Item 1. Financial Statements
Item 1. Financial Statements.
MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended June 30, 2022 and 2021
(In millions, except per share amounts)
(Unaudited)
Three months ended June 30,
2022
2021
Net sales
$
541.0
$
494.6
Cost of sales
457.6
421.4
Gross profit
83.4
73.2
Selling, general and administrative expenses
56.3
59.4
Restructuring expenses
1.5
0.3
Impairment charges (reversals) – net
-
( 1.8
)
Loss on sale of assets
-
6.6
Operating income
25.6
8.7
Interest expense
( 4.1
)
( 4.2
)
Other (expense) income – net
( 2.3
)
0.2
Earnings before income taxes
19.2
4.7
Provision for income taxes
( 4.9
)
( 1.9
)
Net earnings
14.3
2.8
Net earnings attributable to noncontrolling interest
-
( 0.5
)
Net earnings attributable to Modine
$
14.3
$
2.3
Net earnings per share attributable to Modine shareholders:
Basic
$
0.27
$
0.04
Diluted
$
0.27
$
0.04
Weighted-average shares outstanding:
Basic
52.2
51.8
Diluted
52.4
52.5
The notes to condensed consolidated financial statements are an integral part of these statements.
1
Table of Contents
MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three months ended June 30, 2022 and 2021
(In millions)
(Unaudited)
Three months ended June 30,
2022
2021
Net earnings
$
14.3
$
2.8
Other comprehensive income (loss), net of income taxes:
Foreign currency translation
( 23.9
)
5.2
Defined benefit plans
1.3
3.4
Cash flow hedges
( 1.6
)
( 0.4
)
Total other comprehensive income (loss)
( 24.2
)
8.2
Comprehensive income (loss)
( 9.9
)
11.0
Comprehensive loss (income) attributable to noncontrolling interest
0.4
( 0.7
)
Comprehensive income (loss) attributable to Modine
$
( 9.5
)
$
10.3
The notes to condensed consolidated financial statements are an integral part of these statements.
2
Table of Contents
MODINE MANUFACTURING COMPANY
CONSOLIDATED
BALANCE SHEETS
June 30, 2022 and March 31, 2022
(In millions, except per share amounts)
(Unaudited)
June 30, 2022
March 31, 2022
ASSETS
Cash and cash equivalents
$
58.7
$
45.2
Trade accounts receivable – net
353.5
367.5
Inventories
310.8
281.2
Other current assets
58.6
63.7
Total current assets
781.6
757.6
Property, plant and equipment – net
299.5
315.4
Intangible assets – net
86.3
90.3
Goodwill
164.6
168.1
Deferred income taxes
25.7
27.2
Other noncurrent assets
66.9
68.4
Total assets
$
1,424.6
$
1,427.0
LIABILITIES AND SHAREHOLDERS’ EQUITY
Short-term debt
$
6.5
$
7.7
Long-term debt – current portion
21.5
21.7
Accounts payable
318.5
325.8
Accrued compensation and employee benefits
90.4
85.1
Other current liabilities
59.4
54.2
Total current liabilities
496.3
494.5
Long-term debt
360.2
348.4
Deferred income taxes
4.4
5.9
Pensions
44.8
47.2
Other noncurrent liabilities
71.8
72.9
Total liabilities
977.5
968.9
Commitments and contingencies (see Note 17)
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 54.9 million and 54.8 million shares
34.3
34.2
Additional paid-in capital
262.7
261.6
Retained earnings
358.7
344.4
Accumulated other comprehensive loss
( 173.3
)
( 149.5
)
Treasury stock, at cost, 3.0
million and 2.8 million shares
( 41.7
)
( 40.0
)
Total Modine shareholders’ equity
440.7
450.7
Noncontrolling interest
6.4
7.4
Total equity
447.1
458.1
Total liabilities and equity
$
1,424.6
$
1,427.0
The notes to condensed consolidated financial statements are an integral part of these statements.
3
Table of Contents
MODINE MANUFACTURING COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
For the three months ended June 30, 2022 and 2021
(In millions)
(Unaudited)
Three months ended June 30,
2022
2021
Cash flows from operating activities:
Net earnings
$
14.3
$
2.8
Adjustments to reconcile net earnings to net cash provided by (used for) operating activities:
Depreciation and amortization
13.9
13.5
Impairment charges (reversals) – net
-
( 1.8
)
Loss on sale of assets
-
6.6
Stock-based compensation expense
1.1
1.2
Deferred income taxes
( 0.9
)
( 3.1
)
Other – net
0.8
0.9
Changes in operating assets and liabilities:
Trade accounts receivable
0.7
( 4.9
)
Inventories
( 38.5
)
( 26.7
)
Accounts payable
6.8
9.2
Other assets and liabilities
16.3
( 7.8
)
Net cash provided by (used for) operating activities
14.5
( 10.1
)
Cash flows from investing activities:
Expenditures for property, plant and equipment
( 10.4
)
( 11.4
)
Payments for disposition of assets
-
( 5.7
)
Other – net
-
1.6
Net cash used for investing activities
( 10.4
)
( 15.5
)
Cash flows from financing activities:
Borrowings of debt
86.7
97.5
Repayments of debt
( 74.3
)
( 62.5
)
Borrowings on bank overdraft facilities – net
1.8
5.7
Purchases of treasury stock under share repurchase program
( 1.1
)
-
Dividend paid to noncontrolling interest
( 0.6
)
( 0.9
)
Other – net
( 0.5
)
( 0.4
)
Net cash provided by financing activities
12.0
39.4
Effect of exchange rate changes on cash
( 2.6
)
0.4
Net increase in cash, cash equivalents, and restricted cash
13.5
14.2
Cash, cash equivalents, and restricted cash – beginning of period
45.4
46.1
Cash, cash equivalents, and restricted cash – end of period
$
58.9
$
60.3
The notes to condensed consolidated financial statements are an integral part of these statements.
4
Table of Contents
MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the three months ended June 30, 2022 and 2021
(In millions)
(Unaudited)
Common stock
Additional
Retained
Accumulated other
Treasury stock,
Non-
controlling
Shares
Amount
paid-in capital
earnings
comprehensive loss
at cost
interest
Total
Balance, March 31 ,
2022
54.8
$
34.2
$
261.6
$
344.4
$
( 149.5
)
$
( 40.0
)
$
7.4
$
458.1
Net earnings
-
-
-
14.3
-
-
-
14.3
Other comprehensive loss
-
-
-
-
( 23.8
)
-
( 0.4
)
( 24.2
)
Stock options and awards
0.1
0.1
-
-
-
-
-
0.1
Purchase of treasury stock
-
-
-
-
-
( 1.7
)
-
( 1.7
)
Stock-based compensation expense
-
-
1.1
-
-
-
-
1.1
Dividend paid to noncontrolling interest
-
-
-
-
-
-
( 0.6
)
( 0.6
)
Balance, June 30 ,
2022
54.9
$
34.3
$
262.7
$
358.7
$
( 173.3
)
$
( 41.7
)
$
6.4
$
447.1
Common stock
Additional
Retained
Accumulated other
Treasury stock,
Non-
controlling
Shares
Amount
paid-in capital
earnings
comprehensive loss
at cost
interest
Total
Balance, March 31 ,
2021
54.3
$
33.9
$
255.0
$
259.2
$
( 161.2
)
$
( 38.2
)
$
7.4
$
356.1
Net earnings
-
-
-
2.3
-
-
0.5
2.8
Other comprehensive income
-
-
-
-
8.0
-
0.2
8.2
Stock options and awards
0.2
0.1
0.7
-
-
-
-
0.8
Purchase of treasury stock
-
-
-
-
-
( 1.0
)
-
( 1.0
)
Stock-based compensation expense
-
-
1.2
-
-
-
-
1.2
Dividend paid to noncontrolling interest
-
-
-
-
-
-
( 0.9
)
( 0.9
)
Balance, June 30 ,
2021
54.5
$
34.0
$
256.9
$
261.5
$
( 153.2
)
$
( 39.2
)
$
7.2
$
367.2
The notes to condensed consolidated financial statements are an integral part of these statements.
5
Table of Contents
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
Note 1: General
The accompanying unaudited condensed consolidated financial statements of Modine Manufacturing Company
(“Modine” or the “Company”) were prepared in conformity with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10 -Q and Rule 10 - 01 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes necessary for a comprehensive presentation of financial position, results of operations and cash flows required by GAAP for complete financial statements. The financial statements include all normal recurring
adjustments that are, in the opinion of management, necessary for a fair statement of results for the interim periods. Results for the first three months of fiscal 2023 are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the consolidated financial statements and
related notes in Modine’s Annual Report on Form 10 -K for the year ended March 31, 202 2.
Disposition of Austrian Air-cooled Automotive Business in Fiscal 2022
On April 30, 2021, the Company sold
its air-cooled automotive business in Austria to Schmid Metall GmbH. As a result of this transaction, the Company recorded a loss of $ 6.6
million during the first quarter of fiscal 2022, which included the write-off of $ 1.7 million of net
actuarial losses related to its pension plan. The Company reported this loss within the loss on sale of assets line on the consolidated statement of operations. Upon transaction closing, $ 5.9 million of cash within the business transferred to the buyer.
In connection with the sale of this business, the Company provided the buyer with a 5 -year, € 4.0 million loan facility. The buyer began borrowing
under this facility during the second quarter of fiscal 2022. At both June 30,2022 and March 31, 2022, the Company recorded a € 4.0
million loan receivable within other noncurrent assets on its consolidated balance sheet because the Company expects to receive the principal repayment more than twelve months from the balance sheet date. Borrowings under the agreement currently
bear interest at 2.6 percent.
Liquid-Cooled
Automotive Business Held for Sale in Fiscal 2022
The Company previously
agreed to sell its liquid-cooled automotive business. During the first quarter of fiscal 2022, the Company and the prospective buyer modified the transaction perimeter to remove certain manufacturing operations. U.S. GAAP requires companies
to measure asset groups that revert back to held and used classification at the lower of their (i) carrying value, as if held for sale classification had not been met; or (ii) fair value at the date of the decision not to sell. As a result,
the Company evaluated the long-lived assets of these businesses that no longer met the requirements to be classified as held for sale and reversed $ 7.4
million of previously-recorded impairment charges during the first quarter of fiscal 2022 to adjust the long-lived assets to their estimated fair value. This impairment reversal was partially offset by $ 5.3 million of impairment charges recorded during the first quarter of fiscal 2022 related to other automotive assets held for sale. The Company reported the net $ 2.1 million impairment reversal during the first quarter of fiscal 2022 within the impairment charges (reversals) line on the consolidated statement
of operations.
The Company and the
prospective buyer subsequently terminated the sale agreement during the third quarter of fiscal 2022. As a result, the liquid-cooled automotive business reverted back to held and used classification and the Company remeasured its long-lived
assets during the third quarter of fiscal 2022.
Disposition of Previously-Closed Facility in Fiscal 2022
During the first quarter of fiscal 2022, the Company signed a definitive agreement to sell a previously-closed manufacturing facility in the U.S.
As a result, the Company recorded an impairment charge of $ 0.3 million within the Climate Solutions segment to write down the property
to fair value less costs to sell. During July 2021, the sale was completed and the Company received net cash proceeds of $ 0.7 million.
6
Table of Contents
Note 2: Revenue Recognition
Effective April 1, 2022, the Company began managing its operations under two operating segments, Climate Solutions and Performance Technologies. The Climate Solutions segment includes the previously-reported Building HVAC Systems (“BHVAC”) and
the Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings. The Performance Technologies segment includes the previously-reported Heavy Duty Equipment (“HDE”) and Automotive segments and the CIS Coatings
business. See Note 19 for additional segment financial information.
The Company’s segments and their principal revenue-generating activities are as follows:
Climate Solutions
The Climate Solutions segment provides energy-efficient, climate-controlled components and solutions for a wide array of applications. The Climate
Solutions segment principally generates revenue from selling heat transfer products, heating, ventilating, air conditioning, and refrigeration (“HVAC & refrigeration”) products, and data center cooling solutions. Heat transfer products
include heat transfer coils used in commercial and residential HVAC and refrigeration applications. HVAC and refrigeration products include commercial and residential unit heaters, vertical and horizontal unit ventilators, air conditioning
chillers, low global warming potential unit coolers, air-cooled condensers, and dry coolers. Data center cooling solutions, which are integrated with system controls, include air- and liquid-cooled chillers, computer room air conditioner and air
handler units, and fan walls.
Performance Technologies
The Performance Technologies segment provides products and solutions that enhance the performance of customer applications. The Performance
Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications. Air-cooled products include radiators, charge air coolers, condensers, and engine cooling modules.
Liquid-cooled products include engine oil coolers, charge air coolers, condensers, and exhaust gas recirculation coolers. In addition, the Performance Technologies segment provides advanced solutions, which are designed to improve battery range
and vehicle life, to zero-emission and hybrid commercial vehicle and automotive customers. These solutions include battery thermal management systems, electronics cooling packages, and battery chillers. The advanced solutions provided by the
segment also include coating products and application services that extend the life of equipment and components by protecting against corrosion.
7
Table of Contents
Disaggregation of Revenue
The table below presents revenue for each of the Company’s operating segments. Each segment’s revenue is disaggregated by product group, by
geographic location and based upon the timing of revenue recognition. The disaggregated revenue information presented in the table below for fiscal 2022 has been recast to be comparable to the current period presentation.
Three months ended June 30 , 2022
Three months ended June 30 , 2021
Climate
Solutions
Performance
Technologies
Segment
Total
Climate
Solutions
Performance
Technologies
Segment
Total
Product groups:
Heat transfer
$
140.5
$
-
$
140.5
$
117.7
$
-
$
117.7
HVAC & refrigeration
78.2
-
78.2
70.6
-
70.6
Data center cooling
25.5
-
25.5
18.2
-
18.2
Air-cooled
-
153.0
153.0
-
141.5
141.5
Liquid-cooled
-
110.9
110.9
-
118.7
118.7
Advanced solutions
-
32.9
32.9
-
27.9
27.9
Inter-segment sales
0.2
7.5
7.7
-
9.0
9.0
Net sales
$
244.4
$
304.3
$
548.7
$
206.5
$
297.1
$
503.6
Geographic location:
Americas
$
139.4
$
164.3
$
303.7
$
104.0
$
138.3
$
242.3
Europe
99.0
96.1
195.1
96.0
104.4
200.4
Asia
6.0
43.9
49.9
6.5
54.4
60.9
Net sales
$
244.4
$
304.3
$
548.7
$
206.5
$
297.1
$
503.6
Timing of revenue recognition:
Products transferred at a point in time
$
230.8
$
281.8
$
512.6
$
203.4
$
277.6
$
481.0
Products transferred over time
13.6
22.5
36.1
3.1
19.5
22.6
Net sales
$
244.4
$
304.3
$
548.7
$
206.5
$
297.1
$
503.6
Contract Balances
Contract assets and contract liabilities from contracts with customers were as follows:
June 30, 2022
March 31, 2022
Contract assets
$
18.2
$
26.8
Contract liabilities
17.9
11.8
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 $ 8.6 million dec rease in contract assets during the first three months of fiscal 2023
primarily resulted from a decrease in contract assets for revenue recognized over time.
Contract liabilities, included within other current liabilities in the consolidated balance sheets, consist of payments received in advance of satisfying performance
obligations under customer contracts, including contracts for customer-owned tooling. The $ 6.1 million increase in contract liabilities
during the first three months of fiscal 2023 primarily resulted from payments received in advance of the Company’s satisfaction of performance obligations.
Note 3: Fair Value Measurements
Fair value is defined as the price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants. Fair value measurements are classified under the following hierarchy:
•
Level 1 – Quoted prices for identical instruments in active markets.
•
Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in
which all significant inputs are observable in active markets.
•
Level 3 – Model-derived valuations in which one or more significant inputs are not observable.
When available, the Company uses quoted market prices to determine fair value and classifies such measurements as Level 1. In some cases, where market prices are not
available, the Company uses observable market-based inputs to calculate fair value, in which case the measurements are classified as Level 2. If quoted or observable market prices are not available, the Company determines fair value based upon
valuation models that use, where possible, market-based data such as interest rates, yield curves or currency rates. These measurements are classified as Level 3.
The carrying values of cash, cash equivalents, restricted cash, short-term investments, trade accounts receivable, accounts payable, and short-term debt approximate fair
value due to the short-term nature of these instruments. The fair value of the Company’s long-term debt is disclosed in Note 16 .
8
Table of Contents
Note 4: Pensions
Pension cost included the following components:
Three months ended June 30,
2022
2021
Service cost
$
0.1
$
0.1
Interest cost
2.0
1.8
Expected return on plan assets
( 2.9
)
( 3.2
)
Amortization of unrecognized net loss
1.4
1.7
Net periodic benefit cost
$
0.6
$
0.4
Our
funding policy 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. In connection with funding relief provisions within the American Rescue
Plan Act of 2021, we do no t expect to make cash contributions to our U.S. pension plans during fiscal 2023.
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 awards granted for retention and performance, (2) a discretionary equity program for other management and key employees, and (3) stock awards for non-employee directors.
The Company calculates compensation expense based upon the fair value of the instruments at the time of grant and subsequently recognizes expense ratably over the
respective vesting periods of the stock-based awards. The Company recognized stock-based compensation expense of $ 1.1 million and $ 1.2 million f or the three months ended June 30, 2022 and 2021, respectively.
The fair value of stock-based compensation awards granted during the three months ended June 30, 2022 and
2021 were as follows:
Three months ended June 30,
2022
2021
Shares
Fair Value
Per Award
Shares
Fair Value
Per Award
Stock options
0.2
$
6.92
0.2
$
9.39
Restricted stock awards
0.2
$
12.28
0.2
$
17.49
In lieu of performance-based stock awards, the Company granted performance cash awards to the LTIP
participants during the first quarter of fiscal 2023. The performance metrics for the cash awards are based upon a target three-year average cash flow return on invested capital and a target three-year average growth in consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA ” ) at the end of the performance period ending March 31, 2025.
9
Table of Contents
The Company used the following assumptions in determining fair value for stock options:
Three months ended June 30,
2022
2021
Expected life of awards in years
6.0
6.1
Risk-free interest rate
3.0
%
1.0
%
Expected volatility of the Company’s stock
57.8
%
56.4
%
Expected dividend yield on the Company’s stock
0.0
%
0.0
%
As of June 30, 2022 , unrecognized compensation expense related to non-vested stock-based compensation
awards, which will be recognized as expense over the remaining service periods, was as follows:
Unrecognized
Compensation
Expense
Weighted-Average
Remaining Service
Period in Years
Stock options
$
3.2
2.7
Restricted stock awards
7.6
2.5
Total
$
10.8
2.6
Note 6: Restructuring Activities
During the first quarter of fiscal 2023, restructuring and repositioning expenses primarily consisted of severance expenses related to targeted headcount reductions in
Europe within the Performance Technologies segment.
During the first quarter of fiscal 2022, restructuring and repositioning expenses primarily consisted
of equipment transfer costs and severance-related expenses within the Performance Technologies segment.
Restructuring and repositioning expenses were as follows:
Three months ended June 30,
2022
2021
Employee severance and related benefits
$
1.4
$
0.1
Other restructuring and repositioning expenses
0.1
0.2
Total
$
1.5
$
0.3
Other restructuring and repositioning expenses primarily consist of equipment transfers and plant consolidation costs.
10
Table of Contents
The Company accrues severance in accordance with its written plans, procedures, and relevant statutory requirements. Changes in accrued severance were as follows:
Three months ended June 30,
2022
2021
Beginning balance
$
20.2
$
4.0
Additions
1.4
0.1
Payments
( 3.3
)
( 1.3
)
Effect of exchange rate changes
( 0.9
)
0.1
Ending balance
$
17.4
$
2.9
Note 7: Other Income and Expense
Other income and expense consisted of the following:
Three months ended June 30,
2022
2021
Interest income
$
0.1
$
-
Foreign currency transactions (a)
( 2.0
)
0.4
Net periodic benefit cost (b)
( 0.4
)
( 0.2
)
Total other (expense) income – net
$
( 2.3
)
$
0.2
(a)
Foreign currency transactions primarily consist of foreign
currency transaction gains and losses on the re-measurement or settlement of foreign currency-denominated assets and liabilities, including intercompany loans and transactions denominated in a foreign currency, along with gains and losses on
certain foreign currency exchange contracts.
(b)
Net periodic benefit cost for the Company’s pension and
postretirement plans is exclusive of service cost.
Note 8: Income Taxes
The Company’s effective tax rate for the three months ended June 30, 2022 and 2021 was 25.5 percent and 40.4 percent , respectively. The effective tax rate for the first quarter of fiscal 2023 is lower than
the first quarter of the prior year, primarily due to changes in the mix and amount of foreign and U.S. earnings. The effective tax rate for the first quarter of fiscal 2022 was favorably impacted by a $ 4.8 million income tax benefit recorded for the release of a valuation allowance in a foreign jurisdiction .
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 the Company’s analysis as of June 30, 2021, the Company determined it was more likely than not that the deferred tax assets in a foreign jurisdiction will be
realized. As a result, the need for the valuation allowance recorded thereon was eliminated and the Company recorded an income tax benefit of $ 4.8 million during the
first quarter of fiscal 2022. The Company’s analysis included consideration of the transaction perimeter modification for the liquid-cooled automotive business and the related impairment reversal; see Note 1 for additional information.
At June 30, 2022, valuation allowances against deferred tax assets in the U.S. and in certain foreign
jurisdictions totaled $ 82.8 million and $ 26.4 million, respectively. The Company will maintain the valuation allowances in each applicable tax jurisdiction until it determines it is more likely
than not the deferred tax assets will be realized, thereby eliminating the need for a valuation allowance. Future events or circumstances, such as lower taxable income or unfavorable changes in the financial outlook of the Company’s operations in
certain foreign jurisdictions, could necessitate the establishment of further valuation allowances .
Accounting policies for interim reporting require the Company to adjust its effective tax rate each
quarter to be consistent with its estimated annual effective tax rate. Under this methodology, the Company applies its estimated annual income tax rate to its year-to-date ordinary earnings to derive its income tax provision each quarter. The
Company records the tax impacts of certain significant, unusual or infrequently occurring items in the period in which they occur. The Company excluded the impact of its operations in certain foreign locations from the overall effective tax rate
methodology and recorded them discretely based upon year-to-date results because the Company anticipates net operating losses for the full fiscal year in these jurisdictions. The Company does not anticipate a significant change in unrecognized tax
benefits during the remainder of fiscal 2023.
11
Table of Contents
Note 9: Earnings Per Share
The components of basic and diluted earnings per share were as follows:
Three months ended June 30,
2022
2021
Net earnings attributable to Modine
$
14.3
$
2.3
Weighted-average shares outstanding – basic
52.2
51.8
Effect of dilutive securities
0.2
0.7
Weighted-average shares outstanding – diluted
52.4
52.5
Earnings per share:
Net earnings per share – basic
$
0.27
$
0.04
Net earnings per share – diluted
$
0.27
$
0.04
For the three months ended June 30, 2022, the calculation of diluted earnings per share excluded 0.9 million and 0.5 million stock options and restricted stock awards, respectively, because they were anti-dilutive.
For the three months ended June 30, 2021, the calculation of diluted earnings per share excluded 0.3 million and 0.2 million stock options and restricted stock awards, respectively, because they were anti-dilutive .
Note 10: Cash, Cash Equivalents and Restricted Cash
Cash, cash equivalents and restricted cash consisted of the following:
June 30, 2022
March 31, 2022
Cash and cash equivalents
$
58.7
$
45.2
Restricted cash
0.2
0.2
Total cash, cash equivalents, and restricted cash
$
58.9
$
45.4
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.
12
Table of Contents
Note 11: Inventories
Inventories consisted of the following:
June 30, 2022
March 31, 2022
Raw materials
$
210.1
$
186.7
Work in process
55.3
55.1
Finished goods
45.4
39.4
Total inventories
$
310.8
$
281.2
Note 12: Property, Plant and Equipment
Property, plant and equipment, including depreciable lives, consisted of the following:
June 30, 2022
March 31, 2022
Land
$
15.9
$
16.8
Buildings and improvements ( 10 - 40 years)
259.8
264.6
Machinery and equipment ( 3 - 15 years)
847.0
869.4
Office equipment ( 3 - 10 years)
94.2
96.2
Construction in progress
28.9
31.2
1,245.8
1,278.2
Less: accumulated depreciation
( 946.3
)
( 962.8
)
Net property, plant and equipment
$
299.5
$
315.4
Note 13: Goodwill and Intangible Assets
The following table presents a rollforward of the carrying value of goodwill from March 31, 2022 to June 30, 2022. The Company has recast the March 31, 2022 goodwill balances to be comparable with the current segment
structure. There was no impact to the underlying reporting units as a result of the segment realignment during the first quarter of fiscal 2023.
Climate
Solutions
Performance
Technologies
Total
Goodwill, March 31 ,
2022
$
108.1
$
60.0
$
168.1
Effect of exchange rate changes
( 3.3
)
( 0.2
)
( 3.5
)
Goodwill, June 30 ,
2022
$
104.8
$
59.8
$
164.6
13
Table of Contents
Intangible assets consisted of the following:
June 30, 2022
March 31, 2022
Gross
Carrying
Value
Accumulated
Amortization
Net
Intangible
Assets
Gross
Carrying
Value
Accumulated
Amortization
Net
Intangible
Assets
Customer relationships
$
59.6
$
( 20.5
)
$
39.1
$
61.2
$
( 20.1
)
$
41.1
Trade names
50.1
( 14.2
)
35.9
50.8
( 13.8
)
37.0
Acquired technology
22.4
( 11.1
)
11.3
23.1
( 10.9
)
12.2
Total intangible assets
$
132.1
$
( 45.8
)
$
86.3
$
135.1
$
( 44.8
)
$
90.3
The Company recorded amortization expense of $ 2.0 million and $ 2.1
million for the three months ended June 30, 2022 and 2021,
respectively . The Company estimates that it will record $ 6.0 million of amortization
expense during the remainder of fiscal 2023 and approximately $ 8.0 million of annual amortization expense in fiscal 2024 through 2028 .
Note 14: Product Warranties
Changes in accrued warranty costs were as follows:
Three months ended June 30,
2022
2021
Beginning balance
$
6.3
$
5.2
Warranties recorded at time of sale
1.4
1.4
Adjustments to pre-existing warranties
( 0.2
)
( 0.2
)
Settlements
( 1.1
)
( 0.8
)
Effect of exchange rate changes
( 0.2
)
-
Ending balance
$
6.2
$
5.6
14
Table of Contents
Note 15: Leases
Lease Assets and Liabilities
The following table provides a summary of leases recorded on the consolidated balance sheets.
Balance Sheet Location
June 30, 2022
March 31, 2022
Lease Assets
Operating lease ROU assets
Other noncurrent assets
$
52.1
$
52.1
Finance lease ROU assets (a)
Property, plant and equipment – net
7.3
7.7
Lease Liabilities
Operating lease liabilities
Other current liabilities
$
11.9
$
12.7
Operating lease liabilities
Other noncurrent liabilities
41.9
41.2
Finance lease liabilities
Long-term debt – current portion
0.4
0.4
Finance lease liabilities
Long-term debt
2.5
2.8
(a)
Finance lease right-of-use (“ROU”) assets were recorded net of accumulated amortization, which totaled $ 2.8 million at both June 30, 2022 and March 31, 2022.
Components of Lease Expense
The components of lease expense were as follows:
Three months ended June 30,
2022
2021
Operating lease expense (a)
$
5.3
$
4.6
Finance lease expense:
Depreciation of ROU assets
0.1
0.1
Interest on lease liabilities
-
-
Total lease expense
$
5.4
$
4.7
(a)
For the three months ended
June 30, 2022 and 2021, operating lease expense included short-term lease expense of $ 1.3 million and $ 0.8 million,
respectively. Variable lease expense was not significant.
Note 16: Indebtedness
Long-term debt consisted of the following:
_
Fiscal year of
maturity
June 30, 2022
March 31, 2022
Term loans
2025
$
158.5
$
163.7
Revolving credit facility
2025
81.7
64.9
5.9 % Senior Notes
2029
100.0
100.0
5.8 % Senior Notes
2027
41.7
41.7
Other (a)
2.9
3.2
384.8
373.5
Less: current portion
( 21.5
)
( 21.7
)
Less: unamortized debt issuance costs
( 3.1
)
( 3.4
)
Total long-term debt
$
360.2
$
348.4
(a)
Other long-term debt primarily
includes finance lease obligations .
Long-term debt, including the current portion of long-term debt, matures as follows:
Fiscal Year
Remainder of 2023
$
18.2
2024
21.5
2025
226.6
2026
33.8
2027
33.8
2028 & beyond
50.9
Total
$
384.8
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 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 June 30, 2022, the weighted-average interest rates for revolving credit facility borrowings and the term loans were 2.8 and 3.4 percent, respectively . 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.
15
Table of Contents
At June 30, 2022, the Company’s borrowings under its revolving credit and swingline facilities totaled $ 81.7
million and $ 4.0 million, respectively, and domestic letters of credit totaled $ 5.4 million. As a result, available borrowing capacity under the Company’s revolving credit facility was $ 158.9 million as of June 30, 2022. At March 31, 2022, the Company’s borrowings under its revolving credit and swingline facilities totaled $ 64.9 million and $ 7.0 million,
respectively.
The
Company also maintains credit agreements for its foreign subsidiaries. The outstanding short-term borrowings related to these foreign credit agreements totaled $ 2.5 million at June 30, 2022. There were $ 0.7 million of short-term borrowings related to these
foreign credit agreements at March 31, 2022.
Provisions in the Company’s credit agreement, Senior Note agreements, and various foreign credit agreements require the Company to maintain compliance with various
covenants and include certain cross-default clauses. Under its primary debt agreements in the U.S., the Company has provided liens on substantially all domestic assets. Also, as specified in the credit agreement, the term loans may require
prepayments in the event of certain asset sales. In addition, at the time of each incremental borrowing under the revolving credit facility, the Company is required to represent to the lenders that there has been no material adverse effect, as
defined in the credit agreement, on its business, property, or results of operations.
The leverage ratio covenant requires the Company to limit its consolidated indebtedness, less a portion of its cash balances, 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”.) 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 June 30, 2022, the Company was in compliance with its debt covenants; its leverage ratio and interest coverage ratio were 2.1 and 12.0 , 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 June 30, 2022 and March 31, 2022, 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 $ 133.2 million and $ 138.9 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 3 for the definition of a Level 2 fair value measurement.
Note 17: Risks, Uncertainties, Contingencies and Litigation
COVID- 19 Pandemic and Supply Chain Disruptions
T he COVID-19 pandemic and other market and economic dynamics have contributed to ongoing global supply
chain challenges and inflationary market conditions. Since the fourth quarter of fiscal 2022, the military conflict between Russia and Ukraine and the related sanctions imposed by governments in the U.S. and abroad have also impacted these
market conditions, particularly driving higher oil and gas prices. The Company is focused on mitigating the negative impacts of labor shortages, supply chain challenges and inflationary market conditions, including rising raw material and
logistic prices as well as delays and shortages in certain purchased commodities and components.
At this time, the Company cannot
reasonably estimate the full impact of the COVID-19 pandemic or the ongoing supply chain challenges and other related economic or market dynamics. If the Company, its suppliers, or its customers experience prolonged shutdowns or other significant
business disruptions, it is possible that the Company’s 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.
16
Table of Contents
Environmental
T he Company has recorded environmental investigation and remediation accruals related to manufacturing
facilities in the U.S., one of which the Company currently owns and operates, and a former manufacturing facility in the Netherlands. These accruals primarily relate to soil and groundwater contamination at 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. In instances where a range of loss can be reasonably estimated for a probable environmental liability, but no amount within the range is a better estimate than any other amount, the Company accrues
the minimum of the range. The Company’s accruals for environmental matters totaled $ 18.8 million and $ 18.2 million as of June 30, 2022 and March 31, 2022, respectively. During the first three months
of fiscal 2023 and 2022, the Company increased its remediation accrual related to a former manufacturing facility in the U.S. by $ 1.0
million and $ 3.4 million, respectively. As additional information becomes available regarding the environmental matters, the Company will
re-assess the liabilities and revise the estimated accruals, if necessary. While it is possible that the ultimate environmental remediation costs may be in excess of amounts accrued, the Company believes, based upon currently available information,
that 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 .
17
Table of Contents
Note 18: Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss were as follows:
Three months ended June 30, 2022
Foreign
Currency
Translation
Defined
Benefit
Plans
Cash Flow
Hedges
Total
Beginning balance
$
( 39.1
)
$
( 111.1
)
$
0.7
$
( 149.5
)
Other comprehensive income (loss) before reclassifications
( 23.5
)
-
( 1.2
)
( 24.7
)
Reclassifications:
Amortization of unrecognized net loss (a)
-
1.3
-
1.3
Realized gains – net (b)
-
-
( 0.4
)
( 0.4
)
Income taxes
-
-
-
-
Total other comprehensive income (loss)
( 23.5
)
1.3
( 1.6
)
( 23.8
)
Ending balance
$
( 62.6
)
$
( 109.8
)
$
( 0.9
)
$
( 173.3
)
Three months ended June 30, 2021
Foreign
Currency
Translation
Defined
Benefit
Plans
Cash Flow
Hedges
Total
Beginning balance
$
( 31.0
)
$
( 130.8
)
$
0.6
$
( 161.2
)
Other comprehensive income before reclassifications
5.0
-
0.3
5.3
Reclassifications:
Amortization of unrecognized net loss (a)
-
1.7
-
1.7
Unrecognized net pension loss in disposed business (c)
-
1.7
-
1.7
Realized gains – net (b)
-
-
( 0.7
)
( 0.7
)
Income taxes
-
-
-
-
Total other comprehensive income
5.0
3.4
( 0.4
)
8.0
Ending balance
$
( 26.0
)
$
( 127.4
)
$
0.2
$
( 153.2
)
(a)
Amounts are included in the calculation of net periodic benefit cost for the Company’s defined benefit plans, which include pension and other postretirement plans. See Note 4 for
additional information about the Company’s pension plans.
(b)
A mounts represent net gains and losses associated with cash flow hedges that were reclassified to net earnings .
(c)
As a result of the sale of the air-cooled automotive business in Austria, the Company wrote off $ 1.7 million of net actuarial losses related to its pension plan as a component of the loss on sale recorded during the first quarter of fiscal 2022. See Note 1 for
additional information.
18
Table of Contents
Note 19: Segment Information
Effective April 1, 2022, the Company began managing its operations under two operating segments, Climate Solutions and Performance Technologies. The Climate Solutions segment includes the previously-reported BHVAC and CIS segments, with the
exception of CIS Coatings. The Performance Technologies segment includes the previously-reported HDE and Automotive segments and the CIS Coatings business. See Note 2 for information regarding the primary operating activities of each segment.
The Company’s new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management. The Company expects this simplified segment structure will allow it to better focus
resources on targeted growth opportunities and allow for a more efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow. The segment realignment had no impact on the Company’s consolidated
financial position, results of operations, and cash flows. Segment financial information for the prior periods has been recast to conform to the current presentation.
The following is a summary of net sales, gross profit and operating income by segment:
Three months ended June 30,
2022
2021
External Sales
Inter-segment
Sales
Total
External Sales
Inter-segment
Sales
Total
Net sales:
Climate Solutions
$
244.2
$
0.2
$
244.4
$
206.5
$
-
$
206.5
Performance Technologies
296.8
7.5
304.3
288.1
9.0
297.1
Segment total
541.0
7.7
548.7
494.6
9.0
503.6
Corporate and eliminations
-
( 7.7
)
( 7.7
)
-
( 9.0
)
( 9.0
)
Net sales
$
541.0
$
-
$
541.0
$
494.6
$
-
$
494.6
Three months ended June 30,
2022
2021
_ $’s
% of sales
_ $’s
% of sales
Gross profit:
Climate Solutions
$
50.4
20.6
%
$
32.6
15.8
%
Performance Technologies
33.0
10.8
%
40.2
13.5
%
Segment total
83.4
15.2
%
72.8
14.5
%
Corporate and eliminations
-
-
0.4
-
Gross profit
$
83.4
15.4
%
$
73.2
14.8
%
19
Table of Contents
Three months ended June 30,
2022
2021
Operating income:
Climate Solutions
$
27.0
$
10.7
Performance Technologies
7.4
15.7
Segment total
34.4
26.4
Corporate and eliminations
( 8.8
)
( 17.7
)
Operating income
$
25.6
$
8.7
The following is a summary of segment
assets, comprised entirely of trade accounts receivable and inventories, and other assets:
June 30, 2022
March 31, 2022
Assets:
Climate Solutions
$
325.0
$
291.7
Performance Technologies
339.3
357.0
Other (a)
760.3
778.3
Total assets
$
1,424.6
$
1,427.0
(a)
Represents cash and cash equivalents, other current assets, property
plant and equipment, intangible assets, goodwill, deferred income taxes, and other noncurrent assets for the Climate Solutions and Performance Technologies segments and Corporate.
20
Table of Contents