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 December 31, 2022 was the third quarter of fiscal 2023. Supply Chain Disruptions and Inflationary Market Conditions Market and economic dynamics, including the impacts of the COVID-19 pandemic and the military conflict between Russia and Ukraine, have contributed to global supply chain challenges and inflationary market conditions. We are focused on mitigating the negative impacts of labor shortages, supply chain challenges and inflationary market conditions, including changes in raw material, energy, logistic, and interest costs, as well as delays and shortages in certain purchased commodities and components. We have implemented selling price increases for many of our products in response to raw material and other cost increases and are engaged with suppliers to ensure availability of key raw materials. We cannot reasonably estimate the full impact that the ongoing supply chain challenges and other related economic and market dynamics will have on our business, results of operations, or cash flows in the future. Third Quarter Highlights Net sales in the third quarter of fiscal 2023 increased $57.8 million, or 12 percent, from the third quarter of fiscal 2022, primarily due to higher sales in our Performance Technologies and Climate Solutions segments. Cost of sales increased $34.8 million, or 8 percent, primarily due to higher sales volume. Gross profit increased $23.0 million and gross margin improved 250 basis points to 17.4 percent. Selling, general and administrative (“SG&A”) expenses increased $7.7 million, primarily due to higher compensation-related expenses. Operating income of $39.5 million during the third quarter of fiscal 2023 decreased $39.9 million from the prior year, primarily due to the absence of a $57.2 million impairment reversal recorded in the prior year related to the liquid-cooled automotive business, which reverted back to held and used classification upon the termination of a sale agreement with the prospective buyer during the third quarter of fiscal 2022. See Note 1 of the Notes to Condensed Consolidated Financial Statements for further information regarding the liquid-cooled automotive business, which was classified as held for sale during the first seven months of fiscal 2022. Year-to-date Highlights Net sales in the first nine months of fiscal 2023 increased $204.1 million, or 14 percent, from the same period last year, primarily due to higher sales in each of our operating segments. Cost of sales increased $141.0 million, or 11 percent, from the same period last year, primarily due to higher sales volume and higher raw material costs, including underlying metal prices and related premiums, fabrication, freight, and packaging costs. Gross profit increased $63.1 million and gross margin improved 200 basis points to 16.5 percent. SG&A expenses increased $11.5 million, primarily due to higher compensation-related expenses. Operating income of $101.9 million during the first nine months of fiscal 2023 increased $3.3 million from the prior year, primarily due to higher gross profit, partially offset by the absence of a $55.7 million net impairment reversal recorded in the prior year that primarily related to the liquid-cooled automotive business. 23 Table of Contents CONSOLIDATED RESULTS OF OPERATIONS The following table presents our consolidated financial results on a comparative basis for the three and nine months ended December 31, 2022 and 2021: Three months ended December 31, Nine months ended December 31, 2022 2021 2022 2021 (in millions) $'s % of sales $'s % of sales $'s % of sales $'s % of sales Net sales $ 560.0 100.0 % $ 502.2 100.0 % $ 1,679.8 100.0 % $ 1,475.7 100.0 % Cost of sales 462.4 82.6 % 427.6 85.1 % 1,402.6 83.5 % 1,261.6 85.5 % Gross profit 97.6 17.4 % 74.6 14.9 % 277.2 16.5 % 214.1 14.5 % Selling, general and administrative expenses 58.0 10.3 % 50.3 10.0 % 173.1 10.3 % 161.6 11.0 % Restructuring expenses 0.1 - 2.1 0.4 % 2.2 0.1 % 3.0 0.2 % Impairment charges (reversals) – net - - (57.2 ) -11.4 % - - (55.7 ) -3.8 % Loss on sale of assets - - - - - - 6.6 0.4 % Operating income 39.5 7.1 % 79.4 15.8 % 101.9 6.1 % 98.6 6.7 % Interest expense (5.9 ) -1.1 % (3.8 ) -0.8 % (14.7 ) -0.9 % (11.8 ) -0.8 % Other expense – net (0.4 ) -0.1 % (1.1 ) -0.2 % (4.1 ) -0.2 % (1.6 ) -0.1 % Earnings before income taxes 33.2 5.9 % 74.5 14.8 % 83.1 4.9 % 85.2 5.8 % Provision for income taxes (8.5 ) -1.5 % (0.1 ) - (19.8 ) -1.2 % (7.4 ) -0.5 % Net earnings $ 24.7 4.4 % $ 74.4 14.8 % $ 63.3 3.8 % $ 77.8 5.3 % Comparison of Three Months ended December 31, 2022 and 2021 Third quarter net sales of $560.0 million were $57.8 million, or 12 percent, higher than the third quarter of the prior year, primarily due to higher sales volume in each of our segments and favorable commercial pricing. These increases were partially offset by a $30.2 million unfavorable impact of foreign currency exchange rates. Sales in the Performance Technologies and Climate Solutions segments increased $35.8 million and $21.3 million, respectively. Third quarter cost of sales increased $34.8 million, or 8 percent, primarily due to higher sales volume, partially offset by a $25.5 million favorable impact of foreign currency exchange rates. As a percentage of sales, cost of sales decreased 250 basis points to 82.6 percent, primarily due to the favorable impacts of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs. As a result of higher sales and lower cost of sales as a percentage of sales, third quarter gross profit increased $23.0 million and gross margin improved 250 basis points to 17.4 percent. Third quarter SG&A expenses increased $7.7 million, primarily driven by higher compensation-related expenses, which increased approximately $5.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions. The compensation-related expenses included higher incentive compensation expenses driven by improved financial results, as compared with the prior year. These increases were partially offset by a $2.3 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, which decreased $0.9 million. Restructuring expenses of $0.1 million in the third quarter of fiscal 2023 decreased $2.0 million compared with the third quarter of fiscal 2022, primarily due to lower severance and equipment transfer costs in the Climate Solutions and Performance Technologies segments, respectively. 24 Table of Contents During the third quarter of fiscal 2022, in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges within the Performance Technologies segment. See Note 1 of the Notes to Condensed Consolidated Financial Statements for further information. Operating income of $39.5 million in the third quarter of fiscal 2023 decreased $39.9 million compared with the third quarter of fiscal 2022, primarily due to the absence of the significant impairment reversal recorded in the prior year, partially offset by higher gross profit. Interest expense during the third quarter of fiscal 2023 increased $2.1 million compared with the third quarter of fiscal 2022, primarily due to unfavorable changes in interest rates. In addition, we amended and extended our U.S. credit agreement that provides for a multi-currency revolving credit facility and U.S. dollar- and euro- denominated term loans maturing in October 2027, along with shorter-duration swingline loans. In connection with this credit agreement modification, we recorded $0.7 million of costs as interest expense during the third quarter of fiscal 2023. The provision for income taxes was $8.5 million and $0.1 million in the third quarter of fiscal 2023 and 2022, respectively. The $8.4 million increase was primarily due the absence of an $8.2 million income tax benefit recorded during the third quarter of fiscal 2022 resulting from the reversal of valuation allowances in foreign jurisdictions. Comparison of Nine Months ended December 31, 2022 and 2021 Fiscal 2023 year-to-date net sales of $1,679.8 million were $204.1 million, or 14 percent, higher than the same period last year, primarily due to higher sales volume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases. These increases were partially offset by a $93.1 million unfavorable impact of foreign currency exchange rates. Sales in the Performance Technologies and Climate Solutions segments increased $102.2 million and $97.9 million, respectively. Fiscal 2023 year-to-date cost of sales of $1,402.6 million increased $141.0 million, or 11 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $42.0 million. These increases were partially offset by an $80.2 million favorable impact of foreign currency exchange rates. As a percentage of sales, cost of sales decreased 200 basis points to 83.5 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs. As a result of higher sales and lower cost of sales as a percentage of sales, gross profit increased $63.1 million and gross margin improved 200 basis points to 16.5 percent. Fiscal 2023 year-to-date SG&A expenses increased $11.5 million, primarily driven by higher compensation-related expenses, which increased approximately $14.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions. These increases were partially offset by a $7.1 million favorable impact of foreign currency exchange rates. In addition, strategic reorganization costs, costs associated with our review of strategic alternatives for our automotive businesses, and environmental charges related to a previously-closed manufacturing facility in the U.S., which are each recorded at Corporate, decreased $3.1 million, $2.3 million, and $1.8 million, respectively, during the first nine months of fiscal 2023 compared with the same period in the prior year. Restructuring expenses of $2.2 million in the first nine months of fiscal 2023 decreased $0.8 million compared with the same period last year, primarily due to lower severance expenses in the Climate Solutions segment, partially offset by higher restructuring expenses in the Performance Technologies segment. 25 Table of Contents The net impairment reversal of $55.7 million during the first nine months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Performance Technologies segment. See Note 1 of the Notes to Condensed Consolidated Financial Statements for further information. We sold our Austrian 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 $101.9 million during the first nine months of fiscal 2023 increased $3.3 million compared with the same period last year, primarily due to the $63.1 million increase in gross profit and the absence of the $6.6 million loss on the sale of the Austrian air-cooled automotive business in the prior year. These drivers, which increased operating income in the first nine months of fiscal 2023, were partially offset by the absence of the $55.7 million net impairment reversal recorded in the prior year and higher SG&A expenses. Interest expense during the first nine months of fiscal 2023 increased $2.9 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and $0.7 million of costs recorded in connection with the credit agreement modification during the third quarter of fiscal 2023. The provision for income taxes was $19.8 million and $7.4 million during the first nine months of fiscal 2023 and 2022, respectively. The $12.4 million increase was primarily due to the absence of a net $11.4 million income tax benefit related to valuation allowances on deferred tax assets in foreign jurisdictions recorded in the prior year. SEGMENT RESULTS OF OPERATIONS Effective April 1, 2022, we began managing the company under two operating segments, Climate Solutions and Performance Technologies. Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management. This simplified segment structure allows us to better focus resources on targeted growth opportunities and better enables an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow. The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications. The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center cooling solutions. The Performance Technologies segment provides products and solutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations. The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications. In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services. The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings. The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS Coatings business. The segment realignment had no impact on our consolidated financial position, results of operations, and cash flows. Segment financial information for fiscal 2022 has been recast to conform to the current presentation. 26 Table of Contents The following is a discussion of our segment results of operations for the three months and nine months ended December 31, 2022 and 2021: Climate Solutions Three months ended December 31, Nine months ended December 31, 2022 2021 2022 2021 (in millions) $'s % of sales $'s % of sales $'s % of sales $'s % of sales Net sales $ 248.6 100.0 % $ 227.3 100.0 % $ 748.9 100.0 % $ 651.0 100.0 % Cost of sales 193.8 78.0 % 185.4 81.6 % 586.4 78.3 % 540.6 83.0 % Gross profit 54.8 22.0 % 41.9 18.4 % 162.5 21.7 % 110.4 17.0 % Selling, general and administrative expenses 24.6 9.9 % 23.6 10.4 % 72.3 9.7 % 67.0 10.3 % Restructuring expenses - - 1.5 0.6 % 0.3 - 1.7 0.3 % Impairment charge - - - - - - 0.3 - Operating income $ 30.2 12.2 % $ 16.8 7.4 % $ 89.9 12.0 % $ 41.4 6.4 % Comparison of Three Months ended December 31, 2022 and 2021 Climate Solutions net sales increased $21.3 million, or 9 percent, from the third quarter of fiscal 2022 to the third quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing. This increase was partially offset by a $13.7 million unfavorable impact of foreign currency exchange rates. Compared with the third quarter of the prior year, sales of data center cooling, heat transfer, and HVAC & refrigeration products increased $16.3 million, $2.8 million, and $2.2 million, respectively. Climate Solutions cost of sales increased $8.4 million, or 5 percent, from the third quarter of fiscal 2022 to the third quarter of fiscal 2023, primarily due to higher sales volume, partially offset by an $11.6 million favorable impact of foreign currency exchange rates. As a percentage of sales, cost of sales decreased 360 basis points to 78.0 percent, primarily due to the favorable impact of higher sales volume, and improved operating efficiencies, partially offset by higher labor and inflationary costs. As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.9 million and gross margin improved 360 basis points to 22.0 percent. SG&A expenses increased $1.0 million, yet decreased 50 basis points as a percentage of sales. The increase in SG&A expenses was primarily due to increases in general and administrative expenses that have been impacted by inflationary market conditions and, to a lesser extent, higher compensation-related expenses. These increases were partially offset by a $1.1 million favorable impact of foreign currency exchange rate changes. Restructuring expenses decreased $1.5 million compared with the third quarter of fiscal 2022. The fiscal 2022 restructuring expenses primarily consisted of severance expenses related to targeted headcount reductions in Europe and China. Operating income of $30.2 million increased $13.4 million from the third quarter of fiscal 2022 to the third quarter of fiscal 2023, primarily due to higher gross profit. 27 Table of Contents Comparison of Nine Months ended December 31, 2022 and 2021 Climate Solutions year-to-date net sales increased $97.9 million, or 15 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases. These increases were partially offset by a $43.6 million unfavorable impact of foreign currency exchange rates. Compared with the same period in the prior year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $41.3 million, $37.6 million, and $18.9 million, respectively. Climate Solutions year-to-date cost of sales increased $45.8 million, or 8 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, higher raw material prices, which increased by approximately $10.0 million. These increases were partially offset by a $37.0 million favorable impact of foreign currency exchange rates. As a percentage of sales, cost of sales decreased 470 basis points to 78.3 percent, primarily due to the favorable impact of higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher labor and inflationary costs. As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $52.1 million and gross margin improved 470 basis points to 21.7 percent. Climate Solutions year-to-date SG&A expenses increased $5.3 million, yet decreased 60 basis points as a percentage of sales. The increase in SG&A expenses was primarily due to higher compensation-related expenses, including higher commission expenses, and increases in other general and administrative expenses that have been impacted by inflationary market conditions. These increases were partially offset by a $3.5 million favorable impact of foreign currency exchange rate changes. Restructuring expenses of $0.3 million during the first nine months of fiscal 2023 decreased $1.4 million compared with the same period last year, primarily due to lower severance expenses. The severance expenses during the first nine months of fiscal 2022 primarily related to targeted headcount reductions in Europe and China. The $0.3 million of restructuring expenses during the first nine months of fiscal 2023 primarily consisted of closure costs related to a previously-leased facility. During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write-down a previously-closed manufacturing facility in the U.S. 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 of $89.9 million increased $48.5 million from the same period last year, primarily due to higher gross profit and lower restructuring expenses, partially offset by higher SG&A expenses. Performance Technologies Three months ended December 31, Nine months ended December 31, 2022 2021 2022 2021 (in millions) $'s % of sales $'s % of sales $'s % of sales $'s % of sales Net sales $ 317.8 100.0 % $ 282.0 100.0 % $ 952.1 100.0 % $ 849.9 100.0 % Cost of sales 274.8 86.5 % 249.1 88.3 % 836.9 87.9 % 747.3 87.9 % Gross profit 43.0 13.5 % 32.9 11.7 % 115.2 12.1 % 102.6 12.1 % Selling, general and administrative expenses 25.5 8.0 % 23.4 8.3 % 72.2 7.6 % 73.4 8.6 % Restructuring expenses 0.1 - 0.6 0.2 % 1.9 0.2 % 1.3 0.2 % Impairment reversals - net - - (57.2 ) -20.3 % - - (56.0 ) -6.6 % Operating income $ 17.4 5.5 % $ 66.1 23.5 % $ 41.1 4.3 % $ 83.9 9.9 % Comparison of Three Months ended December 31, 2022 and 2021 Performance Technologies net sales increased $35.8 million, or 13 percent, from the third quarter of fiscal 2022 to the third quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing. These increases were partially offset by a $16.5 million unfavorable impact of foreign currency exchange rates. Compared with the third quarter of the prior year, sales of air-cooled, liquid-cooled, and advanced solutions products increased $20.8 million, $10.5 million, and $5.2 million respectively. 28 Table of Contents Performance Technologies cost of sales increased $25.7 million, or 10 percent, from the third quarter of fiscal 2022 to the third quarter of fiscal 2023, primarily due to higher sales volume and, to a lesser extent, higher labor costs. These increases were partially offset by a $14.0 million favorable impact of foreign currency exchange rates. As a percentage of sales, cost of sales decreased 180 basis points to 86.5 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs. As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $10.1 million and gross margin improved 180 basis points to 13.5 percent. SG&A expenses increased $2.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 30 basis points. The increase in SG&A expenses was primarily due to higher product development costs and other general and administrative expenses that have been impacted by inflationary market conditions. These increases were partially offset by a $1.2 million favorable impact of foreign currency exchange rate changes. Restructuring expenses of $0.1 million during the third quarter of fiscal 2023 decreased $0.5 million compared with the third quarter of fiscal 2022, primarily due to lower equipment transfer costs. During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value. See Note 1 of the Notes to Condensed Consolidated Financial Statements for further information. Operating income of $17.4 million decreased $48.7 million from the third quarter of fiscal 2022 to the third quarter of fiscal 2023, primarily due to the absence of the significant impairment reversal recorded in the prior year, partially offset by higher gross profit. Comparison of Nine Months ended December 31, 2022 and 2021 Performance Technologies year-to-date net sales increased $102.2 million, or 12 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases. These increases were partially offset by a $49.6 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, the absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021. Compared with the same period in the prior year, sales of air-cooled, liquid-cooled, and advanced solutions products increased $65.4 million, $24.6 million, and $16.3 million respectively. Performance Technologies year-to-date cost of sales increased $89.6 million, or 12 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $32.0 million. In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales. During fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business until they reverted back to held and used classification during the third quarter of fiscal 2022. These increases were partially offset by a $43.4 million favorable impact of foreign currency exchange rates. As a percentage of sales, cost of sales was consistent with the same period in the prior year, as the higher material, labor and other inflationary costs were offset by the favorable impact of higher sales. 29 Table of Contents As a result of the higher sales and a consistent gross margin at 12.1 percent, gross profit increased $12.6 million. Performance Technologies year-to-date SG&A expenses decreased $1.2 million compared with the same period last year. As a percentage of sales, year-to-date SG&A expenses decreased by 100 basis points. The decrease in SG&A expenses was primarily due to a $3.8 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, partially offset by higher product development costs and other general and administrative expenses that have been impacted by inflationary market conditions. Restructuring expenses during the first nine months of fiscal 2023 increased $0.6 million compared with the same period last year, primarily due to higher severance expenses, partially offset by lower equipment transfer costs. The severance expenses during the first nine months of fiscal 2023 primarily related to targeted headcount reductions in Europe. Restructuring expenses during the first nine months of fiscal 2022 primarily consisted of equipment transfer costs. The year-to-date net impairment reversal of $56.0 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business. The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded during the first six months of fiscal 2022. See Note 1 of the Notes to Condensed Consolidated Financial Statements for further information. Operating income of $41.1 million during the first nine months of fiscal 2023 decreased $42.8 million from the same period last year, primarily due to the absence of the significant net impairment reversal recorded in the prior year, partially offset by higher gross profit. Liquidity and Capital Resources Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents as of December 31, 2022 of $82.2 million, and available borrowing capacity of $236.2 million under our revolving credit facility. Given our extensive international operations, approximately $78.0 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 provided by operating activities for the nine months ended December 31, 2022 was $67.9 million, which represents a $60.5 million increase compared with the same period in the prior year. This increase in operating cash flow was primarily due to the favorable impact of higher earnings and favorable net changes in working capital, as compared with the same period in the prior year. While inventories have increased $32.4 million from March 31, 2022 to December 31, 2022, the increase has been less significant than the increase during the same period last year. In fiscal 2023, the Company has increased its inventory levels to support higher production levels. In fiscal 2022, the higher inventory levels largely resulted from increased raw material prices and impacts from global supply constraints and challenges, which continue to impact our businesses in fiscal 2023. In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year. 30 Table of Contents Capital Expenditures Capital expenditures of $35.2 million during the first nine months of fiscal 2023 increased $4.5 million compared with the same period in the prior year. The fiscal 2023 capital expenditures include investments supporting our strategic growth initiatives, including expanding our data center business. Debt In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027. This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024. 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. The permitted leverage and interest expense coverage ratios were not modified by the recent credit agreement amendment. 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 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 December 31, 2022, our leverage ratio and interest coverage ratio were 1.6 and 12.4, respectively. We expect to remain in compliance with our debt covenants during the remainder of fiscal 2023 and beyond. Share Repurchase Program During the first nine months of fiscal 2023, we repurchased $4.7 million of our common stock. As of December 31, 2022, we had $47.9 million of authorized share repurchases remaining under the current repurchase program, which expires in November 2024. Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price. 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, 2022. Other risks and uncertainties include, but are not limited to, the following: Market Risks: • The impact of potential adverse developments or disruptions in the global economy and financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the military conflict between Russia and Ukraine; 31 Table of Contents • The impact of other 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 foreign currency exchange rate fluctuations; increases in interest rates; recession and recovery therefrom; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade that have been or may be implemented in the U.S. or abroad; • The impact of potential further price increases associated with raw materials, including aluminum, copper, steel and stainless steel (nickel), and other purchased component inventory including, but not limited to, increases in the underlying material cost based upon the London Metal Exchange and related premiums or fabrication costs. These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand. This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, including through our quotation process or through contract provisions for prospective price adjustments, as well as the inherent lag in timing of such contract provisions; • Our ability to mitigate increased labor costs and labor shortages; • The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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 impact of problems, including logistic and transportation challenges, associated 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; • The overall health of and price-reduction pressure from 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; • Our ability to maintain current customer relationships and compete effectively for new business, including our ability to achieve profit margins acceptable to us by offsetting or otherwise addressing any cost increases associated with supply chain challenges and inflationary market conditions; • The impact of product or manufacturing difficulties or operating inefficiencies, including program launch and product transfer challenges and warranty claims; • The impact of delays or modifications initiated by major customers with respect to program launches, product applications or requirements; • Our ability to consistently structure our operations in order to develop and maintain a competitive cost base with appropriately skilled and stable labor, while also positioning ourselves geographically, so that we can continue to support our customers with the technical expertise and market-leading products they demand and expect from Modine; 32 Table of Contents • Our ability to effectively and efficiently manage our cost structure in response to sales volume increases or decreases; • Costs and other effects of the investigation and remediation of environmental contamination; including 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; • The impact of a 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 realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers; • Our ability to successfully execute and realize anticipated benefits from strategies, including restructuring activities, to reduce costs and improve operating margins; and • The potential impacts from actions by activist shareholders, including disruption of our business and related costs. Financial Risks: • Our ability to fund our global liquidity requirements efficiently for our 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 increases in interest rates in relation to our variable-rate debt obligations; 33 Table of Contents • The impact of changes in federal, state or local taxes that could have the effect of increasing our income tax expense; • Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements); • The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and • Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate. Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.