returns to recognize foreign tax credits that were expected to be realized based upon future sources of income and recorded a $( 2.5 ) million income tax benefit related to a manufacturing deduction in the United States. Shortly after the Tax Act was enacted, the SEC issued accounting guidance which provided a one-year measurement period during which a company could complete its accounting for the impacts of the Tax Act. During fiscal 2019, the Company completed its accounting for the Tax Act, which resulted in an income tax benefit totaling $ 7.7 million. The Company utilized its deferred tax attributes against the transition tax and finalized its fiscal 2018 U.S. federal income tax return. As a result, the Company decreased the provisional charge recorded for the reduction in the U.S. federal corporate tax rate by $ 9.3 million, since more deferred tax assets were utilized to offset taxable income at a higher fiscal 2018 U.S. federal corporate tax rate. The Company also decreased the transition tax liability to $ 18.9 million, a reduction of $ 0.1 million. In addition, the Company recorded a charge of $ 1.7 million for a reduction to state deferred tax assets. Also in fiscal 2019, the Company changed its determination of whether it was more likely than not certain deferred tax assets of two separate subsidiaries in a foreign jurisdiction would be realized and, as a result, adjusted the respective valuation allowances and recorded an income tax benefit totaling $ 1.0 million. In addition, the Company recorded a net increase of deferred tax asset valuation allowances totaling $ 4.3 million and recorded a $ 2.2 million income tax benefit associated with the reduction in unrecognized tax benefits resulting from a lapse in statutes of limitations.
The Company has recorded valuation allowances against its net deferred tax assets to the extent it has determined it is more likely than not that such assets will not be realized in the future. 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. As further discussed in Note 20, the COVID-19 pandemic has resulted in risks and uncertainties for the Company. 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.
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The tax effects of temporary differences that gave rise to deferred tax assets and liabilities were as follows:
March 31,
2021
2020
Deferred tax assets:
Accounts receivable
$
0.3
$
0.3
Inventories
4.5
4.5
Plant and equipment
7.5
4.7
Lease liabilities
14.0
15.7
Pension and employee benefits
24.0
45.1
Net operating and capital losses
52.7
70.2
Credit carryforwards
51.8
56.8
Other, principally accrued liabilities
8.9
8.1
Total gross deferred tax assets
163.7
205.4
Less: valuation allowances
( 90.7
)
( 46.9
)
Net deferred tax assets
73.0
158.5
Deferred tax liabilities:
Plant and equipment
9.8
13.1
Lease assets
13.8
15.6
Goodwill
5.1
4.8
Intangible assets
25.1
26.4
Other
0.6
1.9
Total gross deferred tax liabilities
54.4
61.8
Net deferred tax assets
$
18.6
$
96.7
At March 31, 2021, the net deferred tax assets presented in the table above exclude deferred tax assets and liabilities classified as held for sale. At March 31, 2021, the Company recorded a full valuation allowance for the net deferred tax assets of the held for sale businesses. See Note 2 for additional information regarding the businesses held for sale.
Unrecognized tax benefits were as follows:
Years ended March 31,
2021
2020
Beginning balance
$
9.7
$
13.8
Gross increases - tax positions in prior period
0.1
0.3
Gross decreases - tax positions in prior period
( 0.6
)
( 1.0
)
Gross increases - tax positions in current period
0.9
1.1
Settlements
-
( 2.1
)
Lapse of statute of limitations
( 0.5
)
( 2.4
)
Ending balance
$
9.6
$
9.7
The Company’s liability for unrecognized tax benefits as of March 31, 2021 was $ 9.6 million and, if recognized, $ 1.5 million would have an effective tax rate impact. The Company estimates a $ 2.4 million decrease in unrecognized tax benefits during fiscal 2022 due to lapses in statutes of limitations and settlements. If recognized, these reductions would not have a significant impact on the Company’s effective tax rate.
The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense. During fiscal 2021 and 2020, interest and penalties included within income tax expense were not significant. At March 31, 2021 and 2020, accrued interest and penalties totaled $ 0.6 million and $ 0.5 million, respectively.
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The Company files income tax returns in multiple jurisdictions and is subject to examination by taxing authorities throughout the world. At March 31, 2021, the Company was under income tax examination in a number of jurisdictions. The following tax years remain subject to examination for the Company’s major tax jurisdictions:
Germany
Fiscal 2015 - Fiscal 2020
Italy
Fiscal 2016 - Fiscal 2020
United States
Fiscal 2017 - Fiscal 2020
At March 31, 2021, the Company had federal and state tax credits of $ 60.5 million that, if not utilized against U.S. taxes, will expire between fiscal 2022 and 2041 . The Company also had state and local tax loss carryforwards totaling $ 135.8 million that, if not utilized against state apportioned taxable income, will expire between fiscal 2022 and 2041 . In addition, the Company had tax loss and foreign attribute carryforwards totaling $ 211.4 million in various tax jurisdictions throughout the world. Carryforwards in the U.S. and in certain foreign jurisdictions are offset by valuation allowances. If not utilized against taxable income, $ 6.8 million of these carryforwards will expire between fiscal 2022 and 2034 , and $ 204.6 million, mainly related to the U.S, Germany and Italy, will not expire due to an unlimited carryforward period.
The Company’s practice and intention is to reinvest, with certain insignificant exceptions, the earnings of its non-U.S. subsidiaries outside of the U.S., and therefore, the Company has not recorded foreign withholding taxes or deferred income taxes for these earnings. The Company has estimated the net amount of unrecognized foreign withholding tax and deferred tax liabilities would total approximately $ 10.0 million if the accumulated foreign earnings were distributed; however, the actual tax cost would be dependent on circumstances existing when remittance occurs.
Note 9: Earnings Per Share
The components of basic and diluted earnings per share were as follows:
Years ended March 31,
2021
2020
2019
Basic Earnings Per Share:
Net (loss) earnings attributable to Modine
$
( 210.7
)
$
( 2.2
)
$
84.8
Less: Undistributed earnings attributable to unvested shares
-
-
( 0.4
)
Net (loss) earnings available to Modine shareholders
$
( 210.7
)
$
( 2.2
)
$
84.4
Weighted-average shares outstanding - basic
51.3
50.8
50.5
Net (loss) earnings per share - basic
$
( 4.11
)
$
( 0.04
)
$
1.67
Diluted Earnings Per Share:
Net (loss) earnings attributable to Modine
$
( 210.7
)
$
( 2.2
)
$
84.8
Less: Undistributed earnings attributable to unvested shares
-
-
( 0.2
)
Net (loss) earnings available to Modine shareholders
$
( 210.7
)
$
( 2.2
)
$
84.6
Weighted-average shares outstanding - basic
51.3
50.8
50.5
Effect of dilutive securities
-
-
0.8
Weighted-average shares outstanding - diluted
51.3
50.8
51.3
Net (loss) earnings per share - diluted
$
( 4.11
)
$
( 0.04
)
$
1.65
For fiscal 2021, 2020 and 2019, the calculation of diluted earnings per share excluded 1.0 million, 1.1 million, and 0.4 million stock options, respectively, because they were anti-dilutive. For fiscal 2021, 2020 and 2019, the calculation of diluted earnings per share excluded 0.4 million, 0.5 million, and 0.3 million restricted stock awards, respectively, because they were anti-dilutive. For fiscal 2021 and 2020, the total number of potentially-dilutive securities was 0.2 million and 0.3 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.
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 10: Cash, Cash Equivalents and Restricted Cash
Cash, cash equivalents and restricted cash consisted of the following:
March 31,
2021
2020
Cash and cash equivalents
$
37.8
$
70.9
Restricted cash
0.1
0.4
Cash and restricted cash held for sale
8.2
-
Total cash, cash equivalents, restricted cash and cash held for sale
$
46.1
$
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 11: Inventories
Inventories consisted of the following:
March 31,
2021
2020
Raw materials
$
117.1
$
123.6
Work in process
38.5
34.6
Finished goods
40.0
49.2
Total inventories
$
195.6
$
207.4
At March 31, 2021, inventories excluded amounts classified as held for sale. See Note 2 for additional information.
Note 12: Property, Plant and Equipment
Property, plant and equipment, including depreciable lives, consisted of the following:
March 31,
2021
2020
Land
$
16.4
$
19.7
Buildings and improvements ( 10 - 40 years)
203.5
276.7
Machinery and equipment ( 3 - 15 years)
623.2
870.3
Office equipment ( 3 - 10 years)
81.3
95.2
Construction in progress
19.0
40.5
943.4
1,302.4
Less: accumulated depreciation
( 673.5
)
( 854.4
)
Net property, plant and equipment
$
269.9
$
448.0
At March 31, 2021, property, plant and equipment excluded amounts classified as held for sale. In addition, upon classifying the liquid- and air-cooled automotive businesses as held for sale, the Company ceased depreciating the property, plant and equipment within the disposal groups. See Note 2 for additional information.
Depreciation expense totaled $ 60.1 million, $ 68.2 million, and $ 67.9 million for fiscal 2021, 2020, and 2019, respectively. Gains and losses related to the disposal of property, plant and equipment are recorded within SG&A expenses. For fiscal 2021, 2020, and 2019, losses related to the disposal of property, plant and equipment totaled $ 0.7 million, $ 0.6 million, and $ 0.9 million, respectively.
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 13: Intangible Assets
Intangible assets consisted of the following:
March 31, 2021
March 31, 2020
Gross
Carrying
Value
Accumulated
Amortization
Net
Intangible
Assets
Gross
Carrying
Value
Accumulated
Amortization
Net
Intangible
Assets
Customer relationships
$
62.8
$
( 16.9
)
$
45.9
$
60.8
$
( 12.6
)
$
48.2
Trade names
51.5
( 11.4
)
40.1
58.3
( 16.2
)
42.1
Acquired technology
23.9
( 9.3
)
14.6
23.6
( 7.6
)
16.0
Total intangible assets
$
138.2
$
( 37.6
)
$
100.6
$
142.7
$
( 36.4
)
$
106.3
The Company recorded $ 8.5 million, $ 8.9 million, and $ 9.0 million of amortization expense during fiscal 2021, 2020, and 2019, respectively. The Company estimates that it will record $ 8.4 million of amortization expense in fiscal 2022 and approximately $ 8.0 million of annual amortization expense in fiscal 2023 through 2026.
Note 14: Goodwill
Changes in the carrying amount of goodwill, by segment and in the aggregate, were as follows:
BHVAC
CIS
Automotive
Total
Balance, March 31, 2019
$
14.1
$
153.9
$
0.5
$
168.5
Impairment charge
-
-
( 0.5
)
( 0.5
)
Effect of exchange rate changes
( 0.6
)
( 1.3
)
-
( 1.9
)
Balance, March 31, 2020
13.5
152.6
-
166.1
Effect of exchange rate changes
1.3
3.3
-
4.6
Balance, March 31, 2021
$
14.8
$
155.9
$
-
$
170.7
The Company tests goodwill for impairment annually, as of March 31, or more frequently if events or circumstances change that would, more likely than not, reduce the fair value of a reporting unit below its carrying value. To test goodwill for impairment, the Company determines the fair value of each reporting unit based upon the present value of estimated future cash flows and compares the fair value of each reporting unit with its carrying value. The Company’s determination of fair value involves judgment and the use of significant estimates and assumptions, including 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.
As a result of its annual goodwill impairment tests performed as of March 31, 2021, the Company determined that the fair value of each of the reporting units within its BHVAC and CIS segments exceeded their respective book values.
In fiscal 2020, the Company determined that the goodwill recorded within its Automotive segment was fully impaired and recorded a $ 0.5 million impairment charge as a result.
At both March 31, 2021 and 2020, accumulated goodwill impairment losses totaled $ 31.6 million a nd $ 9.2 million, within the HDE and Automotive segments, respectively.
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 15: Product Warranties and Other Commitments
Product Warranties
Many of the Company’s products are covered under a warranty period ranging from one to five years . The Company records a liability for product warranty obligations at the time of sale and adjusts its warranty accruals if it becomes probable that expected claims will differ from previous estimates.
Changes in accrued warranty costs were as follows:
Years ended March 31 ,
2021
2020
Beginning balance
$
7.9
$
9.2
Warranties recorded at time of sale
5.5
5.3
Adjustments to pre-existing warranties
( 0.9
)
( 1.6
)
Settlements
( 5.6
)
( 4.8
)
Reclassified as held for sale
( 2.0
)
-
Effect of exchange rate changes
0.3
( 0.2
)
Ending balance
$
5.2
$
7.9
Indemnification Agreements
From time to time, the Company provides indemnification agreements related to the sale or purchase of an entity or facility. These indemnification agreements cover customary representations and warranties typically provided in conjunction with such transactions, including income, sales, excise or other tax matters, environmental matters and other third-party claims. The indemnification periods provided generally range from less than one year to fifteen years . In addition, standard indemnification provisions reside in many commercial agreements to which the Company is a party and relate to responsibility in the event of potential third-party claims. The fair value of the Company’s outstanding indemnification obligations at March 31, 2021 was not material.
Commitments
At March 31, 2021, the Company had capital expenditure commitments of $ 10.0 million, excluding commitments of the held for sale liquid- and air-cooled automotive businesses. Significant commitments include tooling and equipment expenditures for new and renewal programs with vehicular customers. The Company utilizes inventory arrangements with certain vendors in the normal course of business under which the vendors maintain inventory stock at the Company’s facilities or at outside facilities. Title passes to the Company at the time goods are withdrawn for use in production. The Company has agreements with the vendors to use the material within a specific period of time. In some cases, the Company bears the risk of loss for the inventory because Modine is required to insure the inventory against damage and/or theft. This inventory is included within the Company’s consolidated balance sheets as raw materials inventory.
Note 16: Leases
Effective April 1, 2019, the Company adopted new lease accounting guidance ; see Note 1 for additional information.
The Company determines if an arrangement is a lease at contract inception. The lease term begins upon lease commencement, which is when the Company takes possession of the asset, and may include options to extend or terminate the lease when it is reasonably certain that such options will be exercised. The Company uses the lease term within its determination of the appropriate lease classification, either as an operating lease or as a finance lease, and to calculate straight-line lease expense for its operating leases.
ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. The Company recognizes ROU assets and lease liabilities at the lease commencement date, based upon the present value of lease payments over the lease term. As its lease agreements typically do not provide an implicit interest rate, the Company primarily uses an incremental borrowing rate to calculate the ROU asset and lease liability. In determining the incremental borrowing rate, the Company considers its current collateralized borrowing rate, the term of the lease, and the economic environment where the lease activity is concentrated. The Company believes this method effectively estimates a borrowing rate that it could obtain for a debt instrument with similar terms as the lease agreement.
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Based upon its accounting policy, the Company does not separate lease and non-lease components for any asset class. In addition, the Company does not record short-term leases (i.e. leases with an initial term of 12 months or less) on its consolidated balance sheets.
Certain leases require the Company to pay taxes, insurance, maintenance, and other operating expenses associated with the leased asset. Such amounts are not included in the measurement of the lease liability to the extent they are variable in nature. These variable lease costs are recognized as variable lease expense when incurred. The depreciable life of the ROU assets and related leasehold improvements are limited by the expected lease term, unless the lease contains a provision to transfer title to the Company or a purchase option that the Company expects to execute.
The Company’s most significant leases represent leases of real estate, such as manufacturing facilities, warehouses, and offices. In addition, the Company leases manufacturing and IT equipment and vehicles. The Company’s most significant leases have remaining lease terms of 1 to 13 years. Certain leases contain renewal options for varying periods, which are at the Company’s discretion. If reasonably certain of exercise, the Company includes the renewal periods within the calculation of ROU assets and lease liabilities. The Company’s lease agreements do not contain material residual value guarantees or material restrictive covenants.
Lease Assets and Liabilities
The following table provides a summary of leases recorded on the consolidated balance sheets. The March 31, 2021 amounts exclude operating lease ROU assets and liabilities, which each totaled $ 6.1 million, that are classified as held for sale on the Company’s consolidated balance sheet; see Note 2 for additional information.
-
Balance Sheet Location
-
March 31, 2021
March 31, 2020
Lease Assets
Operating lease ROU assets
Other noncurrent assets
$
54.1
$
61.4
Finance lease ROU assets (a)
Property, plant and equipment - net
8.3
8.5
Lease Liabilities
Operating lease liabilities
Other current liabilities
$
11.2
$
10.9
Operating lease liabilities
Other noncurrent liabilities
44.8
50.3
Finance lease liabilities
Long-term debt - current portion
0.4
0.4
Finance lease liabilities
Long-term debt
3.2
3.3
(a)
Finance lease ROU assets were recorded net of accumulated amortization of $ 2.4 million and $ 1.8 million as of March 31, 2021 and 2020, respectively.
Components of Lease Expense
The Company records operating lease expense as either cost of sales or SG&A expenses within its consolidated statements of operations, depending upon the nature and use of the ROU assets. The Company records finance lease expense as depreciation expense within cost of sales or SG&A expenses, depending upon the nature and use of the ROU assets, and as interest expense in its consolidated statements of operations.
The components of lease expense were as follows:
Years ended March 31,
2021
2020
Operating lease expense (a)
$
19.5
$
21.2
Finance lease expense:
Depreciation of ROU assets
0.5
0.5
Interest on lease liabilities
0.2
0.2
Total lease expense
$
20.2
$
21.9
(a)
In fiscal 2021 and 2020, operating lease expense included short-term lease expense of $ 3.5 million and $ 4.1 million, respectively. Variable lease expense was not significant.
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Supplemental Cash Flow Information
Years ended March 31,
2021
2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases
$
14.2
$
14.7
Financing cash flows for finance leases
0.6
0.5
ROU assets obtained in exchange for lease liabilities
Operating leases
$
9.8
$
9.0
Finance leases
0.1
0.2
Lease Term and Discount Rates
March 31, 2021
March 31, 2020
Weighted-average remaining lease term:
Operating leases
6.9 years
9.3 years
Finance leases
7.8 years
8.8 years
Weighted-average discount rate:
Operating leases
3.3
%
3.5
%
Finance leases
4.7
%
4.7
%
Maturity of Lease Liabilities
Future minimum rental payments for leases with initial non-cancellable lease terms in excess of one year were as follows at March 31, 2021:
Fiscal Year
Operating Leases
Finance Leases
2022
$
12.8
$
0.6
2023
10.9
0.6
2024
8.1
0.6
2025
6.7
0.6
2026
6.1
0.5
2027 and beyond
18.5
1.4
Total lease payments
63.1
4.3
Less: Interest
( 7.1
)
( 0.7
)
Present value of lease liabilities
$
56.0
$
3.6
The future minimum rental payments summarized above exclude payments for lease liabilities held for sale.
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 17: Indebtedness
Long-term debt consisted of the following:
io
_
Fiscal year of maturity
_
March 31, 2021
March 31, 2020
Term loans
_ 2025 _
$
$ 178.9
$
$ 189.4
Revolving credit facility
2025
4.8
127.2
5.9 % Senior Notes
2029
100.0
100.0
5.8 % Senior Notes
2027
50.0
50.0
Other (a)
3.6
6.0
337.3
472.6
Less: current portion
( 21.9 )
( 15.6 )
Less: unamortized debt issuance costs
( 4.2 )
( 5.0 )
Total long-term debt
$
$ 311.2
$
$ 452.0
(a)
Other long-term debt primarily includes finance lease obligations and borrowings by foreign subsidiarie s.
Long-term debt matures as follows:
Fiscal Year
2022
$
21.9
2023
21.9
2024
21.9
2025
153.2
2026
33.8
2027 and beyond
84.6
Total
$
337.3
The Company maintains a credit agreement with a syndicate of banks that provides for a multi-currency $ 250.0 million revolving credit facility expiring in June 2024 . In addition, this credit agreement provides for both U.S. dollar- and euro-denominated term loan facilities, with repayments continuing into fiscal 2025, and shorter-duration swingline loans. Borrowings under the revolving credit, swingline 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 March 31, 2021, the weighted-average interest rates for these variable-rate borrowings was 2.5 percent. Based upon the terms of the credit agreement, the Company classifies borrowings under its revolving credit and swingline facilities as long-term and short-term debt, respectively, on its consolidated balance sheets.
At March 31, 2021, the Company’s borrowings under its revolving credit and swingline facilities totaled $ 4.8 million and $ 1.4 million, respectively, and domestic letters of credit totaled $ 5.7 million. As a result, available borrowing capacity under the Company’s revolving credit facility was $ 238.1 million as of March 31, 2021.
The Company also maintains credit agreements for its foreign subsidiaries. The $ 5.0 million of outstanding short-term borrowings related to these foreign credit agreements at March 31, 2021 were classified as held for sale; see Note 2 for additional information on businesses held for sale. The outstanding short-term borrowings at March 31, 2020 totaled $ 14.8 million.
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 credit 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.
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
In May 2020 and in response to risks and uncertainties introduced by the COVID-19 pandemic, the Company executed amendments to its primary credit agreements in the U.S. to provide additional financial covenant flexibility. The amendments temporarily raised the leverage ratio covenant limit during fiscal 2021 and 2022. In May 2021, based upon its outlook for fiscal 2022, the Company determined that such financial covenant flexibility was no longer necessary and amended the primary agreements. The May 2021 amendments reinstated the 3.25 to 1 leverage ratio covenant limit.
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 fourth quarter of fiscal 2021 was 5.75 to 1. 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. As of March 31, 2021, the Company was in compliance with its debt covenants ; its leverage ratio and interest coverage ratio were 1.9 and 9.3 , respectively.
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 March 31, 2021 and 2020, the carrying value of the Company’s long-term debt approximated fair value, with the exception of the Senior Notes, which had an aggregate fair value of approximately $ 146.0 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: Pension and Employee Benefit Plans
Defined Contribution Employee Benefit Plans
The Company maintains a domestic 401(k) plan that allows employees to contribute a portion of their salary to help them save for retirement. The Company currently matches employee contributions up to 4.5 percent of their compensation. During fiscal 2021, as part of its response to the negative impacts of the COVID-19 pandemic, the Company suspended matching employee contributions for part of the year. The Company’s expense for defined contribution employee benefit plans during fiscal 2021, 2020, and 2019 was $ 3.0 million, $ 6.6 million, and $ 6.4 million, respectively.
In addition, the Company maintains non-qualified deferred compensation plans for eligible employees, and various non-U.S. subsidiaries have government-required defined contribution plans in place, under which they contribute a percentage of employee earnings into accounts, consistent with local laws.
Statutory Termination Plans
Certain non-U.S. subsidiaries have statutory termination indemnity plans covering eligible employees. The benefits under these plans are based upon years of service and final average compensation levels or a monthly retirement benefit amount. These programs are substantially unfunded in accordance with local laws.
Pension Plans
The Company maintains non-contributory defined benefit pension plans that cover eligible domestic employees. These plans are closed to new participants. The primary domestic plans cover most domestic employees hired on or before December 31, 2003 and provide benefits based primarily upon years of service and average compensation for salaried and some hourly employees. Benefits for other hourly employees are based upon a monthly retirement benefit amount. Currently, the Company’s domestic pension plans do not include increases in annual earnings or future service in calculating the average annual earnings and years of credited service under the pension plan benefit formula. Certain non-U.S. subsidiaries of the Company also have legacy defined benefit plans which cover a smaller number of active employees and are substantially unfunded. The primary non-U.S. plans are maintained in Germany, Austria, and Italy and are closed to new participants. Liabilities associated with pension plans maintained in Austria and Germany have been classified as liabilities held for sale on the March 31, 2021 consolidated balance sheet since the pension plans will convey to the buyers of the Company’s liquid- and air-cooled automotive businesses. The held for sale pension liabilities totaled $ 17.8 million as of March 31, 2021. See Note 2 for additional information.
The Company contributed $ 19.3 million, $ 3.5 million, and $ 8.0 million to its U.S. pension plans during fiscal 2021, 2020, and 2019, respectively. In addition, the Company contributed $ 2.2 million, $ 2.3 million, and $ 5.9 million to its non-U.S. pension plans during fiscal 2021, 2020, and 2019, respectively. These contributions are reported in the change in other liabilities in the consolidated statements of cash flows.
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Postretirement Plans
The Company provides selected healthcare and life insurance benefits for eligible retired domestic employees. The Company periodically amends these unfunded plans to change the contribution rate of retirees and the amounts and forms of coverage. An annual limit on the Company’s cost is defined for the majority of these plans. The Company’s net periodic income for its postretirement plans in each of fiscal 2021, 2020, and 2019 was $ 0.3 million.
Measurement Date
The Company uses March 31 as the measurement date for its pension and postretirement plans.
Changes in benefit obligations and plan assets, as well as the funded status of the Company’s global pension plans, were as follows:
Years ended March 31,
2021
2020
Change in benefit obligation:
Benefit obligation at beginning of year
$
264.7
$
258.8
Service cost
0.4
0.4
Interest cost
7.9
9.1
Actuarial loss
2.7
15.5
Benefits paid
( 17.1
)
( 18.2
)
Curtailment gains (a)
( 0.1
)
( 0.3
)
Effect of exchange rate changes
2.1
( 0.6
)
Benefit obligation at end of year
$
260.6
$
264.7
Change in plan assets:
Fair value of plan assets at beginning of year
$
131.1
$
155.1
Actual return on plan assets
47.8
( 11.6
)
Benefits paid
( 17.1
)
( 18.2
)
Employer contributions
21.5
5.8
Fair value of plan assets at end of year
$
183.3
$
131.1
Funded status at end of year
$
( 77.3
)
$
( 133.6
)
Amounts recognized in the consolidated balance sheets:
Current liability
$
( 0.9
)
$
( 2.7
)
Noncurrent liability
( 58.6
)
( 130.9
)
Liabilities held for sale
( 17.8
)
-
$
( 77.3
)
$
( 133.6
)
(a)
The curtailment gains in fiscal 2021 and 2020 are associated with headcount reductions in Europe within the Automotive segment. The Company recognizes curtailment gains as a component of net periodic benefit cost in the period headcount reductions occur. See Note 6 for additional information on the Company’s restructuring activities.
As of March 31, 2021, 2020, and 2019, the benefit obligation associated with the Company’s non-U.S. pension plans totaled $ 36.4 million, $ 35.7 million, and $ 36.5 million respectively. The $ 0.7 million increase in the benefit obligation associated with non-U.S. pension plans as of March 31, 2021, compared with the prior year, was primarily due to a $ 2.2 million impact of foreign currency exchange rate changes and service and interest cost totaling $ 0.7 million, partially offset by employer contributions of $ 2.2 million for benefits paid to plan participants during the year. In fiscal 2020, the $ 0.8 million decrease primarily resulted from employer contributions of $ 2.2 million for benefits paid to plan participants during the year, partially offset by service and interest cost totaling $ 0.9 million.
The accumulated benefit obligation for pension plans was $ 258.9 million and $ 263.1 million as of March 31, 2021 and 2020, respectively. The net actuarial loss related to the pension plans recognized in accumulated other comprehensive loss was $ 151.1 million and $ 191.5 million as of March 31, 2021 and 2020, respectively.
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Costs for the Company’s global pension plans included the following components:
Years ended March 31,
2021
2020
2019
Components of net periodic benefit cost:
Service cost
$
0.4
$
0.4
$
0.5
Interest cost
7.9
9.1
9.6
Expected return on plan assets
( 11.5
)
( 12.0
)
( 12.3
)
Amortization of net actuarial loss
6.9
6.0
5.6
Settlements (a)
0.2
0.2
0.2
Net periodic benefit cost
$
3.9
$
3.7
$
3.6
Other changes in benefit obligation recognized in other comprehensive income (loss):
Net actuarial gain (loss)
$
33.8
$
( 38.7
)
$
( 7.7
)
Amortization of net actuarial loss
7.1
6.2
5.8
Total recognized in other comprehensive income (loss)
$
40.9
$
( 32.5
)
$
( 1.9
)
(a)
The settlement charges resulted from activity associated with the Company’s non-U.S. pension plans.
The Company amortized $ 7.1 million, $ 6.2 million, and $ 5.6 million of net actuarial loss in fiscal 2021, 2020, and 2019, respectively. In each of these years, less than $ 1.0 million of the amortization was attributable to the Company’s non-U.S. pension plans. The Company estimates $ 6.6 million of net actuarial loss for its pension plans will be amortized from accumulated other comprehensive loss into net periodic benefit cost during fiscal 2022. The fiscal 2022 estimated amortization includes less than $ 1.0 million related to the Company’s non-U.S. pension plans. In addition, the Company expects to recognize approximately $ 7.0 million of net actuarial losses in fiscal 2022 as part of the anticipated losses to be recorded upon sale of the liquid- and air-cooled automotive businesses.
The Company used a discount rate of 3.2 % and 3.4 % as of March 31, 2021 and 2020, respectively, for determining its benefit obligations under its U.S. pension plans. The Company used a weighted-average discount rate of 1.0 % as of both March 31, 2021 and 2020, respectively, for determining its benefit obligations under its non-U.S. pension plans. The Company used a discount rate of 3.4 %, 4.0 %, and 4.0 % to determine its costs under its U.S. pension plans for fiscal 2021, 2020, and 2019, respectively. The Company used a weighted-average discount rate of 1.4 %, 1.7 %, and 1.9 % to determine its costs under its non-U.S. pension plans for fiscal 2021, 2020, and 2019, respectively. The Company determined the discount rates used for its U.S. pension plans by modeling a portfolio of high-quality corporate bonds, with appropriate consideration given to expected defined benefit payment terms and duration of the respective pension obligations. The Company used a similar process to determine the discount rate for its non-U.S. pension obligations.
Plan assets in the Company’s U.S. pension plans comprise 100 percent of the Company’s world-wide pension plan assets. The Company’s U.S. pension plan weighted-average asset allocations at the measurement dates of March 31, 2021 and 2020 were as follows:
March 31, 2021
March 31, 2020
Target allocation
Plan assets
Target allocation
Plan assets
Equity securities
76
%
73
%
65
%
60
%
Debt securities
18
%
17
%
21
%
22
%
Real estate investments
5
%
9
%
13
%
16
%
Cash and cash equivalents
1
%
1
%
1
%
2
%
100
%
100
%
100
%
100
%
Due to market conditions and other factors, including timing of benefit payments and other transactions, actual asset allocation may vary from the target allocation outlined above. The Company periodically rebalances the assets to the target allocations. As of March 31, 2021 and 2020, the Company’s pension plans did not directly own shares of Modine common stock.
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The Company employs a total return investment approach, whereby a mix of investments are used to maximize the long-term growth of principal, while avoiding excessive risk. The Company has established pension plan guidelines based upon an evaluation of market conditions, tolerance for risk and cash requirements for benefit payments. The Company measures and monitors investment risk on an ongoing basis through quarterly investment portfolio reviews, annual liability measurements and periodic asset/liability studies.
The expected rate of return on U.S. plan assets is based upon historical return experience and forward-looking return expectations for major asset class categories. For fiscal 2021, 2020, and 2019 U.S. pension plan expense, the expected rate of return on plan assets was 7.5 percent. For fiscal 2022 U.S. pension plan expense, the Company has assumed a rate of return on plan assets of 7.5 percent.
The Company’s funding policy for its U.S. pension plans is to contribute annually, at a minimum, the amount necessary on an actuarial basis to provide for benefits in accordance with applicable laws and regulations. The Company expects to contribute approximately $ 13.0 million to its U.S. plans during fiscal 2022.
Estimated pension benefit payments, excluding payments for pension liabilities held for sale, for the next ten fiscal years are as follows:
Fiscal Year
Estimated Pension
Benefit Payments
2022
$
15.2
2023
15.5
2024
15.6
2025
15.6
2026
15.5
2027 - 2031
74.6
Note 19: Derivative Instruments
The Company uses derivative financial instruments from time to time as a tool to manage certain financial risks. The Company’s policy prohibits the use of leveraged derivatives. Accounting for derivatives and hedging activities requires derivative financial instruments to be measured at fair value and recognized as assets or liabilities in the consolidated balance sheets. Accounting for the gain or loss resulting from the change in fair value of the derivative financial instruments depends on whether it has been designated as a hedge, and, if so, on the nature of the hedging activity.
Commodity Derivatives
The Company periodically enters into over-the-counter forward contracts related to forecasted purchases of aluminum and copper. The Company’s strategy in entering into these contracts is to reduce its exposure to changing market prices of these commodities. The Company designates certain commodity forward contracts as cash flow hedges for accounting purposes. Accordingly, for these designated hedges, the Company records unrealized gains and losses related to the change in the fair value of the contracts in accumulated other comprehensive income (loss) (“AOCI”) within shareholders’ equity and subsequently recognizes the gains and losses within cost of sales as the underlying inventory is sold.
Foreign Exchange Contracts
The Company’s foreign exchange risk management strategy uses derivative financial instruments to mitigate foreign currency exchange risk. The Company periodically enters into foreign currency forward contracts to hedge specific foreign currency-denominated assets and liabilities as well as forecasted transactions. The Company designates certain hedges of forecasted transactions as cash flow hedges for accounting purposes. Accordingly, for these designated hedges, the Company records unrealized gains and losses related to the change in the fair value of the contracts in AOCI within shareholders’ equity and subsequently recognizes the gains and losses as a component of earnings at the same time and in the same financial statement line that the underlying transactions impact earnings. The Company has not designated forward contracts related to foreign currency-denominated assets and liabilities as hedges. Accordingly, for these non-designated contracts, the Company records unrealized gains and losses related to changes in fair value in other income and expense. Gains and losses on these foreign currency contracts are offset by foreign currency gains and losses associated with the related assets and liabilities.
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The fair value of the Company’s derivative financial instruments recorded in the consolidated balance sheets were as follows:
_
Balance Sheet Location
March 31, 2021
March 31, 2020
Derivatives designated as hedges:
Commodity derivatives
Other current assets
$
0.5
$
-
Commodity derivatives
Other current liabilities
-
1.3
Foreign exchange contracts
Other current assets
0.1
0.1
Derivatives not designated as hedges:
Foreign exchange contracts
Other current liabilities
$
-
$
-
The amounts associated with derivative financial instruments that the Company designated for hedge accounting during the years ended March 31 were as follows:
Gain (loss) recognized in
other comprehensive income
Statement of
Operations
Gain (loss) reclassified
from AOCI
2021
2020
2019
Location
2021
2020
2019
Commodity derivatives
$
2.2
$
( 2.6
)
$
( 0.3
)
Cost of sales
$
-
$
( 0.8
)
$
( 0.4
)
Foreign exchange contracts
-
( 0.1
)
( 0.4
)
Net sales
-
( 0.1
)
( 0.4
)
Foreign exchange contracts
( 0.1
)
0.2
1.0
Cost of sales
( 0.1
)
0.4
0.6
Total gains (losses)
$
2.1
$
( 2.5
)
$
0.3
$
( 0.1
)
$
( 0.5
)
$
( 0.2
)
The amounts associated with derivative financial instruments that the Company did not designate for hedge accounting were as follows:
_
Years ended March 31,
_
Statement of Operations Location
2021
2020
2019
Foreign exchange contracts
Net sales
$
-
$
( 0.1
)
$
( 0.7
)
Foreign exchange contracts
Other income (expense) - net
0.6
( 0.1
)
( 0.3
)
Total gains (losses)
$
0.6
$
( 0.2
)
$
( 1.0
)
Note 20: 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 of fiscal 2021 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. While the Company withdrew most of the cost-saving actions in the third quarter of fiscal 2021 as production returned to more normal levels as markets recovered, it remains focused on controlling operating and administrative expenses
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
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 consolidated financial statements and reported amounts of revenue and expenses during the reporting periods presented. For example, the Company’s goodwill impairment review is particularly sensitive to assumptions that could be adversely impacted by the COVID-19 pandemic. 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.
Market Risk
The Company sells a broad range of products that provide thermal solutions to customers operating in diverse markets, including commercial, industrial, and building HVAC&R markets and vehicular markets, including commercial vehicle, off-highway and automotive and light vehicle. The COVID-19 pandemic negatively impacted many of these markets; while we expect the markets will continue to recover, risk and uncertainties remain present.
Credit Risk
The Company invests excess cash primarily in investment quality, short-term liquid debt instruments. Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of accounts receivable. The Company sells a broad range of products that provide thermal solutions to customers operating throughout the world. In fiscal 2021 and 2020, one vehicular customer accounted for more than ten percent of the Company’s total sales. In fiscal 2019, two vehicular customers each accounted for ten percent or more of the Company’s total sales. Sales to the Company’s top ten customers were 43 percent, 45 percent, and 50 percent of total sales in fiscal 2021, 2020, and 2019, respectively. At March 31, 2021 and 2020, 35 percent and 34 percent, respectively, of the Company’s trade accounts receivable were due from the Company’s top ten customers. These customers operate primarily in the automotive, commercial vehicle, off-highway, data center cooling and commercial air conditioning markets. The Company generally does not require collateral or advanced payments from its customers. The Company has not experienced significant credit losses to customers in the markets served nor has experienced a significant increase in credit losses in connection with the COVID-19 pandemic.
The Company manages credit risk through its focus on the following:
•
Cash and investments – reviewing cash deposits and short-term investments to ensure banks have credit ratings acceptable to the Company and that short-term investments are maintained in secured or guaranteed instruments;
•
Accounts receivable – performing periodic customer credit evaluations and actively monitoring their financial condition and applicable business news;
•
Pension assets – ensuring that investments within pension plans provide appropriate diversification, monitoring of investment teams, ensuring that portfolio managers adhere to the Company’s investment policies and directives, and ensuring that exposure to high risk investments is limited; and
•
Insurance – ensuring that insurance providers maintain financial ratings that are acceptable to the Company.
Counterparty Risk
The Company manages counterparty risk through its focus on the following:
•
Customers – performing thorough reviews of customer credit reports and accounts receivable aging reports by internal credit committees;
•
Suppliers – maintaining a supplier risk management program and utilizing industry sources to identify and mitigate high risk situations; and
•
Derivatives – ensuring that counterparties to derivative instruments maintain credit ratings that are acceptable to the Company.
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
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 $ 16.0 million and $ 18.2 million at March 31, 2021 and 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.
Note 21: Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss were as follows:
Foreign
Currency
Translation
Defined
Benefit Plans
Cash Flow
Hedges
Total
Balance, March 31, 2020
$
( 61.4
)
$
( 160.9
)
$
( 1.0
)
$
( 223.3
)
Other comprehensive income before reclassifications
30.4
33.8
2.1
66.3
Reclassifications:
Amortization of unrecognized net loss (a)
-
6.7
-
6.7
Realized losses - net (b)
-
-
0.1
0.1
Income taxes
-
( 10.4
)
( 0.6
)
( 11.0
)
Total other comprehensive income
30.4
30.1
1.6
62.1
Balance, March 31, 2021
$
( 31.0
)
$
( 130.8
)
$
0.6
$
( 161.2
)
Foreign
Currency
Translation
Defined
Benefit Plans
Cash Flow
Hedges
Total
Balance, March 31, 2019
$
( 42.6
)
$
( 136.3
)
$
0.5
$
( 178.4
)
Other comprehensive loss before reclassifications
( 18.2
)
( 38.7
)
( 2.5
)
( 59.4
)
Reclassifications:
Amortization of unrecognized net loss (a)
-
5.8
-
5.8
Realized losses - net (b)
-
-
0.5
0.5
Foreign currency translation gains (c)
( 0.6
)
-
-
( 0.6
)
Income taxes
-
8.3
0.5
8.8
Total other comprehensive loss
( 18.8
)
( 24.6
)
( 1.5
)
( 44.9
)
Balance, March 31, 2020
$
( 61.4
)
$
( 160.9
)
$
( 1.0
)
$
( 223.3
)
(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. See Note 18 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. See Note 19 for additional information regarding derivative instruments.
(c)
As a result of the sale of its investment in NEX during fiscal 2020, the Company wrote off $ 0.6 million of accumulated foreign currency translation gains.
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 22: Segment and Geographic Information
The Company’s product lines consist of heat-transfer components and systems. The Company serves commercial, industrial, and building HVAC&R markets and vehicular markets.
The Company’s BHVAC segment provides heating, ventilating and air conditioning products to customers throughout the world. The Company’s CIS segment provides coils, coolers, and coating solutions to global customers. The Company’s HDE and Automotive segments represent its vehicular businesses and primarily serve the commercial vehicle, off-highway and automotive and light vehicle markets. In addition, the HDE segment serves the commercial vehicle and automotive aftermarkets in Brazil.
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.
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 progresses towards 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 HDE 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 and 2019 has been recast to conform to the fiscal 2021 presentation.
The following is a summary of net sales, gross profit, and operating income by segment. See Note 3 for additional information regarding net sales by primary end market.
Year ended March 31, 2021
External Sales
Inter-segment
Sales
Total
Net sales:
BHVAC
$
240.3
$
0.3
$
240.6
CIS
528.1
3.9
532.0
HDE
648.3
33.8
682.1
Automotive
391.7
6.6
398.3
Segment total
1,808.4
44.6
1,853.0
Corporate and eliminations
-
( 44.6
)
( 44.6
)
Net sales
$
1,808.4
$
-
$
1,808.4
Year ended March 31, 2020
External Sales
Inter-segment
Sales
Total
Net sales:
BHVAC
$
219.4
$
1.7
$
221.1
CIS
620.1
3.8
623.9
HDE
693.8
52.1
745.9
Automotive
442.2
2.7
444.9
Segment total
1,975.5
60.3
2,035.8
Corporate and eliminations
-
( 60.3
)
( 60.3
)
Net sales
$
1,975.5
$
-
$
1,975.5
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Year ended March 31, 2019
External Sales
Inter-segment
Sales
Total
Net sales:
BHVAC
$
209.1
$
3.3
$
212.4
CIS
704.7
2.9
707.6
HDE
811.8
60.5
872.3
Automotive
487.1
1.8
488.9
Segment total
2,212.7
68.5
2,281.2
Corporate and eliminations
-
( 68.5
)
( 68.5
)
Net sales
$
2,212.7
$
-
$
2,212.7
Inter-segment sales are accounted for based upon an established markup over production costs. Net sales for Corporate and eliminations primarily represent the elimination of inter-segment sales.
Years ended March 31,
2021
2020
2019
Gross profit:
_ $’s
% of
sales
_ $’s
% of
sales
_ $’s
% of
sales
BHVAC
$
83.0
34.5
%
$
71.5
32.3
%
$
63.4
29.9
%
CIS
66.5
12.5
%
92.9
14.9
%
114.9
16.2
%
HDE
88.4
13.0
%
96.6
13.0
%
127.8
14.7
%
Automotive
56.0
14.1
%
48.4
10.9
%
59.0
12.1
%
Segment total
293.9
15.9
%
309.4
15.2
%
365.1
16.0
%
Corporate and eliminations
( 0.5
)
-
( 1.9
)
-
0.4
-
Gross profit
$
293.4
16.2
%
$
307.5
15.6
%
$
365.5
16.5
%
Years ended March 31,
Operating income:
2021
2020
2019
BHVAC
$
47.2
$
36.4
$
26.9
CIS
8.2
32.9
53.4
HDE
36.8
37.8
65.0
Automotive
( 150.9
)
( 10.0
)
( 0.4
)
Segment total
( 58.7
)
97.1
144.9
Corporate and eliminations (a)
( 39.0
)
( 59.2
)
( 35.2
)
Operating (loss) income
$
( 97.7
)
$
37.9
$
109.7
(a)
The operating loss for Corporate includes certain research and development costs, legal, finance and other general corporate and central services expenses, and other costs that are either not directly attributable to an operating segment or not considered when management evaluates segment performance. During fiscal 2021, 2020 and 2019, the Company recorded $ 6.6 million, $ 39.2 million, and $ 7.1 million respectively, of costs directly associated with its review of strategic alternatives for the liquid-and air-cooled automotive businesses, including costs to separate and prepare the underlying businesses for potential sale.
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The following is a summary of total assets by segment:
March 31,
2021
2020
BHVAC
$
110.8
$
102.3
CIS
609.2
617.7
HDE
438.7
417.4
Automotive (a)
124.2
272.5
Corporate and eliminations (b)
( 6.2
)
126.2
Total assets
$
1,276.7
$
1,536.1
(a)
During fiscal 2021, the Company recorded impairment charges totaling $ 166.8 million within the Automotive segment, primarily related to the property, plant and equipment of the liquid- and air-cooled automotive businesses, which are classified as held for sale as of March 31, 2021. See Note 2 for additional information.
(b)
At March 31, 2021, Corporate assets totaled $ 17.5 million and were more than offset by eliminations for intercompany balances, including accounts receivable. During fiscal 2021, the Company recorded income tax charges totaling $ 103.3 million, which established a full valuation allowance on deferred tax assets in the U.S that are recorded at Corporate. See Note 8 for additional information.
The following is a summary of capital expenditures and depreciation and amortization expense by segment:
Years ended March 31,
Capital expenditures:
2021
2020
2019
BHVAC
$
1.5
$
3.1
$
1.3
CIS
6.1
15.0
16.4
HDE
13.5
31.5
29.4
Automotive
11.1
19.1
24.9
Corporate
0.5
2.6
1.9
Total capital expenditures
$
32.7
$
71.3
$
73.9
Years ended March 31,
Depreciation and amortization expense:
2021
2020
2019
BHVAC
$
3.1
$
3.4
$
3.5
CIS
25.0
24.0
23.9
HDE
25.5
25.4
26.3
Automotive (a)
13.2
22.3
21.2
Corporate
1.8
2.0
2.0
Total depreciation and amortization
$
68.6
$
77.1
$
76.9
(a)
Upon classifying the liquid- and air-cooled automotive businesses as held for sale, the Company ceased depreciating the long-lived assets within the disposal groups. See Note 2 for additional information.
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The following is a summary of net sales by geographical area, based upon the location of the selling unit:
Years ended March 31,
2021
2020
2019
United States
$
765.7
$
941.9
$
1,032.3
China
217.6
168.5
172.1
Italy
188.6
187.4
217.3
Hungary
153.7
142.4
165.6
United Kingdom
96.4
82.0
86.6
Germany
83.4
97.5
123.1
Austria
59.6
93.0
116.2
Other
243.4
262.8
299.5
Net sales
$
1,808.4
$
1,975.5
$
2,212.7
The following is a summary of property, plant and equipment by geographical area:
March 31,
2021
2020
United States
$
80.3
$
114.6
Mexico
43.5
50.0
China
31.3
56.8
Italy
30.0
49.8
Hungary
27.6
55.4
Germany
1.8
27.0
Austria
-
26.0
Other
55.4
68.4
Total property, plant and equipment (a)
$
269.9
$
448.0
(a)
In connection with the pending sales of the liquid- and air-cooled automotive businesses within the Automotive segment, the Company wrote-down the carrying value of the disposal groups’ property, plant and equipment to zero as of March 31, 2021. The assets impaired were located in Hungary, Germany, Austria, China, the U.S., Italy, and the Netherlands. See Note 2 for additional information on the held for sale businesses and impairment charges recorded during fiscal 2021.
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Modine Manufacturing Company
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the consolidated financial statements, including the related notes, as listed in the index appearing under Item 15(a)(1), and the financial statement schedule listed in the index appearing under Item 15(a)(2), of Modine Manufacturing Company and its subsidiaries (the “Company”) (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of March 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Changes in Accounting Principles
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in fiscal 2020.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
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Table of Contents
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Goodwill Impairment Assessment – CIS Reporting Units
As described in Notes 1 and 14 to the consolidated financial statements, the Company’s consolidated goodwill balance was $170.7 million as of March 31, 2021, and the goodwill associated with the CIS reporting units was $155.9 million. Management assesses goodwill for impairment annually as of March 31 of each year, or more frequently if events or circumstances change that would, more likely than not, reduce the fair value of a reporting unit below its carrying value. Management determines the fair value of a reporting unit based upon the present value of estimated future cash flows. Determining the fair value of a reporting unit involves judgment and the use of significant estimates and assumptions by management, which include assumptions regarding the revenue growth rates and operating profit margins used to calculate estimated future cash flows, the risk-adjusted discount rates, business trends and market conditions.
The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment of the CIS reporting units is a critical audit matter are (i) the significant judgment by management when determining the fair value of the reporting units; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating evidence relating to management’s estimated future cash flows and significant assumptions related to revenue growth rates, operating profit margins, and the risk-adjusted discount rates; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the goodwill impairment assessment, including controls over the estimated fair value of the CIS reporting units. These procedures also included, among others, testing management’s process for developing the fair value estimates; evaluating the appropriateness of the discounted cash flow model; testing the completeness, accuracy, and relevance of underlying data used in the model; and evaluating the significant assumptions used by management related to revenue growth rates, operating profit margins, and risk-adjusted discount rates. Evaluating management’s assumptions related to revenue growth rates and operating profit margins involved evaluating whether the assumptions used were reasonable considering (i) the current and past performance of the reporting units, (ii) the consistency with external market and industry data, and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in the evaluation of the Company’s discounted cash flow model and the risk-adjusted discount rates significant assumption.
/s/ PricewaterhouseCoopers LLP
Milwaukee, WI
May 27, 2021
We have served as the Company’s auditor since 1935.
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ITEM 9 . CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE .
Not applicable.