MODINE MANUFACTURING CO 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. When we use the terms “Modine,” “we,” “us,” the “Company,” or “our” in this report, we are referring to Modine Manufacturing Company. Our fiscal year ends on March 31 and, accordingly, all references to quarters refer to our fiscal quarters. The quarter ended June 30, 2021 was the first quarter of fiscal 2022. Air-cooled Automotive Business On April 30, 2021, we sold our air-cooled automotive business to Schmid Metall GmbH. As a result of this transaction, we recorded a loss of $6.6 million during the first quarter of fiscal 2022. The finalization of and payment for the purchase price adjustment for net working capital and certain other items, as defined by the sale agreement, are pending. While we do not expect a material adjustment, it is possible that the loss on sale may increase when the purchase price adjustment is finalized. Liquid-cooled Automotive Business On November 2, 2020, we signed a definitive agreement to sell our liquid-cooled automotive business to Dana Incorporated, subject to the receipt of governmental and third-party approvals and satisfaction of other closing conditions. During the first quarter of fiscal 2022, we withdrew the regulatory filing for approval of the transaction in Germany. Together with the buyer, we subsequently resubmitted a plan containing a modified sale perimeter for regulatory approval. As part of the modified perimeter, certain manufacturing operations will no longer convey to the buyer. We are currently working with the buyer to amend the definitive sale agreement to reflect the transaction modifications. We currently estimate that we will record a loss on sale of approximately $30.0 million to $50.0 million when the sale is completed. The loss on sale recorded will be impacted by the final negotiated terms with the buyer and other impacts such as changes in working capital, costs to sell and net actuarial losses in accumulated other comprehensive loss related to the disposal group’s pension plans. It is possible that the loss on sale recorded could differ materially from our estimate. As a result of the modified sale perimeter, we reevaluated the long-lived assets within the businesses that will not be sold and reversed $7.4 million of previously-recorded impairment charges to adjust the asset groups to their estimated fair value. This impairment reversal was partially offset by $5.3 million of impairment charges related to other assets held for sale in the Automotive segment. See Note 2 of the Notes to Condensed Consolidated Financial Statements for further information regarding the accounting impacts of this pending sale. COVID-19 As the COVID-19 pandemic continues, both the health and overall well-being of our employees and delivering quality products and services to our customers remain our top priorities. The COVID-19 pandemic has broadly impacted the global economy and our key end markets, which were most severely impacted during the first quarter of fiscal 2021. In an effort to mitigate the negative impacts of COVID-19 on our financial results, we implemented cost-saving actions starting in the first quarter of fiscal 2021 that primarily impacted selling, general and administrative (“SG&A”) expenses and capital expenditures. While we remain focused on controlling expenses, we withdrew most of the cost-saving actions in the third quarter of fiscal 2021 as production returned to more normal levels as markets recovered. As a result and as anticipated, compensation-related expenses, particularly SG&A expenses, were higher in the first quarter of fiscal 2022 compared with the prior year. The full extent of the impacts of COVID-19, which will largely depend on the length and severity of the pandemic, could have a material adverse effect on our business, results of operations, and cash flows. 24 Table of Contents First Quarter Highlights Net sales in the first quarter of fiscal 2022 increased $146.8 million, or 42 percent, from the first quarter of fiscal 2021, primarily due to higher sales volume in each of our segments. Sales during the first quarter of the prior year were negatively impacted by the COVID-19 pandemic. Cost of sales increased $119.7 million compared with the first quarter of fiscal 2021. Gross profit increased $27.1 million and gross margin improved 150 basis points to 14.8 percent. SG&A expenses increased $14.7 million, primarily due to higher compensation-related expenses, as the prior-year benefitted from cost-saving measures implemented in response to COVID-19, which were subsequently withdrawn in the third quarter of fiscal 2021. Operating income of $8.7 million during the first quarter of fiscal 2022 represents an improvement of $11.9 million from the prior-year operating loss of $3.2 million, primarily due to higher earnings in our Heavy Duty Equipment (“HDE”), Automotive, and Commercial Industrial Solutions (“CIS”) segments, partially offset by the $6.6 million loss recorded on the sale of the air-cooled automotive business. CONSOLIDATED RESULTS OF OPERATIONS The following table presents our consolidated financial results on a comparative basis for the three months ended June 30, 2021 and 2020: Three months ended June 30, 2021 2020 (in millions) _ $’s % of sales _ $’s % of sales Net sales $ 494.6 100.0 % $ 347.8 100.0 % Cost of sales 421.4 85.2 % 301.7 86.7 % Gross profit 73.2 14.8 % 46.1 13.3 % Selling, general and administrative expenses 59.4 12.0 % 44.7 12.9 % Restructuring expenses 0.3 0.1 % 4.6 1.3 % Impairment charges (reversals) – net (1.8 ) -0.4 % - - Loss on sale of assets 6.6 1.3 % - - Operating income (loss) 8.7 1.8 % (3.2 ) -0.9 % Interest expense (4.2 ) -0.8 % (5.4 ) -1.6 % Other income – net 0.2 - - - Earnings (loss) before income taxes 4.7 1.0 % (8.6 ) -2.5 % (Provision) benefit for income taxes (1.9 ) -0.4 % 0.2 0.1 % Net earnings (loss) $ 2.8 0.6 % $ (8.4 ) -2.4 % First quarter net sales of $494.6 million were $146.8 million, or 42 percent, higher than the first quarter of the prior year, primarily due to higher sales volume across each of our segments and, to a lesser extent, a $23.5 million favorable impact of foreign currency exchange rates. Sales in the first quarter of the prior year were negatively impacted by the COVID-19 pandemic. Sales in the HDE, CIS, Automotive, and Building HVAC Systems (“BHVAC”) segments increased $78.3 million, $36.7 million, $24.1 million and $12.3 million, respectively. First quarter cost of sales increased $119.7 million, or 40 percent, primarily due to higher sales volume. As a percentage of sales, cost of sales decreased 150 basis points to 85.2 percent, primarily due to the favorable impact of the higher sales volume and lower depreciation expense in the Automotive segment. We ceased depreciating the long-lived assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during fiscal 2021. These favorable drivers were partially offset by higher material costs, which negatively impacted cost of sales by approximately $13.0 million. 25 Table of Contents As a result of higher sales and lower cost of sales as a percentage of sales, first quarter gross profit increased $27.1 million and gross margin improved 150 basis points to 14.8 percent. First quarter SG&A expenses increased $14.7 million. The increase in SG&A expenses was primarily due to higher compensation-related expenses, as the prior year was favorably impacted by cost-saving actions, including furloughs, shortened work weeks and temporary salary reductions, that we implemented to mitigate the negative impacts of COVID-19. In addition, we recorded $3.5 million of environmental charges at Corporate during the first quarter of fiscal 2022 related to a previously-owned manufacturing facility in the U.S. We also incurred higher costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and for strategic reorganization costs, including professional fees for the recruiting of new senior management positions and our implementation of our 80/20 strategy. These costs increased $1.5 million and $0.6 million, respectively. Restructuring expenses of $0.3 million decreased $4.3 million, primarily due to lower severance expenses and costs associated with plant consolidation and equipment transfer activities. The net impairment reversal of $1.8 million in the first quarter of fiscal 2022 primarily related to assets held for sale in the Automotive segment. We recorded a net impairment reversal of $2.1 million in the Automotive segment associated with the pending sale of the liquid-cooled automotive business. This net impairment reversal was partially offset by a $0.3 million impairment charge in the CIS segment related to a previously-closed facility. We sold our air-cooled automotive business on April 30, 2021. As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022. Operating income of $8.7 million during the first quarter of fiscal 2022 represents an $11.9 million improvement from the prior-year operating loss of $3.2 million and was primarily due to higher earnings in our HDE, Automotive and CIS segments. The provision for income taxes was $1.9 million in the first quarter of fiscal 2022, compared with a benefit for income taxes of $0.2 million during the first quarter of the prior year. The $2.1 million change was primarily due to increased operating earnings in the current year, partially offset by a $4.8 million income tax benefit recorded in the current year resulting from the reversal of a tax valuation allowance in a foreign jurisdiction. SEGMENT RESULTS OF OPERATIONS Effective July 1, 2021, the BHVAC segment assumed leadership of our business operation in Guadalajara, Spain, which was previously managed by and reported within the CIS segment. This organizational change is integral to our strategic initiative to align our data center businesses under the BHVAC leadership team in order to accelerate organizational efficiencies and operational improvements. We are focused on expanding our presence in the North American and European data center markets. Beginning for the second quarter of fiscal 2022, we will report the financial results of the business in Spain as part of the BHVAC segment. 26 Table of Contents The following is a discussion of our segment results of operations for the three months ended June 30, 2021 and 2020: Building HVAC Systems Three months ended June 30, 2021 2020 (in millions) _ $’s % of sales _ $’s % of sales Net sales $ 59.9 100.0 % $ 47.6 100.0 % Cost of sales 43.7 72.9 % 33.1 69.5 % Gross profit 16.2 27.1 % 14.5 30.5 % Selling, general and administrative expenses 9.4 15.7 % 7.4 15.5 % Operating income $ 6.8 11.4 % $ 7.1 15.0 % BHVAC net sales increased $12.3 million, or 26 percent, from the first quarter of fiscal 2021 to the first quarter of fiscal 2022, primarily due to higher sales volume and, to a lesser extent, a $3.2 million favorable impact of foreign currency exchange rates. BHVAC sales in the first quarter of fiscal 2021 were negatively impacted by the COVID-19 pandemic. Compared with the first quarter of the prior year, BHVAC sales increased $6.8 million and $5.5 million in the U.K. and the U.S., respectively. The higher sales in the U.K. were primarily due to higher sales of air conditioning, data center, and ventilation products. The higher sales in the U.S. were primarily driven by higher sales of heating products, partially offset by lower sales of ventilation products. BHVAC cost of sales increased $10.6 million, or 32 percent, from the first quarter of fiscal 2021 to the first quarter of fiscal 2022 and included a $2.7 million unfavorable impact of foreign currency exchange rate changes. As a percentage of sales, cost of sales increased 340 basis points to 72.9 percent, primarily due to higher material costs, which negatively impacted cost of sales by approximately 360 basis points. As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $1.7 million and gross margin declined 340 basis points to 27.1 percent. SG&A expenses increased $2.0 million, or 20 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased $1.4 million, and a $0.4 million unfavorable impact of foreign currency exchange rate changes. Operating income of $6.8 million decreased $0.3 million from the first quarter of fiscal 2021 to the first quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit. 27 Table of Contents Commercial and Industrial Solutions Three months ended June 30, 2021 2020 (in millions) _ $’s % of sales _ $’s % of sales Net sales $ 159.2 100.0 % $ 122.5 100.0 % Cost of sales 138.4 87.0 % 107.0 87.4 % Gross profit 20.8 13.0 % 15.5 12.6 % Selling, general and administrative expenses 14.1 8.8 % 13.1 10.6 % Restructuring expenses - - 2.4 2.0 % Impairment charge 0.3 0.2 % - - Operating income $ 6.4 4.0 % $ - - CIS net sales increased $36.7 million, or 30 percent, from the first quarter of fiscal 2021 to the first quarter of fiscal 2022, primarily due to higher sales volume and, to a lesser extent, a $7.0 million favorable impact of foreign currency exchange rates. CIS sales in the first quarter of fiscal 2021 were negatively impacted by the COVID-19 pandemic. Compared with the first quarter of the prior year, sales to commercial HVAC&R customers increased $35.1 million. CIS cost of sales increased $31.4 million, or 29 percent, from the first quarter of fiscal 2021 to the first quarter of fiscal 2022, primarily due to higher sales volume. In addition, cost of sales was unfavorably impacted by $6.3 million from foreign currency exchange rate changes. As a percentage of sales, cost of sales decreased 40 basis points to 87.0 percent, primarily due to the favorable impact of higher sales volume and improved operating efficiencies. These favorable drivers were partially offset by higher material costs and unfavorable sales mix. As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $5.3 million and gross margin improved 40 basis points to 13.0 percent. SG&A expenses increased $1.0 million compared with the first quarter of the prior year, primarily due to a $0.6 unfavorable impact of foreign currency exchange rate changes and higher compensation-related expenses. Restructuring expenses decreased $2.4 million compared with the first quarter of fiscal 2021. The restructuring expenses during the first quarter of fiscal 2021 primarily consisted of severance expenses related to plant consolidation activities in China and targeted headcount reductions in North America. During the first quarter of fiscal 2022, we signed an agreement to sell a previously-closed manufacturing facility in the U.S. As a result, we recorded an impairment charge of $0.3 million to write-down the property to fair value less costs to sell. We sold the facility and received net cash proceeds of $0.7 million during July 2021. Operating income increased $6.4 million from the first quarter of fiscal 2021 to the first quarter of fiscal 2022, primarily due to higher gross profit and lower restructuring expenses, partially offset by higher SG&A expenses. 28 Table of Contents Heavy Duty Equipment Three months ended June 30, 2021 2020 (in millions) _ $’s % of sales _ $’s % of sales Net sales $ 201.8 100.0 % $ 123.5 100.0 % Cost of sales 179.2 88.8 % 112.2 90.8 % Gross profit 22.6 11.2 % 11.3 9.2 % Selling, general and administrative expenses 13.5 6.7 % 11.9 9.7 % Restructuring expenses 0.2 0.1 % 1.9 1.5 % Operating income (loss) $ 8.9 4.4 % $ (2.5 ) -2.0 % HDE net sales increased $78.3 million, or 63 percent, from the first quarter of fiscal 2021 to the first quarter of fiscal 2022, primarily due to higher sales volume. HDE sales in the first quarter of fiscal 2021 were negatively impacted by the COVID-19 pandemic. Sales to commercial vehicle, off-highway, and automotive and light vehicle customers increased $32.9 million, $26.5 million, and $7.4 million, respectively. HDE cost of sales increased $67.0 million, or 60 percent, from the first quarter of fiscal 2021 to the first quarter of fiscal 2022, primarily due to higher sales volume. As a percentage of sales, cost of sales decreased 200 basis points to 88.8 percent. Beyond the favorable impact of the higher sales volume, cost savings from procurement initiatives favorably impacted cost of sales by approximately $2.0 million. These favorable drivers were partially offset by higher material and tariff costs, which negatively impacted cost of sales by approximately $8.0 million. As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $11.3 million and gross margin improved 200 basis points to 11.2 percent. SG&A expenses increased $1.6 million compared with the first quarter of the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses. Restructuring expenses during the first quarter of fiscal 2022 totaled $0.2 million, a decrease of $1.7 million compared with the first quarter of fiscal 2021, and primarily consisted of equipment transfer costs. Operating income of $8.9 million represents an $11.4 million improvement from the prior-year operating loss of $2.5 million and was primarily due to higher gross profit and lower restructuring expenses, partially offset by higher SG&A expenses. Automotive Three months ended June 30, 2021 2020 (in millions) _ $’s % of sales _ $’s % of sales Net sales $ 86.2 100.0 % $ 62.1 100.0 % Cost of sales 73.0 84.7 % 57.3 92.3 % Gross profit 13.2 15.3 % 4.8 7.7 % Selling, general and administrative expenses 11.0 12.7 % 8.4 13.6 % Restructuring expenses 0.1 0.1 % 0.2 0.2 % Impairment charges (reversals) – net (2.1 ) -2.4 % - - Operating income (loss) $ 4.2 4.9 % $ (3.8 ) -6.1 % 29 Table of Contents Automotive net sales increased $24.1 million, or 39 percent, from the first quarter of fiscal 2021 to the first quarter of fiscal 2022, primarily due to higher sales volume and, to a lesser extent, a $6.7 million favorable impact of foreign currency exchange rates. Sales volumes in the first quarter of fiscal 2021 were negative ly impacted by the COVID-19 pandemic. Sales in Europe and North America increased $23.9 million and $1.8 million, respectively. Sales in Asia decreased $1.6 million. Automotive cost of sales increased $15.7 million, or 27 percent, from the first quarter of fiscal 2021 to the first quarter of fiscal 2022, primarily due to higher sales volume. As a percentage of sales, cost of sales decreased 760 basis points to 84.7 percent, primarily due to lower depreciation expenses. Depreciation expenses decreased $4.5 million compared with the first quarter of fiscal 2021. We ceased depreciating the long-lived assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale in fiscal 2021. We completed the sale of the air-cooled automotive business on April 30, 2021. As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $8.4 million and gross margin improved 760 basis points to 15.3 percent. SG&A expenses increased $2.6 million compared with the first quarter of the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses. The net impairment reversal of $2.1 million in the first quarter of fiscal 2022 primarily related to assets in our liquid-cooled automotive business. As a result of modifying the sale perimeter with the buyer, we reevaluated the long-lived assets within the businesses that will no longer be sold to the prospective buyer and reversed $7.4 million of previously-recorded impairment charges to adjust the asset groups to their estimated fair value. This impairment reversal was partially offset by $5.3 million of impairment charges related to other assets held for sale in the Automotive segment. Operating income of $4.2 million represents an $8.0 million improvement from the prior-year operating loss of $3.8 million and was primarily due to higher gross profit and the net impairment reversal, partially offset by higher SG&A expenses. Liquidity and Capital Resources Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $49.0 million as of June 30, 2021 and an available borrowing capacity of $199.4 million under our revolving credit facility. Given our extensive international operations, approximately $46.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries. Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated. We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis. Net Cash Provided by Operating Activities Net cash used for operating activities for the three months ended June 30, 2021 was $10.1 million, which represents a $22.4 million decrease compared with net cash provided by operating activities in the same period in the prior year. This decrease in operating cash flow was primarily due to unfavorable net changes in working capital, partially offset by the favorable impact of higher earnings. The unfavorable changes in working capital during the first three months of fiscal 2022, compared with the same period in the prior year, included higher inventory levels and higher payments for incentive compensation and employee benefits. The higher inventory levels in fiscal 2022 have resulted from higher unit costs and increased quantities on hand for raw materials and other purchased component inventory. 30 Table of Contents Capital Expenditures Capital expenditures of $11.4 million during the first three months of fiscal 2022 increased $2.3 million compared with the same period in the prior year. Debt Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below. Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales. In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations. The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”). We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense. As of June 30, 2021, our leverage ratio and interest coverage ratio were 2.0 and 10.8, respectively. We expect to remain in compliance with our debt covenants during fiscal 2022 and beyond. Forward-Looking Statements This report, including, but not limited to, the discussion under Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains statements, including information about future financial performance, accompanied by phrases such as “believes,” “estimates,” “expects,” “plans,” “anticipates,” “intends,” and other similar “forward-looking” statements, as defined in the Private Securities Litigation Reform Act of 1995. Modine’s actual results, performance or achievements may differ materially from those expressed or implied in these statements, because of certain risks and uncertainties, including, but not limited to, those described under “Risk Factors” in Item 1A. in Part I. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021. Other risks and uncertainties include, but are not limited to, the following: Market Risks: • The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers, customers, and employees; • Economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including, in particular, foreign currency exchange rate fluctuations; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); inflation; changes in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade, public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade, the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the short- and long-term implications of “Brexit”; 31 Table of Contents • The impact of potential price increases associated with raw materials, including aluminum, copper, steel and stainless steel (nickel), and other purchased component inventory including, but not limited to, increases in the underlying material cost based upon the London Metal Exchange and related premiums, fabrication, or freight costs. These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand. This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whether through our quotation process or through contract provisions for prospective price adjustments, as well as the inherent lag in timing of such contract provisions; and • The impact of current and future environmental laws and regulations on our business and the businesses of our customers, including our ability to take advantage of opportunities to supply alternative new technologies to meet environmental and/or energy standards and objectives. Operational Risks: • The overall health and continually increasing price-down focus of our vehicular customers in light of economic and market-specific factors, and the potential impact on us from any deterioration in the stability or performance of any of our major customers; • The impact of any problems with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained; • Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offset or otherwise address increasing pricing pressures from competitors and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability; • The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims and delays or inefficiencies resulting from restrictions imposed in response to the COVID-19 pandemic; • The impact of any delays or modifications initiated by major customers with respect to program launches, product applications or volume requirements; • Our ability to consistently structure our operations in order to develop and maintain a competitive cost base with appropriately skilled and stable labor, while also positioning ourselves geographically, so that we can continue to support our customers with the technical expertise and market-leading products they demand and expect from Modine; • Our ability to effectively and efficiently modify our cost structure in response to sales volume increases or decreases and to complete restructuring activities and realize the anticipated benefits of those activities; • Costs and other effects of the investigation and remediation of environmental contamination; particularly when related to the actions or inactions of others and/or facilities over which we have no control; • Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, in light of tight global labor markets; • Our ability to protect our proprietary information and intellectual property from theft or attack by internal or external sources; 32 Table of Contents • The impact of any substantial disruption or material breach of our information technology systems, and any related delays, problems or costs; • Increasingly complex and restrictive laws and regulations, including those associated with being a U.S. public company and others present in various jurisdictions in which we operate, and the costs associated with compliance therewith; • Work stoppages or interference at our facilities or those of our major customers and/or suppliers; • The constant and increasing pressures associated with healthcare and associated insurance costs; and • Costs and other effects of litigation, claims, or other obligations. Strategic Risks: • Our ability to successfully complete the pending sale of our liquid-cooled automotive business, including the receipt of governmental and third-party approvals and the risk that the sale will not close because of a failure to satisfy one or more of the closing conditions (including governmental and third-party approvals) on a timely basis or at all, and our ability to successfully exit our other automotive businesses in a manner that is in the best interest of our shareholders; • Our ability to successfully realize anticipated benefits from our increased “industrial” market presence, with our BHVAC and CIS businesses, while maintaining appropriate focus on the market opportunities presented by our vehicular businesses; • Our ability to identify and execute growth and diversification opportunities in order to position us for long-term success; and • The potential impacts from any actions by activist shareholders, including disruption of our business and related costs. Financial Risks: • Our ability to fund our global liquidity requirements efficiently for Modine’s current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy; • The impact of potential increases in interest rates, particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations, and of the continued uncertainty around the utilization of LIBOR or alternative reference rates; • The impact of changes in federal, state or local tax regulations that could have the effect of increasing our income tax expense; • Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements); 33 Table of Contents • The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and • Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate. Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements. Item 3. Quantitative and Qualitative Disclosures About Market Risk. The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021. The Company’s market risks have not materially changed since the fiscal 2021 Form 10-K was filed.