Item 8. Financial Statements and Supplementary Data
ITEM 8 .
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA .
MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended March 31, 2023, 2022 and 2021
(In millions, except per share amounts)
2023
2022
2021
Net sales
$
2,297.9
$
2,050.1
$
1,808.4
Cost of sales
1,908.5
1,740.8
1,515.0
Gross profit
389.4
309.3
293.4
Selling, general and administrative expenses
234.0
215.1
210.9
Restructuring expenses
5.0
24.1
13.4
Impairment charges (reversals) – net
-
( 55.7
)
166.8
Loss on sale of assets
-
6.6
-
Operating income (loss)
150.4
119.2
( 97.7
)
Interest expense
( 20.7
)
( 15.6
)
( 19.4
)
Other expense – net
( 4.4
)
( 2.1
)
( 2.2
)
Earnings (loss) before income taxes
125.3
101.5
( 119.3
)
Benefit (provision) for income taxes
28.3
( 15.2
)
( 90.2
)
Net earnings (loss)
153.6
86.3
( 209.5
)
Net earnings attributable to noncontrolling interest
( 0.5
)
( 1.1
)
( 1.2
)
Net earnings (loss) attributable to Modine
$
153.1
$
85.2
$
( 210.7
)
Net earnings (loss) per share attributable to Modine shareholders:
Basic
$
2.93
$
1.64
$
( 4.11
)
Diluted
$
2.90
$
1.62
$
( 4.11
)
Weighted-average shares outstanding:
Basic
52.3
52.0
51.3
Diluted
52.8
52.5
51.3
The notes to consolidated financial statements are an integral part of these statements.
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MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended March 31, 2023, 2022 and 2021
(In millions)
2023
2022
2021
Net earnings (loss)
$
153.6
$
86.3
$
( 209.5
)
Other comprehensive income (loss):
Foreign currency translation
( 18.9
)
( 8.3
)
30.9
Defined benefit plans, net of income taxes of $ 1.1 , $ 0 and $ 10.4 million
6.7
19.7
30.1
Cash flow hedges, net of income taxes of $ 0 , $ 0 and $ 0.6 million
0.1
0.1
1.6
Total other comprehensive income (loss)
( 12.1
)
11.5
62.6
Comprehensive income (loss)
141.5
97.8
( 146.9
)
Comprehensive income attributable to noncontrolling interest
-
( 0.9
)
( 1.7
)
Comprehensive income (loss) attributable to Modine
$
141.5
$
96.9
$
( 148.6
)
The notes to consolidated financial statements are an integral part of these statements.
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MODINE MANUFACTURING COMPANY
CONSOLIDATED BALANCE SHEETS
March 31, 2023 and 2022
(In millions, except per share amounts)
2023
2022
ASSETS
Cash and cash equivalents
$
67.1
$
45.2
Trade accounts receivable – net
398.0
367.5
Inventories
324.9
281.2
Other current assets
56.4
63.7
Total current assets
846.4
757.6
Property, plant and equipment – net
314.5
315.4
Intangible assets – net
81.1
90.3
Goodwill
165.6
168.1
Deferred income taxes
83.7
27.2
Other noncurrent assets
74.6
68.4
Total assets
$
1,565.9
$
1,427.0
LIABILITIES AND SHAREHOLDERS’ EQUITY
Short-term debt
$
3.7
$
7.7
Long-term debt – current portion
19.7
21.7
Accounts payable
332.8
325.8
Accrued compensation and employee benefits
89.8
85.1
Other current liabilities
61.1
54.2
Total current liabilities
507.1
494.5
Long-term debt
329.3
348.4
Deferred income taxes
4.8
5.9
Pensions
40.2
47.2
Other noncurrent liabilities
84.9
72.9
Total liabilities
966.3
968.9
Commitments and contingencies (see Note 20)
Shareholders’ equity:
Preferred stock, $ 0.025 par value, authorized 16.0 million shares, issued – none
-
-
Common stock, $ 0.625 par value, authorized 80.0 million shares, issued 55.4 million and 54.8 million
shares
34.6
34.2
Additional paid-in capital
270.8
261.6
Retained earnings
497.5
344.4
Accumulated other comprehensive loss
( 161.1
)
( 149.5
)
Treasury stock, at cost, 3.3 million and 2.8 million shares
( 49.0
)
( 40.0
)
Total Modine shareholders’ equity
592.8
450.7
Noncontrolling interest
6.8
7.4
Total equity
599.6
458.1
Total liabilities and equity
$
1,565.9
$
1,427.0
The notes to consolidated financial statements are an integral part of these statements.
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MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended March 31, 2023, 2022 and 2021
(In millions)
2023
2022
2021
Cash flows from operating activities:
Net earnings (loss)
$
153.6
$
86.3
$
( 209.5
)
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
Depreciation and amortization
54.5
54.8
68.6
Impairment charges (reversals) – net
-
( 55.7
)
166.8
Loss on sale of assets
-
6.6
-
Stock-based compensation expense
6.6
5.7
6.3
Deferred income taxes
( 59.6
)
( 3.8
)
67.9
Other – net
4.8
3.1
6.3
Changes in operating assets and liabilities:
Trade accounts receivable
( 40.7
)
( 55.6
)
( 17.1
)
Inventories
( 49.4
)
( 70.7
)
( 5.0
)
Accounts payable
10.2
55.1
44.0
Accrued compensation and employee benefits
6.4
9.8
15.7
Other assets
19.6
( 2.4
)
27.5
Other liabilities
1.5
( 21.7
)
( 21.7
)
Net cash provided by operating activities
107.5
11.5
149.8
Cash flows from investing activities:
Expenditures for property, plant and equipment
( 50.7
)
( 40.3
)
( 32.7
)
Proceeds from (payments for) dispositions of assets
0.3
( 7.6
)
0.7
Disbursements for loan origination (see Note 1)
-
( 4.7
)
-
Proceeds from maturities of short-term investments
3.4
3.6
3.4
Purchases of short-term investments
( 3.4
)
( 3.9
)
( 3.6
)
Other – net
-
1.9
0.9
Net cash used for investing activities
( 50.4
)
( 51.0
)
( 31.3
)
Cash flows from financing activities:
Borrowings of debt
374.3
351.8
32.7
Repayments of debt
( 403.4
)
( 306.7
)
( 183.6
)
Borrowings (repayments) on bank overdraft facilities – net
3.0
( 4.3
)
3.6
Purchase of treasury stock under share repurchase program
( 7.3
)
-
-
Dividend paid to noncontrolling interest
( 0.6
)
( 0.9
)
-
Financing fees paid
( 0.6
)
( 0.2
)
( 0.8
)
Other – net
1.3
( 0.5
)
3.0
Net cash (used for) provided by financing activities
( 33.3
)
39.2
( 145.1
)
Effect of exchange rate changes on cash
( 2.0
)
( 0.4
)
1.4
Net increase (decrease) in cash, cash equivalents and restricted cash
21.8
( 0.7
)
( 25.2
)
Cash, cash equivalents and restricted cash – beginning of year
45.4
46.1
71.3
Cash, cash equivalents and restricted cash – end of year
$
67.2
$
45.4
$
46.1
The notes to consolidated financial statements are an integral part of these statements.
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MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the years ended March 31, 2023, 2022 and 2021
(In millions)
Common stock
Additional
paid-in
Retained
Accumulated other
comprehensive
Treasury
stock, at
Non-
controlling
Shares
Amount
capital
earnings
loss
cost
interest
Total
Balance, March 31, 2020
53.4
$
33.3
$
245.1
$
469.9
$
( 223.3
)
$
( 37.1
)
$
5.7
$
493.6
Net (loss) earnings
-
-
-
( 210.7
)
-
-
1.2
( 209.5
)
Other comprehensive income
-
-
-
-
62.1
-
0.5
62.6
Stock options and awards
0.9
0.6
3.6
-
-
-
-
4.2
Purchase of treasury stock
-
-
-
-
-
( 1.1
)
-
( 1.1
)
Stock-based compensation expense
-
-
6.3
-
-
-
-
6.3
Balance, March 31, 2021
54.3
33.9
255.0
259.2
( 161.2
)
( 38.2
)
7.4
356.1
Net earnings
-
-
-
85.2
-
-
1.1
86.3
Other comprehensive income (loss)
-
-
-
-
11.7
-
( 0.2
)
11.5
Stock options and awards
0.5
0.3
0.9
-
-
-
-
1.2
Purchase of treasury stock
-
-
-
-
-
( 1.8
)
-
( 1.8
)
Stock-based compensation expense
-
-
5.7
-
-
-
-
5.7
Dividend paid to noncontrolling interest
-
-
-
-
-
-
( 0.9
)
( 0.9
)
Balance, March 31, 2022
54.8
34.2
261.6
344.4
( 149.5
)
( 40.0
)
7.4
458.1
Net earnings
-
-
-
153.1
-
-
0.5
153.6
Other comprehensive loss
-
-
-
-
( 11.6
)
-
( 0.5
)
( 12.1
)
Stock options and awards
0.6
0.4
2.6
-
-
-
-
3.0
Purchase of treasury stock
-
-
-
-
-
( 9.0
)
-
( 9.0
)
Stock-based compensation expense
-
-
6.6
-
-
-
-
6.6
Dividend paid to noncontrolling interest
-
-
-
-
-
-
( 0.6
)
( 0.6
)
Balance, March 31, 2023
55.4
$
34.6
$
270.8
$
497.5
$
( 161.1
)
$
( 49.0
)
$
6.8
$
599.6
The notes to consolidated financial statements are an integral part of these statements.
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 1: Significant Accounting Policies
Nature of Operations
Modine Manufacturing Company (“Modine” or the “Company”) specializes in providing innovative and environmentally responsible thermal management
products and solutions to diversified global markets and customers in a wide array of commercial, industrial, and building heating, ventilating, air conditioning, and refrigeration (“HVAC&R”) markets. In addition, the Company is a leading
provider of engineered heat transfer systems and high-quality heat transfer components for use in on- and off-highway original equipment manufacturer (“OEM”) vehicular applications. The Company’s primary product groups include i) heat transfer; ii)
HVAC & refrigeration; iii) data center cooling; iv) air-cooled; v) liquid-cooled; and vi) advanced solutions.
Disposition of Austrian Air-cooled Automotive Business in Fiscal 2022
On April 30, 2021, the Company sold i ts Austrian a ir-cooled automotive business to Schmid Metall GmbH. As a result of
this transaction, the Company recorded a loss of $ 6.6 million during 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.
Later in fiscal 2022, the Company paid the buyer $ 2.4 million upon the finalization of a purchase price adjustment for net working
capital and certain other items. Financial results of this business, prior to the disposition, are reported within the Performance Technologies segment. See Note 2 for information regarding the accounting for this business while it was held for
sale. Net sales of this business were $ 63.0 million in fiscal 2021.
In connection with the sale of this business, the Company provided the buyer with a 5 -year, € 4.0 million loan facility. Borrowings under the
agreement currently bear interest at 5.4 percent. During fiscal 2022, the Company disbursed € 4.0 million ($ 4.7 million) to the buyer under this facility. At
both March 31, 2023 and 2022, the Company recorded the 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.
Disposition of Previously-Closed Facility in Fiscal 2022
During fiscal 2022, the Company sold a previously-closed manufacturing facility in the U.S. and received net cash proceeds of $ 0.7 million. As a result of the sale, 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.
Chief Executive Officer (“CEO”) Transition in Fiscal 2021
In August 2020 , Thomas A. Burke stepped down from his position as President and CEO. The Board of Directors subsequently conducted a search for his successor and, effective December 1, 2020 , appointed Neil D. Brinker as President and CEO.
As a result of Mr. Burke’s departure and in connection with the search for and
transition to his successor, the Company recorded costs totaling $ 6.7 million during fiscal 2021 . These costs, which were recorded as selling, general and administrative (“SG&A”) expenses at
Corporate, primarily consisted of severance and benefit-related expenses based upon the terms of Mr. Burke’s transition and separation agreement and costs directly associated with the CEO search, partially offset by the impact of Mr. Burke’s
forfeited stock-based compensation awards.
Basis of Presentation
The Company prepares its consolidated financial statements in conformity with generally accepted accounting principles (“GAAP”) in the United States.
These principles require management to make certain estimates and assumptions in determining assets, liabilities, revenue, expenses and related disclosures. Actual amounts could differ materially from those estimates.
Consolidation Principles
The consolidated financial statements include the accounts of Modine Manufacturing Company and its majority-owned or Modine-controlled subsidiaries.
The Company eliminates intercompany transactions and balances in consolidation.
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Revenue Recognition
The Company recognizes revenue based upon consideration specified in a contract and as it satisfies performance obligations by transferring control
over its products to its customers, which may be at a point in time or over time. The majority of the Company’s revenue is recognized at a point in time, based upon shipment terms. A portion of the Company’s revenue is recognized over time, based
upon estimated progress toward satisfaction of the contractual performance obligations. See Note 3 for additional information.
Shipping and Handling Costs
The Company records shipping and handling costs incurred upon the shipment of products to its customers in cost of sales, and related amounts billed to
these customers in net sales.
Trade Accounts Receivable
The Company records trade receivables at the invoiced amount. Trade receivables do not bear interest if paid according to the original terms. The Company
maintains an allowance for credit losses, representing its estimate of expected losses associated with its trade accounts receivable. The Company bases its estimate using historical loss experience and considers the aging of the receivables and risks
specific to customers where appropriate. At March 31, 2023 and 2022, the allowance for credit losses was $ 2.2 million and $ 1.7 million, respectively. The changes to the Company’s allowance for credit losses during fiscal 2023 and 2022 were not material and primarily consisted
of current-period provisions, write-offs charged against the allowance, recoveries collected, and foreign currency translation.
The Company enters into supply chain financing programs from time to time to sell accounts receivable, without recourse, to third-party financial
institutions. Sales of accounts receivable are reflected as a reduction of accounts receivable on the consolidated balance sheets and the proceeds are included in cash flows from operating activities in the consolidated statements of cash flows.
During fiscal 2023, 2022, and 2021, the Company sold $ 150.6 million, $ 126.4 million, and $ 88.7 million, respectively, of accounts
receivable to accelerate cash receipts. During fiscal 2023, 2022, and 2021, the Company recorded costs totaling $ 1.2 million, $ 0.3 million, and $ 0.2 million, respectively, related to selling accounts receivable in the
consolidated statements of operations.
Warranty
The Company provides product warranties for specific product lines and accrues for estimated future warranty costs in the period in which the sale is
recorded. The Company records warranty expense, within cost of sales, based upon historical and current claims data or based upon estimated future claims. Accrual balances, which are recorded within other current liabilities, are monitored and
adjusted if it is probable that expected claims will differ from previous estimates. See Note 15 for additional information.
Tooling
The Company accounts for production tooling costs as a component of property, plant and
equipment when it owns title to the tooling and amortizes the capitalized cost to cost of sales over the estimated life of the asset, which is generally three years . At March 31, 2023 and 2022 ,
Company-owned tooling totaled $ 17.1 million
and $ 18.3 million , respectively.
In certain instances, tooling is owned by the customer. At the time customer-owned
tooling is completed and customer acceptance is obtained, the Company records tooling revenue and related production costs within net sales and cost of sales, respectively, in the consolidated statements of operations. If the customer has agreed to reimburse the Company, unbilled customer-owned tooling costs
are recorded as a receivable within other current assets. No significant arrangements exist where customer-owned tooling costs were not accompanied by guaranteed reimbursement. At March 31, 2023 and 2022 , customer-owned tooling receivables totaled $ 10.9 million and $ 12.3 million , respectively.
Stock-based Compensation
The Company recognizes stock-based compensation using the fair value method. Accordingly, compensation expense for stock options, restricted stock and
performance-based stock awards is calculated based upon the fair value of the instruments at the time of grant and is recognized as expense over the respective vesting periods. See Note 5 for additional information.
Research and Development
The Company expenses research and development costs as incurred within SG&A
expenses. During fiscal 2023, 2022, and 2021 , research and development costs totaled $ 44.0 million, $ 50.3 million, and $ 46.3 million, respectively.
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Translation of Foreign Currencies
The Company translates assets and liabilities of foreign subsidiaries into U.S. dollars at the period-end exchange rates and translates income and
expense items at the monthly average exchange rate for the period in which the transactions occur. The Company reports resulting translation adjustments within accumulated other comprehensive income (loss) within shareholders’ equity. The Company
includes foreign currency transaction gains or losses in the statement of operations within other income and expense.
Derivative Instruments
The Company enters into derivative financial instruments from time to time to manage certain financial risks. The Company enters into forward contracts
to reduce exposure to changing future purchase prices for aluminum and copper and into foreign currency exchange contracts to hedge specific foreign currency-denominated assets and liabilities as well as forecasted transactions. The Company
designates certain derivative financial instruments as cash flow hedges for accounting purposes. These instruments are used to manage financial risks and are not speculative. See Note 19 for additional information.
Income Taxes
The Company determines deferred tax assets and liabilities based upon the difference between the amounts reported in the financial statements and the
tax basis of assets and liabilities, using enacted tax rates in effect in the years in which the differences are expected to reverse. The Company establishes a valuation allowance if it is more likely than not that a deferred tax asset, or portion
thereof, will not be realized. The Company records the tax effects of global intangible low-taxed income (“GILTI”) as a period expense in the applicable tax year. The Company uses the portfolio approach for releasing income tax effects from
accumulated other comprehensive income (loss). See Note 8 for additional information.
Earnings per Share
The Company calculates basic earnings per share based upon the weighted-average number of common shares outstanding during the period, while the
calculation of diluted earnings per share includes the dilutive effect of potential common shares outstanding during the period. The calculation of diluted earnings per share excludes potential common shares if their inclusion would have an
anti-dilutive effect. See Note 9 for additional information.
Cash and Cash Equivalents
The Company considers all highly-liquid investments with original maturities of three months or less to be cash equivalents.
Short-term Investments
The Company invests in time deposits with original maturities of more than three months but not more than one year. The Company records these
short-term investments at cost, which approximates fair value, within other current assets in the consolidated balance sheets. As of March 31, 2023 and 2022, the Company’s short-term investments totaled $ 3.5 million and $ 3.7 million, respectively.
Inventories
The Company values inventories using a first-in, first-out or weighted-average basis, at the lower of cost and net realizable value.
Property, Plant and Equipment
The Company records property, plant and equipment at cost. For financial reporting
purposes, the Company computes depreciation using the straight-line method over the expected useful lives of the assets. The Company expenses maintenance and repair costs as incurred. The Company capitalizes costs of improvements. Upon the sale or
other disposition of an asset, the Company removes the cost and related accumulated depreciation from the accounts and includes the gain or loss in the consolidated statements of operations. Capital expenditures of $ 13.6 million , $ 9.0 million, and $ 7.9 million were accrued within accounts payable at March 31, 2023, 2022 and 2021 , respectively.
Leases
The Company’s most significant leases represent leases of real estate, such as manufacturing facilities, warehouses, and office buildings. The Company
also leases manufacturing and information technology equipment and vehicles. The Company recognizes right-of-use (“ROU”) assets and lease liabilities at the lease commencement date, based upon the present value of lease payments over the lease
term. See Note 16 for additional information.
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Goodwill
The Company does not amortize goodwill; rather, it tests for impairment annually unless conditions exist that would require a more frequent
evaluation. The Company performs an assessment of the fair value of its reporting units for goodwill impairment testing based upon, among other things, the present value of expected future cash flows. The Company performed its goodwill impairment
test as of March 31, 2023 and determined the fair value of each of its reporting units exceeded the respective book value. See Note 14 for additional information.
I mpairment of Held and Used Long-lived Assets
The Company reviews held and used long-lived assets, including property, plant and equipment and intangible assets, for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset may not be fully recoverable. In these instances, the Company compares the undiscounted future cash flows expected to be generated from the asset with its carrying value. If
the asset’s carrying value exceeds expected future cash flows, the Company measures and records an impairment loss, if any, as the amount by which the carrying value of the asset exceeds its fair value. The Company estimates fair value using a
variety of valuation techniques, including discounted cash flows, market values and comparison values for similar assets.
Assets Held for Sale
The Company classifies an asset as held for sale when (i) management approves and commits to a formal plan to actively market the asset for sale at a reasonable price in
relation to its fair value; (ii) the asset is available for immediate sale in its present condition; (iii) an active program to locate a buyer and other actions required to complete the sale have been initiated; (iv) the sale of the asset is expected
to be completed within one year; and (v) it is unlikely that significant changes will be made to the plan. Upon classification as held for sale, the Company records the carrying value of the asset at the lower of its carrying value or its estimated
fair value, less costs to sell. In addition, the Company ceases to record depreciation for assets held for sale. See Note 2 for additional information.
Deferred Compensation Trusts
The Company maintains deferred compensation trusts to fund future obligations under its non-qualified deferred compensation plans. The trusts’
investments in third-party debt and equity securities are presented within other noncurrent assets in the consolidated balance sheets.
Self-insurance Reserves
The Company retains a portion of the financial risk for certain insurance coverage, including property, general liability, workers compensation, and
employee healthcare, and therefore maintains reserves that estimate the impact of unreported and under-reported claims that fall below various stop-loss limits and deductibles under its insurance policies. The Company maintains reserves for the
estimated settlement cost of known claims, as well as estimates of incurred but not reported claims. The Company charges costs of claims, including the impact of changes in reserves due to claim experience and severity, to cost of sales or SG&A
expenses. The Company reviews and updates the amount of its insurance-related reserves on a quarterly basis.
Environmental Liabilities
The Company records liabilities for environmental assessments and remediation activities in the period in which its responsibility is probable and the
costs can be reasonably estimated. The Company records environmental indemnification assets from third parties, including prior owners, when recovery is probable. To the extent that the required remediation procedures change, or additional
contamination is identified, the Company’s estimated environmental liabilities may also change. See Note 20 for additional information.
S upplemental Cash Flow Information
Years ended March 31,
2023
2022
2021
Interest paid
$
18.4
$
14.1
$
17.9
Income taxes paid
31.9
21.8
19.7
See Note 16 for
supplemental cash flow information related to the Company’s leases.
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
New Accounting Guidance
Supplier Finance Programs
In September 2022, the Financial Accounting Standards Board (“FASB”) issued new guidance that will require companies that use supplier finance programs to disclose information about the programs,
including key terms, outstanding obligations under such programs and where outstanding amounts are presented within their financial statements. In addition, a roll forward of obligations under supplier finance programs will be required annually.
The new guidance is effective for the Company’s fiscal 2024 financial statements, with the exception of the roll forward disclosure requirement, which will become effective one year later. The Company is currently evaluating the new disclosures,
but does not expect the guidance will have a material impact on its consolidated financial statements.
Income Tax Simplification
In December 2019, the FASB issued new guidance designed to simplify the accounting for income taxes. The new guidance eliminated certain exceptions related to the approach
for intraperiod tax allocations and the methodology for deferred tax liabilities. The Company adopted this guidance as of April 1, 2021. The adoption did not have a material impact on the Company’s consolidated financial statements.
Credit Losses
In June 2016, the FASB issued new guidance related to the accounting for credit losses for certain financial assets, including trade accounts receivable and contract
assets. The new guidance modified the credit loss model to measure and recognize credit losses based upon expected losses rather than incurred losses. The Company adopted this guidance as of April 1, 2020. The adoption did not have a material impact
on the Company’s consolidated balance sheets, statements of operations or statements of cash flows.
Note 2: Assets Held for Sale
On November 2, 2020, the Company signed a definitive agreement to sell its liquid-cooled automotive business to Dana Incorporated (“Dana”). Beginning at that time, the
Company classified this business as held for sale and ceased recording depreciation expense for its long-lived assets. On October 25, 2021, the Company announced that it agreed with Dana to terminate the sale agreement. Both companies had been
actively engaged in the regulatory review process in Germany for many months and agreed that it was no longer in the best interest of either party to pursue the sale transaction further.
In connection with the termination of the sale agreement, the Company determined that the liquid-cooled automotive business no longer met the requirements to
be classified as held for sale. As a result, the Company remeasured the long-lived assets reverting 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 and reversed $ 57.2 million of held for sale impairment charges during the third quarter of
fiscal 2022. The long-lived assets primarily consisted of property, plant and equipment assets and were fully impaired while classified as held for sale. For purposes of the remeasurement, the Company engaged third-party valuation specialists to
assist in estimating the fair values of the assets. The Company primarily used the market and cost valuation approaches and utilized third-party information from various industry-accepted sources, including applicable government-published statistics
and data from appraisal and resale service providers. The market approach focused on prices for comparable assets in arm’s length transactions. For land and building assets, for example, sales of similar properties near the Company’s facilities
were analyzed. For machinery and equipment assets, the Company referenced available third-party information regarding the selling prices of similar equipment. The cost approach focused on the amount for which an asset could be replaced or
reproduced. The cost of an asset was then adjusted downward based on various factors including, but not limited to, age, location, and physical condition. After estimating the fair values of the assets reverting back to held and used
classification, the Company compared the fair value for each asset to its carrying value. Carrying value represented each asset’s carrying value before the initial impairment charge, reduced for depreciation that would have been recorded if the
asset had not been classified as held for sale. The Company then adjusted each asset to the lower of fair value or carrying value, resulting in the reversal of $ 57.2 million of previous impairment charges. In addition, the Company resumed depreciating the property, plant and equipment assets of the liquid-cooled automotive business based on the
remeasured asset values during the third quarter of fiscal 2022.
51
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The $ 57.2 million held for sale impairment reversal during
the third quarter of fiscal 2022 was partially offset by $ 1.2 million of net held for sale impairment charges recorded earlier in fiscal
2022. At both June 30, 2021 and September 30, 2021, while the liquid-cooled automotive business was held for sale, the Company reassessed its fair value less costs to sell. As a result of these evaluations, the Company recorded a total of $ 8.6 million of impairment charges during the first and second quarters of fiscal 2022. These impairment charges reduced the net carrying value of
property, plant and equipment additions during each quarter to zero . In addition, in connection with a modification of the sale
perimeter in the first quarter of fiscal 2022, the Company determined that certain manufacturing operations no longer met the requirements to be classified as held for sale. As a result, the Company reversed $ 7.4 million of previous impairment charges to adjust the long-lived assets within the asset groups impacted by the sale perimeter change to their estimated fair value. The
Company’s determination of fair value for the long-lived assets within the businesses impacted by the sale perimeter
change in the first quarter involved judgement and the use of significant estimates and assumptions, including assumptions regarding future revenue projections and operating profit margins and risk-adjusted discount rates.
When the liquid-cooled automotive business was initially classified as held for sale during the third quarter of fiscal 2021, the Company assessed the disposal group’s fair
value less costs to sell and reduced the net carrying value of the disposal group’s long-lived assets to zero . During fiscal 2021, the
Company recorded impairment charges totaling $ 138.3 million related to the long-lived assets within the liquid-cooled automotive business.
Also during fiscal 2021, the Company signed a definitive agreement to sell its Austrian air-cooled automotive business to Schmid Metall GmbH. Upon classification as held
for sale, the Company estimated an implied loss in excess of the carrying value of the disposal group’s long-lived assets, which primarily consisted of property, plant and equipment assets. As a result, the Company recorded a $ 26.8 million impairment charge related to this business, reducing the carrying value of the disposal group’s long-lived assets to zero . In addition, the Company recorded an impairment charge of $ 1.7 million related to other equipment within the Performance Technologies segment. See Note 1 for additional information regarding the accounting for the sale of the Austrian air-cooled
automotive business, which was completed in fiscal 2022.
The Company reported the impairment charges and reversals during fiscal 2022 and 2021 within the impairment charges (reversals) line on the consolidated statements of
operations.
Note 3: Revenue Recognition
The Company generates revenue from selling innovative thermal management products and solutions to diversified global markets and customers. The
Company recognizes revenue based upon consideration specified in a contract and as it satisfies performance obligations by transferring control over its products to its customers, which may be at a point in time or over time. The majority of the
Company’s revenue is recognized at a point in time, based upon shipment terms. The Company records an allowance for credit losses and accrues for estimated warranty costs at the time of sale. These estimates are based upon historical experience,
current business trends, and current economic conditions. The Company accounts for shipping and handling activities as fulfilment costs rather than separate performance obligations and records shipping and handling costs in cost of sales and related
amounts billed to customers in net sales. The Company establishes payment terms with its customers based upon industry and regional practices, which typically do not exceed 90 days . As the Company expects to receive payment from its customers within one year from the time of sale, it disregards the effects of the time value of money in its determination of the
transaction price. The Company has not disclosed the value of unsatisfied performance obligations because the revenue associated with customer contracts for which the original expected performance period is greater than one year is immaterial.
The following is a description of the Company’s principal revenue-generating activities:
Climate Solutions
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.
Heating products are manufactured in the U.S. and are largely sold to independent distributors, who in turn market the heating products to end customers. Because these
products are sold to many different customers without contractual or practical limitations, the Climate Solutions segment recognizes revenue at the time control is transferred to the customer, generally the independent distributor, based upon
shipping terms, which is generally upon shipment.
52
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Ventilation and air conditioning products are highly-specified to a customer’s needs; the majority of the underlying sales contracts do not provide the Company with an
enforceable right to payment for performance completed to date. As a result, the Climate Solutions segment recognizes revenue for the majority of its products at the time control is transferred to the customer based upon shipping terms, which is
generally upon shipment.
For the sale of heat transfer products, refrigeration products, and data center cooling solutions, individual customer purchase orders generally represent the Company’s
contract with its customers. With the exception of a small number of customers, the applicable customer contracts do not provide the Company with an enforceable right to payment for performance completed to date. As a result, the Climate Solutions
segment recognizes revenue for these products primarily at the time control is transferred to the customer based upon shipping terms, which is generally upon shipment.
For sales to customers whose contract cancellation terms provide an enforceable right to payment, the Climate Solutions segment recognizes revenue over time based upon its
estimated progress toward satisfaction of the performance obligations. The segment measures progress by evaluating the production status toward completion of ordered products not yet shipped to its customers.
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, automotive, bus and specialty vehicle 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.
While the Performance Technologies segment provides customized production and service parts to customers under multi-year programs, these programs typically do not contain
contractually-guaranteed volumes to be purchased by the customer. As a result, individual purchase orders typically represent the quantities ordered by the customer. With the exception of a small number of customers, the terms within the customer
agreement, purchase order, or customer-owned tooling contract do not provide the Company with an enforceable right to payment for performance completed to date. As a result, the Performance Technologies segment recognizes revenue primarily at the
time control is transferred to the customer based upon shipping terms, which is generally upon shipment.
In regard to the Performance Technologies customers with contractual cancellation terms that provide an enforceable right to payment for performance completed to date, the
Company recognizes revenue over time based upon its estimated progress toward satisfaction of the performance obligations. The Performance Technologies segment measures progress by evaluating the production status of ordered products not yet shipped
to the customer.
For sales of coatings
products, in which the customers control the equipment being enhanced by the coating application, the Performance Technologies segment recognizes revenue over time based upon its estimated progress toward satisfaction of the performance
obligations. The segment measures progress by evaluating the production status toward completion of ordered products or services not yet shipped to its customers.
For certain customer programs, the Company agrees to provide annual price reductions based upon contract terms. For these scheduled price reductions, the Company evaluates
whether the provisions represent a material right to the customer, and if so, defers associated revenue as a result.
At times, the Company makes up-front incentive payments to certain customers related to future sales under multi-year programs. The Company capitalizes these incentive
payments, which it expects to recover through future sales, and amortizes the assets as a reduction to revenue when the related products are sold to customers.
53
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Disaggregation of Revenue
The tables below present
revenue for each of the Company’s operating segments, Climate Solutions and Performance Technologies. Each segment’s revenue is disaggregated by product group, by geographic location and based upon the timing of 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 22 for additional
information regarding the Company’s operating segments. The disaggregated revenue information presented in the tables below for fiscal 2022 and 2021 has been recast to be comparable with the fiscal 2023 presentation.
Year ended March 31, 2023
Climate
Solutions
Performance
Technologies
Segment
Total
Product groups:
Heat transfer
$
521.2
$
-
$
521.2
HVAC & refrigeration
336.3
-
336.3
Data center cooling
154.0
-
154.0
Air-cooled
-
658.6
658.6
Liquid-cooled
-
483.9
483.9
Advanced solutions
-
143.9
143.9
Inter-segment sales
0.4
29.8
30.2
Net sales
$
1,011.9
$
1,316.2
$
2,328.1
Geographic location:
Americas
$
580.9
$
702.0
$
1,282.9
Europe
406.0
408.5
814.5
Asia
25.0
205.7
230.7
Net sales
$
1,011.9
$
1,316.2
$
2,328.1
Timing of revenue recognition:
Products transferred at a point in time
$
959.8
$
1,242.3
$
2,202.1
Products transferred over time
52.1
73.9
126.0
Net sales
$
1,011.9
$
1,316.2
$
2,328.1
54
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Year ended March 31, 2022
Climate
Solutions
Performance
Technologies
Segment
Total
Product groups:
Heat transfer
$
488.3
$
-
$
488.3
HVAC & refrigeration
325.5
-
325.5
Data center cooling
96.3
-
96.3
Air-cooled
-
572.3
572.3
Liquid-cooled
-
448.3
448.3
Advanced solutions
-
119.4
119.4
Inter-segment sales
0.4
32.4
32.8
Net sales
$
910.5
$
1,172.4
$
2,082.9
Geographic location:
Americas
$
485.9
$
585.6
$
1,071.5
Europe
396.7
375.7
772.4
Asia
27.9
211.1
239.0
Net sales
$
910.5
$
1,172.4
$
2,082.9
Timing of revenue recognition:
Products transferred at a point in time
$
889.3
$
1,093.7
$
1,983.0
Products transferred over time
21.2
78.7
99.9
Net sales
$
910.5
$
1,172.4
$
2,082.9
Year ended March 31, 2021
Climate
Solutions
Performance
Technologies
Segment
Total
Product groups:
Heat transfer
$
386.9
$
-
$
386.9
HVAC & refrigeration
279.7
-
279.7
Data center cooling
64.5
-
64.5
Air-cooled
-
520.3
520.3
Liquid-cooled
-
458.9
458.9
Advanced solutions
-
98.1
98.1
Inter-segment sales
0.1
31.5
31.6
Net sales
$
731.2
$
1,108.8
$
1,840.0
Geographic location:
Americas
$
379.7
$
472.0
$
851.7
Europe
307.0
411.1
718.1
Asia
44.5
225.7
270.2
Net sales
$
731.2
$
1,108.8
$
1,840.0
Timing of revenue recognition:
Products transferred at a point in time
$
722.7
$
1,044.7
$
1,767.4
Products transferred over time
8.5
64.1
72.6
Net sales
$
731.2
$
1,108.8
$
1,840.0
55
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Contract Balances
Contract assets and contract liabilities from contracts with customers were as follows:
March 31, 2023
March 31, 2022
Contract assets
$
19.3
$
26.8
Contract liabilities
21.5
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 $ 7.5 million decrease in contract assets during 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 $ 9.7 million increase in contract liabilities
during fiscal 2023 primarily resulted from payments received in advance of the Company’s satisfaction of performance obligations.
Note 4: Fair Value Measurements
Fair value is defined as the price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for
the asset or liability in an orderly transaction between market participants. Fair value measurements are classified under the following hierarchy:
•
Level 1 – Quoted prices for identical instruments in active markets.
•
Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and
model-derived valuations in which all significant inputs are observable in active markets.
•
Level 3 – Model-derived valuations in which one or more significant inputs are not observable.
When available, the Company uses quoted market prices to determine fair value and classifies such measurements as Level 1. In some cases, where market
prices are not available, the Company uses observable market-based inputs to calculate fair value, in which case the measurements are classified as Level 2. If quoted or observable market prices are not available, the Company determines fair value
based upon valuation models that use, where possible, market-based data such as interest rates, yield curves or currency rates. These measurements are classified as Level 3.
The carrying values of cash, cash equivalents, restricted cash, short-term investments, trade accounts receivable, accounts payable, and short-term debt approximate fair
value due to the short-term nature of these instruments. In addition, the Company assesses the fair value of a disposal group for each reporting period it is held for sale. See Note 2 for additional information regarding assets held for sale. The
fair value of the Company’s long-term debt is disclosed in Note 17.
The Company holds investments in deferred compensation trusts to fund obligations under certain non-qualified deferred compensation plans. The Company records the fair
value of these investments within other noncurrent assets on its consolidated balance sheets. The Company classifies money market investments held by the trusts within Level 2 of the valuation hierarchy. The Company classifies all other investments
held by the trusts within Level 1 of the valuation hierarchy, as it uses quoted market prices to determine the investments’ fair value. The Company’s deferred compensation obligations, which are recorded as other noncurrent liabilities, are recorded
at the fair values of the investments held by the trust. At March 31, 2023 and 2022, the fair values of the investments and obligations for the Company’s deferred compensation plans each totaled $ 2.3 million and $ 2.9 million, respectively.
56
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Plan assets related to the Company’s pension plans were classified as follows:
March 31, 2023
Level 1
Level 2
Total
Money market investments
$
-
$
1.9
$
1.9
Pooled equity funds
34.9
-
34.9
Other
-
0.4
0.4
Fair value excluding investments measured at net asset value
34.9
2.3
37.2
Investments measured at net asset value
116.1
Total fair value
$
153.3
March 31, 2022
Level 1
Level 2
Total
Money market investments
$
-
$
2.2
$
2.2
Fixed income securities
-
9.1
9.1
Pooled equity funds
40.4
-
40.4
U.S. government and agency securities
-
11.8
11.8
Other
0.1
1.4
1.5
Fair value excluding investment measured at net asset value
40.5
24.5
65.0
Investments measured at net asset value
114.9
Total fair value
$
179.9
The Company determined the fair value of money market investments to approximate their net asset values, without discounts for credit quality or
liquidity restrictions, and classified them within Level 2 of the valuation hierarchy. The Company determined the fair value of pooled equity funds based upon quoted prices from active markets and classified them within Level 1 of the valuation
hierarchy. The Company determined the fair value of fixed income securities and U.S. government and agency securities based upon recent bid prices or the average of recent bid and asking prices when available and, if not available, the Company
valued them through matrix pricing models developed by sources considered by management to be reliable. The Company classified these assets within Level 2 of the valuation hierarchy. As of March 31, 2023 and 2022, the Company held no Level 3 assets within its pension plans.
As a practical expedient, the Company valued certain investments, including pooled
equity, fixed income and real estate funds, using their net asset value (“NAV”) per unit, and therefore, has not classified these investments within the fair value hierarchy. The terms and conditions for redemptions vary for the investments valued
at NAV. The real estate investment fund may be redeemed quarterly with a 90-day notice period. Other investments valued at NAV do not have significantly-restrictive redemption frequency or notice period requirements. The Company does not intend to sell or otherwise dispose of these
investments at prices different than the NAV per unit.
Note 5: Stock-Based Compensation
The Company’s stock-based incentive programs consist of the following: (1) a long-term incentive plan (“LTIP”) for officers and other executives that consists of stock
awards, stock options, and performance-based awards granted for retention and performance, (2) a discretionary equity program for other management and key employees, and (3) stock awards for non-employee directors. The Company’s Board of Directors
and the Human Capital and Compensation Committee, as applicable, have discretionary authority to set the terms of the stock-based awards. Grants to employees during fiscal 2023 were issued under the Company’s Amended and Restated 2020 Incentive
Compensation Plan. In lieu of performance-based stock awards, the Company granted performance cash awards to the LTIP participants in fiscal 2023, 2022, and 2021. At present, the Company accomplishes the fulfillment of equity-based grants through
the issuance of new common shares. As of March 31, 2023, approximately 2.2 million shares authorized under the Amended and Restated 2020 Incentive Compensation Plan remain
available for future grants. Employee participants have the opportunity to deliver back to the Company the number of shares from the vesting of stock awards sufficient to satisfy the individual’s minimum tax withholding obligations. These shares
are held as treasury shares. The Company recorded stock-based compensation expense of $ 6.6 million , $ 5.7 million , and $ 6.3 million in
fiscal 2023, 2022 , and 2021, respectively.
57
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Stock Options
The Company recorded $ 1.2 million , $ 1.1 million , and $ 0.9 million of compensation expense related to stock options in fiscal 2023, 2022 , and 2021, respectively. The grant date fair value of stock options that vested during fiscal 2023, 2022 , and 2021, was $ 1.0 million , $ 0.9 million , and $ 1.3 million , respectively. As of March 31, 2023 , the total compensation expense not yet recognized related to non-vested stock options was $ 2.3 million and the weighted-average period in which the remaining expense is expected to be recognized was
2.1 years.
The Company estimated the fair value of option awards on the date of grant using the Black-Scholes option valuation model and the following
assumptions:
Years ended March 31,
2023
2022
2021
Fair value of options
$
6.99
$
8.79
$
3.46
Expected life of awards in years
6.0
6.1
6.1
Risk-free interest rate
3.0
%
1.1
%
0.4
%
Expected volatility of the Company’s stock
57.8
%
56.5
%
54.1
%
Expected dividend yield on the Company’s stock
0.0
%
0.0
%
0.0
%
Stock options expire no later than 10 years after the grant date and have an exercise price equal to the fair market value of
Modine’s common stock on the date of grant. The risk-free interest rate was based upon yields of U.S. Treasury zero-coupon issues with a term corresponding to the expected life of the options. The expected volatility assumption was based upon
changes in the Company’s historical common stock prices over the same time period as the expected life of the awards. The expected dividend yield is zero, as the Company currently does not anticipate paying dividends over the expected life of the
options. The expected lives of the awards are based upon historical patterns and the terms of the options. Based upon the terms of the fiscal 2023 annual awards, stock options vest 33 percent, 33 percent, and 34 percent per year for three years , respectively. Stock option
grants preceding the fiscal 2023 grant vest 25 percent per year for four years .
A summary of stock option activity for fiscal 2023 was as follows:
Shares
Weighted-average
exercise price
Weighted-average
remaining contractual
term (years)
Aggregate
intrinsic value
Outstanding, beginning of year
1.0
$
12.12
Granted
0.2
12.40
Exercised
( 0.2
)
11.77
Forfeited or expired
( 0.1
)
12.26
Outstanding, end of year
0.9
$
12.28
7.1
$
9.6
Exercisable, March 31, 2023
0.4
$
12.46
5.5
$
4.3
The aggregate intrinsic value represents the difference between the closing price of Modine’s common shares on the last trading day of fiscal 2023 over
the exercise price of the stock options, multiplied by the number of options outstanding or exercisable. The aggregate intrinsic value is not recorded for financial statement purposes, and this value will change based upon daily changes in the price
of Modine’s common shares.
Additional information related to stock options exercised is as follows:
Years ended March 31,
2023
2022
2021
Intrinsic value of stock options exercised
$
1.5
$
0.1
$
1.4
Proceeds from stock options exercised
2.9
1.4
4.1
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Restricted Stock
The Company recorded $ 5.4 million, $ 5.0 million, and $ 4.3 million of compensation expense related to restricted stock in fiscal 2023, 2022, and 2021,
respectively. The grant date fair value of restricted stock awards that vested during fiscal 2023, 2022, and 2021 was $ 4.7 million, $ 4.4 million, and $ 4.5 million, respectively. At March 31, 2023, the Company had $ 6.4 million of unrecognized compensation expense related to non-vested restricted stock, which it expects to recognize over a weighted-average period of 1.8 years. The Company values restricted stock awards using the
closing market price of its common shares on the date of grant. Based upon the terms of the fiscal 2023 annual awards, restricted stock awards vest 33 percent, 33 percent, and 34 percent per year for three years , respectively. Restricted
stock award grants preceding the fiscal 2023 grant vest 25 percent per year for four years . Restricted stock awards granted to non-employee directors in fiscal 2023 vest one year from the time of grant.
A summary of restricted stock activity for fiscal 2023 was as follows:
Shares
Weighted-average
price
Non-vested balance, beginning of year
0.7
$
11.61
Granted
0.5
13.60
Vested
( 0.3
)
11.85
Forfeited
( 0.1
)
10.58
Non-vested balance, end of year
0.8
$
12.95
Restricted Stock – Performance-Based Shares
The Company granted performance-based cash awards in fiscal 2023, 2022, and 2021 in lieu of performance-based stock awards. For performance-based stock
awards, the Company values the awards using the closing market price of its common shares on the date of grant. During fiscal 2023 all performance-based awards were cash-based, therefore, the Company did no t recognize compensation expense related to performance-based stock awards. In fiscal 2022, the Company recorded a $ 0.4 million benefit related to the performance-based stock awards granted in fiscal 2020. The payout earned for the fiscal 2020 awards was less than previously estimated. In fiscal 2021, the
Company recorded $ 1.1 million of compensation expense related to performance-based stock awards.
The payouts earned under the performance portion of the award program are based upon the attainment of certain financial targets over a three-year period and are paid after the end of that three-year performance period, if the performance targets have
been achieved. The performance metrics for the performance-based cash awards granted in fiscal 2021 are based upon both a target three-year average consolidated cash flow return on invested capital and a target three-year average annual revenue growth at the end of the three-year performance period, commencing with the fiscal year of grant. The
performance metrics for the performance-based cash awards granted in fiscal 2022 and fiscal 2023 are based upon both a target three-year
average consolidated 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 three-year performance
period, commencing with the fiscal year of grant.
Note 6: Restructuring Activities
During fiscal 2023,
restructuring and repositioning expenses primarily consisted of severance-related expenses for targeted headcount reductions in each the Climate Solutions and Performance Technologies segments and supported the Company’s objective of reducing
operational and SG&A cost structures. In addition, the Performance Technologies and Climate Solutions segments incurred equipment transfer costs in Europe and closure costs related to a previously-leased facility in the U.S., respectively.
During fiscal 2022, the Company committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Performance Technologies
segment. During fiscal 2022, the Company recorded $ 22.1 million of severance expenses, of which $ 20.3 million were recorded in the Performance Technologies segment and primarily related to
targeted headcount reductions in Europe . In addition, the Company implemented targeted headcount reductions
in the Climate Solutions segment. Also in fiscal 2022, the Company incurred equipment transfer costs within the Performance Technologies segment.
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
During fiscal 2021, restructuring actions consisted primarily of targeted headcount reductions and plant consolidation activities. The headcount reductions were primarily
in Europe and in the Americas within the Performance Technologies segment and supported the Company’s objective of reducing operational and SG&A cost structures. During fiscal 2021, the Company transferred production from its manufacturing
facility in Zhongshan, China to another Climate Solutions segment manufacturing facility in China. As a result of this plant consolidation, the Company recorded $ 3.7 million of severance expenses during fiscal 2021. Other plant consolidation activities in fiscal 2021 included transferring product lines to the Company’s Climate Solutions manufacturing facility in Mexico.
Restructuring and repositioning expenses were as follows:
Years ended March 31,
2023
2022
2021
Employee severance and related benefits
$
3.5
$
22.1
$
11.7
Other restructuring and repositioning expenses
1.5
2.0
1.7
Total
$
5.0
$
24.1
$
13.4
Other restructuring and repositioning expenses primarily consist of equipment transfer and plant consolidation costs.
The Company accrues severance in accordance with its written plans, procedures, and relevant statutory requirements. Changes in accrued severance were
as follows:
Years ended March 31,
2023
2022
Beginning balance
$
20.2
$
4.0
Additions
3.5
22.1
Payments
( 12.4
)
( 5.7
)
Reclassified from held for sale
-
0.4
Effect of exchange rate changes
( 0.7
)
( 0.6
)
Ending balance
$
10.6
$
20.2
During fiscal 2022 and 2021, the Company recorded $ 56.0 million of a net asset impairment reversal and $ 166.8 million of impairment charges, respectively, within its Performance Technologies segment. See Note 2 for additional information.
Also during fiscal 2022, the Company recorded an impairment charge of $ 0.3 million to reduce the carrying value of a previously closed Climate Solutions facility to its estimated fair value, less costs to sell.
Note 7 : Other Income and Expense
Other income and expense consisted of the following:
Years ended March 31,
2023
2022
2021
Interest income
$
1.3
$
0.4
$
0.5
Foreign currency transactions (a)
( 3.7
)
( 1.4
)
0.6
Net periodic benefit cost (b)
( 2.0
)
( 1.1
)
( 3.3
)
Total other expense - net
$
( 4.4
)
$
( 2.1
)
$
( 2.2
)
(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 transactions denominated in a foreign currency and intercompany loans , along with gains and
losses on foreign currency exchange contracts.
(b)
Net periodic benefit cost for the
Company’s pension and postretirement plans is exclusive of service cost .
60
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 8: Income Taxes
The U.S. and foreign components of earnings or loss before income taxes and the benefit or provision for income taxes consisted of the following:
Years ended March 31,
2023
2022
2021
Components of earnings (loss) before income taxes:
United States
$
12.5
$
0.4
$
( 48.7
)
Foreign
112.8
101.1
( 70.6
)
Total earnings (loss) before income taxes
$
125.3
$
101.5
$
( 119.3
)
Income tax (benefit) provision:
Federal:
Current
$
1.5
$
0.1
$
( 0.1
)
Deferred
( 47.5
)
-
58.3
State:
Current
2.3
1.1
0.4
Deferred
( 11.4
)
-
9.2
Foreign:
Current
27.5
17.8
22.0
Deferred
( 0.7
)
( 3.8
)
0.4
Total income tax (benefit) provision
$
( 28.3
)
$
15.2
$
90.2
The reconciliation between the U.S. federal statutory rate and the Company’s effective tax rate was as follows:
Years ended March 31,
2023
2022
2021
Statutory federal tax
21.0
%
21.0
%
21.0
%
State taxes, net of federal benefit
( 0.1
)
1.4
0.9
Taxes on non-U.S. earnings and losses
5.8
3.5
( 9.1
)
Valuation allowances
( 42.9
)
( 8.8
)
( 92.9
)
Tax credits
( 4.5
)
( 3.4
)
2.2
Compensation
0.7
0.6
( 1.3
)
Tax rate or law changes
( 0.2
)
0.6
( 0.2
)
Uncertain tax positions, net of settlements
0.4
( 0.2
)
0.1
Notional interest deductions
( 1.7
)
( 2.7
)
1.3
Dividends and taxable foreign inclusions
0.9
1.6
3.0
Other
( 2.0
)
1.4
( 0.6
)
Effective tax rate
( 22.6
%)
15.0
%
( 75.6
%)
The Company’s fiscal 2023 effective tax rate was favorably impacted by an income tax benefit related to the valuation allowance on deferred tax assets in the U.S. The
effective tax rates in both fiscal 2022 and 2021 were significantly impacted by impairment charges or reversals, largely related to the liquid-cooled automotive business, and income tax charges or benefits related to valuation allowances. See
Note 2 for information regarding the impairment charges and reversals. The income tax charges or benefits related to valuation allowances are described below .
61
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
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.
Since the third quarter of fiscal 2021, the Company has maintained a full valuation allowance against net deferred tax assets in the U.S. since the Company determined, at that time, it was more likely than
not that the net deferred tax assets would not be realized. In the fourth quarter of fiscal 2023, based on the Company’s recent history of earnings, coupled with its forecasted profitability, the Company determined it was more likely than not that
certain deferred tax assets in the U.S. will be realized. As a result, the Company reversed the valuation allowance related to these deferred tax assets and recorded an income tax benefit of $ 57.3 million. The Company evaluated both positive and negative objectively verifiable evidence and placed substantial weight on its fiscal 2022 and 2023 earnings, which resulted
in a significant cumulative three-year income position. The Company also considered its forecasts for future earnings in certain key
businesses. The Company has determined it is more likely than not that a portion of the deferred tax assets in the U.S. related to certain federal and state tax attributes will not be realized prior to expiration and, as such, has maintained a
valuation allowance against these assets. In addition, the Company recorded a net increase of other deferred tax asset valuation allowances totaling $ 3.6
million .
Based upon its analyses during fiscal 2022, the Company determined it was more likely than not that the deferred tax assets in certain foreign jurisdictions would be
realized. As a result, the Company reversed the valuation allowances related to these deferred tax assets and recorded income tax benefits totaling $ 13.0
million. The Company’s analyses included consideration of the transaction perimeter modification and the termination of the sale agreement for the liquid-cooled automotive business and the related impairment reversals. Separately, the Company
determined it was more likely than not that the deferred tax assets in a foreign jurisdiction would not be realized. As a result, the Company recorded an income tax charge of $ 1.6 million. Together, these fiscal 2022 valuation allowance adjustments resulted in a net income tax benefit of $ 11.4 million during fiscal 2022. In addition, the Company recorded a net increase of other deferred tax asset valuation allowances totaling $ 2.5 million.
Based upon its analyses during fiscal 2021, the Company determined it was more likely than not that its deferred tax assets in the U.S. and in certain foreign jurisdictions would not be realized. As a result, the Company
recorded income tax charges totaling $ 116.5 million to increase the valuation allowances on deferred tax assets in the U.S. ($ 103.3 million) and in certain foreign jurisdictions ($ 13.2
million). The Company’s analyses during fiscal 2021 included consideration of the impairment charges recorded for the liquid-cooled automotive business, which contributed to the Company entering into a three-year cumulative loss position in the U.S. and in certain foreign jurisdictions as of December 31, 2020. Also during fiscal 2021, the Company recorded a net increase of
other deferred tax asset valuation allowances totaling $ 22.0 million and recorded a $ 9.3 million income tax benefit resulting from allocation of the income tax provision between net earnings and other comprehensive income .
At March 31, 2023, valuation allowances against deferred tax assets in the U.S. and in certain foreign jurisdictions totaled $ 33.9 million and $ 27.7 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 jurisdictions, could necessitate the establishment of further valuation allowances.
62
Table of Contents
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The tax effects of temporary differences that gave rise to deferred tax assets and liabilities were as follows:
March 31,
2023
2022
Deferred tax assets:
Accounts receivable
$
0.9
$
0.8
Inventories
6.0
6.5
Plant and equipment
17.2
19.9
Lease liabilities
15.9
13.5
Pension and employee benefits
24.1
27.5
Net operating and capital losses
55.4
53.9
Credit carryforwards
49.0
48.5
Research and experimental expenditures
8.0
-
Other, principally accrued liabilities
13.2
13.5
Total gross deferred tax assets
189.7
184.1
Less: valuation allowances
( 61.6
)
( 112.2
)
Net deferred tax assets
128.1
71.9
Deferred tax liabilities:
Plant and equipment
7.5
8.6
Lease assets
15.7
13.2
Goodwill
4.8
4.9
Intangible assets
20.1
22.4
Other
1.1
1.5
Total gross deferred tax liabilities
49.2
50.6
Net deferred tax assets
$
78.9
$
21.3
Unrecognized tax benefits were as follows:
Years ended March 31,
2023
2022
Beginning balance
$
9.3
$
9.6
Gross increases - tax positions in prior period
0.2
0.1
Gross decreases - tax positions in prior period
( 0.1
)
( 0.2
)
Gross increases - tax positions in current period
0.9
1.0
Lapse of statute of limitations
( 0.6
)
( 1.2
)
Ending balance
$
9.7
$
9.3
The Company’s liability for unrecognized tax benefits as of March 31, 2023 was $ 9.7 million and, if recognized, $ 7.8 million would have an effective
tax rate impact. The Company estimates a $ 2.0 million net decrease in unrecognized tax benefits during fiscal 2024 mainly due to lapses in
statutes of limitations. If recognized, these reductions would have an impact on the Company’s effective tax rate.
The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense. During fiscal 2023, 2022 and
2021, interest and penalties included within income tax expense in the consolidated statements of operations were not significant. At March 31, 2023 and 2022, accrued interest and penalties totaled $ 0.8 million and $ 0.7 million, respectively.
The Company files income tax returns in multiple jurisdictions and is subject to examination by taxing authorities throughout the world. At March 31,
2023, the Company was under income tax examination in a number of jurisdictions. The following tax years remain subject to examination for the Company’s major tax jurisdictions:
Germany
Fiscal 2017 - Fiscal 2022
Italy
Fiscal 2018 - Fiscal 2022
United States
Fiscal 2020 - Fiscal 2022
63
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
At March 31, 2023, the Company had federal and state tax credits of $ 60.4 million that, if not utilized against U.S. taxes, will expire between fiscal 2024 and 2043 . The Company also had state and local tax loss carryforwards totaling $ 136.7 million. If not utilized against state apportioned taxable income, certain state and local carryforwards will expire between fiscal 2024 and 2042 , while some will not expire due to an unlimited carryforward period. In addition, the
Company had tax loss and foreign attribute carryforwards totaling $ 285.0 million in various tax jurisdictions throughout the world. Certain
of the carryforwards in foreign jurisdictions are offset by valuation allowances. If not utilized against taxable income, $ 54.9 million of
these carryforwards will expire between fiscal 2024 and 2034 , and $ 230.1 million, mainly related to Germany and Italy, will not expire due to an unlimited
carryforward period.
The Company’s practice and intention is to reinvest, with certain insignificant exceptions, the earnings of its non-U.S. subsidiaries outside of the
U.S., and therefore, the Company has not recorded foreign withholding taxes or deferred income taxes for these earnings. The Company has estimated the net amount of unrecognized foreign withholding tax and deferred tax liabilities would total
approximately $ 12.0 million if the accumulated foreign earnings were distributed; however, the actual tax cost would be dependent on
circumstances existing when remittance occurs.
Note 9: Earnings Per Share
The components of basic and diluted earnings per share were as follows:
Years ended March 31,
2023
2022
2021
Basic Earnings Per Share:
Net earnings (loss) attributable to Modine
$
153.1
$
85.2
$
( 210.7
)
Weighted-average shares outstanding – basic
52.3
52.0
51.3
Net earnings (loss) per share – basic
$
2.93
$
1.64
$
( 4.11
)
Diluted Earnings Per Share:
Net earnings (loss) attributable to Modine
$
153.1
$
85.2
$
( 210.7
)
Weighted-average shares outstanding – basic
52.3
52.0
51.3
Effect of dilutive securities
0.5
0.5
-
Weighted-average shares outstanding – diluted
52.8
52.5
51.3
Net earnings (loss) per share – diluted
$
2.90
$
1.62
$
( 4.11
)
For fiscal 2023, 2022 and 2021, the calculation of diluted earnings per share excluded 0.5 million, 0.5 million, and 1.0 million, stock options, respectively, because they were anti-dilutive. For fiscal 2023, 2022 and 2021, the calculation of diluted earnings per share excluded 0.2 million, 0.2 million, and 0.4 million restricted stock awards, respectively, because they were anti-dilutive. For fiscal 2021 the total number of potentially-dilutive securities
was 0.2 million. However, these securities were not included in the computation of diluted net loss per share since to do so would have
decreased the loss per share.
Note 10: Cash, Cash Equivalents and Restricted Cash
Cash, cash equivalents and restricted cash consisted of the following:
March 31,
2023
2022
Cash and cash equivalents
$
67.1
$
45.2
Restricted cash
0.1
0.2
Total cash, cash equivalents and restricted cash
$
67.2
$
45.4
64
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Restricted cash, which is reported within other current assets and other noncurrent assets in the consolidated balance sheets, consists primarily of
deposits for contractual guarantees or commitments required for rents, import and export duties, and commercial agreements.
Note 11: Inventories
Inventories consisted of the following:
March 31,
2023
2022
Raw materials
$
218.3
$
186.7
Work in process
49.9
55.1
Finished goods
56.7
39.4
Total inventories
$
324.9
$
281.2
Note 12: Property, Plant and Equipment
Property, plant and equipment, including depreciable lives, consisted of the following:
March 31,
2023
2022
Land
$
16.4
$
16.8
Buildings and improvements ( 10 - 40 years)
264.0
264.6
Machinery and equipment ( 3 - 15 years)
853.3
869.4
Office equipment ( 3 - 10 years)
93.6
96.2
Construction in progress
47.5
31.2
1,274.8
1,278.2
Less: accumulated depreciation
( 960.3
)
( 962.8
)
Net property, plant and equipment
$
314.5
$
315.4
Depreciation expense totaled $ 46.5 million, $ 46.4 million, and $ 60.1 million for
fiscal 2023, 2022, and 2021, respectively.
Gains and losses related to the disposal of property, plant and equipment are recorded within SG&A expenses. For fiscal 2023 and 2021, losses
related to the disposal of property, plant and equipment totaled $ 0.1 million and $ 0.7 million, respectively. For fiscal 2022, gains related to the disposal of property, plant and equipment totaled $ 0.1 million.
Note 13: Intangible Assets
Intangible assets consisted of the following:
March 31, 2023
March 31, 2022
Gross
Carrying
Value
Accumulated
Amortization
Net
Intangible
Assets
Gross
Carrying
Value
Accumulated
Amortization
Net
Intangible
Assets
Customer relationships
$
60.3
$
( 23.4
)
$
36.9
$
61.2
$
( 20.1
)
$
41.1
Trade names
50.1
( 15.9
)
34.2
50.8
( 13.8
)
37.0
Acquired technology
22.6
( 12.6
)
10.0
23.1
( 10.9
)
12.2
Total intangible assets
$
133.0
$
( 51.9
)
$
81.1
$
135.1
$
( 44.8
)
$
90.3
65
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The Company recorded $ 8.0 million, $ 8.4 million, and $ 8.5 million of
amortization expense during fiscal 2023, 2022, and 2021, respectively. The Company estimates that it will record approximately $ 8.0
million of annual amortization expense in fiscal 2024 through 2028.
Note 14: Goodwill
The following table presents a roll forward of the carrying value of goodwill from March
31, 2021 to March 31, 2023 . The Company has recast the March 31, 2022 and 2021 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 fiscal 2023.
Climate
Solutions
Performance
Technologies
Total
Balance, March 31, 2021
$
110.5
$
60.2
$
170.7
Effect of exchange rate changes
( 2.4
)
( 0.2
)
( 2.6
)
Balance, March 31, 2022
108.1
60.0
168.1
Effect of exchange rate changes
( 2.4
)
( 0.1
)
( 2.5
)
Balance, March 31, 2023
$
105.7
$
59.9
$
165.6
The Company tests goodwill for impairment annually, as of March 31, or more frequently if events or circumstances change that would, more likely than not, reduce the fair
value of a reporting unit below its carrying value. To test goodwill for impairment, the Company determines the fair value of each reporting unit based upon the present value of estimated future cash flows and compares the fair value of each
reporting unit with its carrying value. The Company’s determination of fair value involves judgment and the use of estimates and assumptions, including assumptions regarding the revenue growth rates and operating profit margins used to calculate
estimated future cash flows and risk-adjusted discount rates.
As a result of its annual goodwill impairment tests performed as of March 31, 2023, the Company determined that the fair value of each of the reporting
units within its Climate Solutions and Performance Technologies segments exceeded their respective book values.
At both March 31, 2023 and 2022, accumulated goodwill impairment losses totaled $ 40.8 million within the Performance Technologies segment .
Note 15: Product Warranties and Other Commitments
Product Warranties
Many of the Company’s products are covered under a warranty period ranging from one to five years . The Company records a
liability for product warranty obligations at the time of sale and adjusts its warranty accruals if it becomes probable that expected claims will differ from previous estimates.
Changes in accrued warranty costs were as follows:
Years ended March 31,
2023
2022
Beginning balance
$
6.3
$
5.2
Warranties recorded at time of sale
5.4
5.5
Adjustments to pre-existing warranties
0.9
( 1.3
)
Settlements
( 5.6
)
( 4.4
)
Reclassified from held for sale
-
1.3
Effect of exchange rate changes
( 0.1
)
-
Ending balance
$
6.9
$
6.3
66
Table of Contents
MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Indemnification Agreements
From time to time, the Company provides indemnification agreements related to the sale or purchase of an entity or facility. These indemnification
agreements cover customary representations and warranties typically provided in conjunction with such transactions, including income, sales, excise or other tax matters, environmental matters and other third-party claims. The indemnification periods
provided generally range from less than one year to fifteen years . In addition, standard indemnification provisions reside in many commercial agreements to which the Company is a party and relate to responsibility in the event of potential
third-party claims. The fair value of the Company’s outstanding indemnification obligations at March 31, 2023 was not material.
Commitments
At March 31, 2023, the Company had capital expenditure commitments of $ 25.3 million . Significant commitments include equipment expenditures to support expanding manufacturing capacity in the Climate Solutions segment and tooling and equipment expenditures for new and renewal programs with
vehicular customers in the Performance Technologies segment. The Company utilizes inventory arrangements with certain vendors in the normal course of business under which the vendors maintain inventory stock at the Company’s facilities or at
outside facilities. Title passes to the Company at the time goods are withdrawn for use in production. The Company has agreements with the vendors to use the material within a specific period of time. In some cases, the Company bears the risk of
loss for the inventory because Modine is required to insure the inventory against damage and/or theft. This inventory is included within the Company’s consolidated balance sheets as raw materials inventory.
Note 16: Leases
The Company determines if an arrangement is a lease at contract inception. The lease term begins upon lease commencement, which is when the Company
takes possession of the asset, and may include options to extend or terminate the lease when it is reasonably certain that such options will be exercised. The Company uses the lease term within its determination of the appropriate lease
classification, either as an operating lease or as a finance lease, and to calculate straight-line lease expense for its operating leases.
ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make
lease payments arising from the lease. The Company recognizes ROU assets and lease liabilities at the lease commencement date, based upon the present value of lease payments over the lease term. As its lease agreements typically do not provide an
implicit interest rate, the Company primarily uses an incremental borrowing rate to calculate the ROU asset and lease liability. In determining the incremental borrowing rate, the Company considers its current collateralized borrowing rate, the term
of the lease, and the economic environment where the lease activity is concentrated. The Company believes this method effectively estimates a borrowing rate that it could obtain for a debt instrument with similar terms as the lease agreement.
Based upon its accounting policy, the Company does not separate lease and non-lease components for any asset class. In addition, the Company does not
record short-term leases (i.e. leases with an initial term of 12 months or less) on its consolidated balance sheets.
Certain leases require the Company to pay taxes, insurance, maintenance, and other operating expenses associated with the leased asset. Such amounts
are not included in the measurement of the lease liability to the extent they are variable in nature. These variable lease costs are recognized as variable lease expense when incurred. The depreciable life of the ROU assets and related leasehold
improvements are limited by the expected lease term, unless the lease contains a provision to transfer title to the Company or a purchase option that the Company expects to execute.
The Company’s most significant leases represent leases of real estate, such as manufacturing facilities, warehouses, and offices. In addition, the
Company leases manufacturing and IT equipment and vehicles. The Company’s most significant leases have remaining lease terms of 1 to 11 years. Certain leases contain renewal options for varying periods, which are at the Company’s discretion. If reasonably certain of exercise, the
Company includes the renewal periods within the calculation of ROU assets and lease liabilities. The Company’s lease agreements do not contain material residual value guarantees or material restrictive covenants.
67
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Lease Assets and Liabilities
The following table provides a summary of leases recorded on the consolidated balance
sheets.
Balance Sheet Location
March 31, 2023
March 31, 2022
Lease Assets
Operating lease ROU assets
Other noncurrent assets
$
59.1
$
52.1
Finance lease ROU assets (a)
Property, plant and equipment - net
7.1
7.7
Lease Liabilities
Operating lease liabilities
Other current liabilities
$
11.8
$
12.7
Operating lease liabilities
Other noncurrent liabilities
48.9
41.2
Finance lease liabilities
Long-term debt - current portion
0.4
0.4
Finance lease liabilities
Long-term debt
2.3
2.8
(a)
Finance lease ROU assets were recorded net of
accumulated amortization of $ 3.2 million and $ 2.8 million as of March 31, 2023 and 2022, respectively.
Components of Lease Expense
The Company records operating lease expense as either cost of sales or SG&A expenses within its consolidated statements of operations, depending
upon the nature and use of the ROU assets. The Company records finance lease expense as depreciation expense within cost of sales or SG&A expenses, depending upon the nature and use of the ROU assets, and as interest expense in its consolidated
statements of operations.
The components of lease expense were as follows:
Years ended March 31,
2023
2022
2021
Operating lease expense (a)
$
21.9
$
20.0
$
19.5
Finance lease expense:
Depreciation of ROU assets
0.5
0.5
0.5
Interest on lease liabilities
0.1
0.2
0.2
Total lease expense
$
22.5
$
20.7
$
20.2
(a)
In fiscal 2023, 2022, and 2021 operating lease
expense included short-term lease expense of $ 5.7 million, $ 4.2 million, and $ 3.5 million respectively. Variable lease expense
was not significant.
Supplemental Cash Flow Information
Years ended March 31,
2023
2022
2021
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases
$
14.6
$
15.7
$
14.2
Financing cash flows for finance leases
0.5
0.6
0.6
ROU assets obtained in exchange for lease liabilities:
Operating leases
$
21.2
$
7.8
$
9.8
Finance leases
-
0.1
0.1
68
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Lease Term and Discount Rates
March 31, 2023
March 31, 2022
Weighted-average remaining lease term:
Operating leases
8.3 years
8.5 years
Finance leases
5.8 years
6.8 years
Weighted-average discount rate:
Operating leases
3.7
%
3.4
%
Finance leases
4.6
%
4.6
%
Maturity of Lease Liabilities
Future minimum rental payments for leases with initial non-cancellable lease terms in excess of one year were as follows at March 31, 2023:
Fiscal Year
Operating Leases
Finance Leases
2024
$
13.8
$
0.5
2025
11.5
0.5
2026
10.1
0.5
2027
8.4
0.5
2028
7.3
0.5
2029
and beyond
19.2
0.6
Total lease payments
70.3
3.1
Less: Interest
( 9.6
)
( 0.4
)
Present value of lease liabilities
$
60.7
$
2.7
Note 17: Indebtedness
In October 2022, the Company 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 U.S. dollar- and euro-denominated term loan facilities maturing in October 2027. In addition, the credit
agreement provides for shorter-duration swingline loans. This credit agreement modified the Company’s then existing $ 250.0 million
revolver and term loan facilities, which would have matured in June 2024.
In connection with the credit agreement modification during fiscal 2023, the Company incurred $ 2.2 million of debt issuance costs. Of these costs, the Company deferred $ 1.5
million, which will be amortized as interest expense over the term of the debt, and recorded $ 0.7 million as interest expense on the
consolidated statement of operations. The Company paid $ 0.6 million for debt issuance costs during fiscal 2023 and the remaining
issuance costs were added to the new term loan principal at the time of the modification.
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Long-term
debt consisted of the following:
Fiscal year
of maturity
March 31, 2023
March 31, 2022
Term loans
2028
$
215.7
$
163.7
5.9 % Senior Notes
2029
100.0
100.0
5.8 % Senior Notes
2027
33.3
41.7
Revolving credit facility
2028
-
64.9
Other (a)
2.7
3.2
351.7
373.5
Less: current portion
( 19.7
)
( 21.7
)
Less: unamortized debt issuance costs
( 2.7
)
( 3.4
)
Total long-term debt
$
329.3
$
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
2024
$
19.7
2025
19.7
2026
44.7
2027
44.7
2028
197.4
2029
and beyond
25.5
Total
$
351.7
Borrowings under the revolving credit, swingline and term loan facilities bear interest at a variable rate, based upon the applicable reference
rate and including a margin percentage dependent upon the Company’s leverage ratio, as described below. At March 31, 2023, the weighted-average interest rate for the term loans was 6.0 percent. Based upon the terms of the credit agreement, the Company classifies borrowings under its revolving credit and swingline facilities as long-term and short-term debt,
respectively, on its consolidated balance sheets.
At March 31, 2023, the Company had no outstanding borrowings related to the revolving credit and swingling facilities and domestic letters of
credit totaled $ 5.4 million. As a result, available borrowing capacity under the Company’s revolving credit facility was $ 269.6 million as of March 31, 2023. 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 $ 3.7 million and $ 0.7
million at March 31, 2023 and March 31, 2022, respectively.
Indebtedness under the Company’s credit agreement and Senior Note agreements is secured by liens on substantially all domestic assets. These
agreements further require compliance with various covenants that may limit the Company’s ability to incur additional indebtedness; grant liens; make investments, loans, or guarantees; engage in certain transactions with affiliates; and make
restricted payments including dividends. In addition, the agreements may require prepayment in the event of certain asset sales.
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Financial covenants within its credit agreements require 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 must also maintain a ratio of Adjusted EBITDA of at least three times consolidated interest expense. As of March 31, 2023, the Company was in compliance with its debt covenants.
The Company estimates the fair value of long-term debt using discounted future cash flows at rates offered to the Company for similar debt
instruments of comparable maturities. As of March 31, 2023 and 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 approximately $ 125.9 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 4 for the definition of a Level 2 fair value measurement.
Note 18: Pension and Employee Benefit Plans
Defined Contribution Employee Benefit Plans
The Company maintains a domestic 401(k) plan that allows employees to contribute a portion of their salary to help them save for retirement. The
Company currently matches employee contributions up to 4.5 percent of their compensation. During fiscal 2021, as part of its response to
the negative impacts of the COVID-19 pandemic, the Company suspended matching employee contributions for part of the year. The Company’s expense for defined contribution employee benefit plans during fiscal 2023, 2022, and 2021 was $ 6.9 million, $ 6.4 million, and $ 3.0 million, respectively.
In addition, the Company maintains non-qualified deferred compensation plans for eligible employees, and various non-U.S. subsidiaries have
government-required defined contribution plans in place, under which they contribute a percentage of employee earnings into accounts, consistent with local laws.
Statutory Termination Plans
Certain non-U.S. subsidiaries have statutory termination indemnity plans covering eligible employees. The benefits under these plans are based upon
years of service and final average compensation levels or a monthly retirement benefit amount. These programs are substantially unfunded in accordance with local laws.
Pension Plans
The Company maintains non-contributory defined benefit pension plans that cover eligible domestic employees. These plans are closed to new
participants. The primary domestic plans cover most domestic employees hired on or before December 31, 2003 and provide benefits based primarily upon years of service and average compensation for salaried and some hourly employees. Benefits for
other hourly employees are based upon a monthly retirement benefit amount. Currently, the Company’s domestic pension plans do not include increases in annual earnings or future service in calculating the average annual earnings and years of credited
service under the pension plan benefit formula. Certain non-U.S. subsidiaries of the Company also have legacy defined benefit plans which cover a smaller number of active employees and are substantially unfunded. The primary non-U.S. plans are
maintained in Germany and Italy and are closed to new participants. The Company previously maintained a pension plan in Austria that conveyed to the buyer of the air-cooled automotive business during fiscal 2022; see Note 1 for additional
information.
In connection with funding relief provisions within the American Rescue Plan Act of 2021, the
Company did no t make cash contributions to its U.S. pension plans during fiscal 2023. The Company contributed $ 3.5 million and $ 19.3 million to its U.S.
pension plans during fiscal 2022 and 2021, respectively. In addition, the Company contributed $ 1.5 million, $ 1.5 million, and $ 2.2 million to its non-U.S. pension plans during fiscal 2023, 2022, and 2021, respectively. These contributions are
reported in the change in other liabilities in the consolidated statements of cash flows.
Postretirement Plans
The Company provides selected healthcare and life insurance benefits for eligible retired domestic employees. The Company periodically amends these
unfunded plans to change the contribution rate of retirees and the amounts and forms of coverage. An annual limit on the Company’s cost is defined for the majority of these plans. The Company’s net periodic income for its postretirement plans in
each of fiscal 2023, 2022, and 2021 was $ 0.3 million.
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Measurement Date
The Company uses March 31 as the measurement date for its pension and postretirement plans.
Changes in benefit obligations and plan assets, as well as the funded status of the Company’s global pension plans, were as follows:
Years ended March 31,
2023
2022
Change in benefit obligation:
Benefit obligation at beginning of year
$
228.6
$
260.6
Service cost
0.2
0.3
Interest cost
8.1
7.3
Actuarial gain
( 25.8
)
( 16.5
)
Benefits paid
( 16.1
)
( 16.0
)
Disposition of air-cooled automotive business
-
( 5.5
)
Effect of exchange rate changes
( 0.1
)
( 1.6
)
Benefit obligation at end of year
$
194.9
$
228.6
Change in plan assets:
Fair value of plan assets at beginning of year
$
179.9
$
183.3
Actual return on plan assets
( 12.0
)
7.6
Benefits paid
( 16.1
)
( 16.0
)
Employer contributions
1.5
5.0
Fair value of plan assets at end of year
$
153.3
$
179.9
Funded status at end of year
$
( 41.6
)
$
( 48.7
)
Amounts recognized in the consolidated balance sheets:
Current liability
$
( 1.4
)
$
( 1.5
)
Noncurrent liability
( 40.2
)
( 47.2
)
$
( 41.6
)
$
( 48.7
)
As of March 31, 2023, 2022, and 2021, the benefit obligation associated with the Company’s non-U.S. pension plans totaled $ 21.2 million, $ 26.5 million, and $ 36.4 million, respectively. The $ 5.3
million decrease in the benefit obligation associated with non-U.S. pension plans as of March 31, 2023, compared with the prior year, was primarily due to net actuarial gains during the year from an increase in discount rates and employer
contributions for benefits paid to plan participants which decreased the obligation by $ 4.4 million and $ 1.5 million, respectively, and to a lesser extent, the impact of foreign currency exchange rates. The decreases were partially offset by service and
interest cost totaling $ 0.7 million. In fiscal 2022, the $ 9.9 million decrease was primarily due to the sale of the air-cooled automotive business in Austria, which resulted in a $ 5.5
million decrease. In addition, net actuarial gains during the year, the impact of foreign currency exchange rate changes, and employer contributions for benefits paid to plan participants decreased the obligation by $ 1.9 million, $ 1.6 million, and $ 1.5 million, respectively. The decreases were partially offset by service and interest cost totaling $ 0.6 million.
The accumulated benefit obligation for pension plans was $ 194.4 million and $ 228.1 million as of March 31, 2023 and 2022, respectively. The net actuarial loss
related to the pension plans recognized in accumulated other comprehensive loss was $ 123.5
million and $ 131.5 million as of March 31, 2023 and 2022, respectively.
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Costs for the Company’s global pension plans included the following components:
Years ended March 31,
2023
2022
2021
Components of net periodic benefit cost:
Service cost
$
0.2
$
0.3
$
0.4
Interest cost
8.1
7.3
7.9
Expected return on plan assets
( 11.6
)
( 12.9
)
( 11.5
)
Amortization of net actuarial loss
5.7
6.9
6.9
Settlements (a)
-
-
0.2
Net periodic benefit cost
$
2.4
$
1.6
$
3.9
Other changes in benefit obligation recognized in other comprehensive income:
Net actuarial gain
$
2.1
$
11.4
$
33.8
Amortization of net actuarial loss (b)
5.7
8.6
7.1
Total recognized in other comprehensive income
$
7.8
$
20.0
$
40.9
(a)
The settlement charges
resulted from activity associated with the Company’s non-U.S. pension plans.
(b)
The fiscal 2022 amount includes $ 1.7 million of net actuarial losses written-off as a
result of the sale of the Austrian air-cooled automotive business. See Note 1 for additional information.
The Company amortized $ 5.7 million, $ 8.6 million, and $ 7.1 million of net actuarial loss in
fiscal 2023, 2022, and 2021, respectively. Exclusive of the $ 1.7 million written-off in fiscal 2022 upon the sale of the Austrian
air-cooled automotive business referenced above, less than $ 1.0 million of the amortization was attributable to the Company’s non-U.S. pension plans in each of these years.
The Company used a discount rate of 5.2 %
and 3.9 % as of March 31, 2023 and 2022, respectively, for determining its benefit obligations under its U.S. pension plans. The Company
used a weighted-average discount rate of 3.8 % and 1.8 % as of March 31, 2023 and 2022, respectively, for determining its benefit obligations under its non-U.S. pension plans. The Company used a discount rate of 3.9 %, 3.2 %, and 3.4 % to determine its costs under its U.S. pension plans for fiscal 2023, 2022, and 2021, respectively. The Company used a weighted-average discount rate
of 2.9 %, 1.6 %, and 1.4 % to determine its costs under its non-U.S. pension plans for fiscal 2023, 2022, and 2021, respectively. The Company determined the discount rates
used for its U.S. pension plans by modeling a portfolio of high-quality corporate bonds, with appropriate consideration given to expected defined benefit payment terms and duration of the respective pension obligations. The Company used a similar
process to determine the discount rate for its non-U.S. pension obligations.
Plan assets in the Company’s U.S. pension plans comprise 100
percent of the Company’s world-wide pension plan assets. The Company’s U.S. pension plan weighted-average asset allocations at the measurement dates of March 31, 2023 and 2022 were as follows:
Target allocation
Plan assets
2023
2022
Equity securities
76
%
76
%
74
%
Debt securities
18
%
15
%
17
%
Real estate investments
5
%
8
%
8
%
Cash and cash equivalents
1
%
1
%
1
%
100
%
100
%
100
%
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Due to market conditions and other factors, including timing of benefit payments and other transactions, actual asset allocation may vary from the
target allocation outlined above. The Company periodically rebalances the assets to the target allocations. As of March 31, 2023 and 2022, the Company’s pension plans did not directly own shares of Modine common stock.
The Company employs a total return investment approach, whereby a mix of investments are used to maximize the long-term growth of principal, while
avoiding excessive risk. The Company has established pension plan guidelines based upon an evaluation of market conditions, tolerance for risk and cash requirements for benefit payments. The Company measures and monitors investment risk on an
ongoing basis through quarterly investment portfolio reviews, annual liability measurements and periodic asset/liability studies.
The expected rate of return on U.S. plan assets is based upon historical return experience and forward-looking return expectations for major asset
class categories. For fiscal 2023, U.S. pension plan expense, the expected rate of return on plan assets was 7.0 percent. For fiscal
2022, and 2021 U.S. pension plan expense, the expected rate of return on plan assets was 7.5 percent. For fiscal 2024 U.S. pension
plan expense, the Company has assumed a rate of return on plan assets of 6.5 percent.
The Company’s funding policy for its U.S. pension plans is to contribute annually, at a minimum, the amount necessary on an actuarial basis to provide
for benefits in accordance with applicable laws and regulations. As a result of funding relief provisions within the American Rescue Plan Act of 2021, the Company does not expect to make cash contributions to its U.S. plans during fiscal 2024.
Estimated pension benefit payments for the next ten fiscal years are as follows:
Fiscal Year
Estimated Pension
Benefit Payments
2024
$
15.5
2025
15.7
2026
15.6
2027
15.5
2028
15.4
2029 - 2033
72.4
Note 19: Derivative Instruments
The Company uses derivative financial instruments from time to time as a tool to manage certain financial risks. The Company’s policy prohibits the use of leveraged
derivatives. Accounting for derivatives and hedging activities requires derivative financial instruments to be measured at fair value and recognized as assets or liabilities in the consolidated balance sheets. All of the Company’s derivative financial instruments are categorized within Level 2 of the fair value hierarchy. Refer to Note 4 for the definition of a Level 2 fair value measurement. Accounting for
the gain or loss resulting from the change in fair value of the derivative financial instruments depends on whether it has been designated as a hedge, and, if so, on the nature of the hedging activity.
Commodity Derivatives
The Company periodically enters into over-the-counter forward contracts related to forecasted purchases of aluminum and copper. The Company’s strategy
in entering into these contracts is to reduce its exposure to changing market prices of these commodities. The Company designates certain commodity forward contracts as cash flow hedges for accounting purposes. Accordingly, for these designated
hedges, the Company records unrealized gains and losses related to the change in the fair value of the contracts in accumulated other comprehensive income (loss) (“AOCI”) within shareholders’ equity and subsequently recognizes the gains and losses
within cost of sales as the underlying inventory is sold.
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Foreign Exchange Contracts
The Company’s foreign exchange risk management strategy uses derivative financial instruments to mitigate foreign currency exchange risk. The Company
periodically enters into foreign currency forward contracts to hedge specific foreign currency-denominated assets and liabilities as well as forecasted transactions. The Company designates certain hedges of forecasted transactions as cash flow
hedges for accounting purposes. Accordingly, for these designated hedges, the Company records unrealized gains and losses related to the change in the fair value of the contracts in AOCI within shareholders’ equity and subsequently recognizes the
gains and losses as a component of earnings at the same time and in the same financial statement line that the underlying transactions impact earnings. The Company has not designated forward contracts related to foreign currency-denominated assets
and liabilities as hedges. Accordingly, for these non-designated contracts, the Company records unrealized gains and losses related to changes in fair value in other income and expense. Gains and losses on these foreign currency contracts are
offset by foreign currency gains and losses associated with the related assets and liabilities.
The fair value of the Company’s derivative financial instruments recorded in the consolidated balance sheets were as follows:
_
Balance Sheet Location
March 31, 2023
March 31, 2022
Derivatives designated as hedges:
Commodity derivatives
Other current assets
$
-
$
0.5
Foreign exchange contracts
Other current assets
1.3
0.3
Derivatives not designated as hedges:
Foreign exchange contracts
Other current liabilities
$
0.2
$
0.3
The amounts associated with derivative financial instruments that the Company designated for hedge accounting during the years ended March 31 were as
follows:
Gain (loss) recognized in
other comprehensive income
Statement of
Operations
Gain (loss) reclassified
from AOCI
2023
2022
2021
Location
2023
2022
2021
Commodity derivatives
$
( 1.6
)
$
1.1
$
2.2
Cost of sales
$
( 1.0
)
$
1.2
$
-
Foreign exchange contracts
1.6
-
-
Net sales
0.6
-
-
Foreign exchange contracts
0.4
0.6
( 0.1
)
Cost of sales
0.7
0.4
( 0.1
)
Total gains (losses)
$
0.4
$
1.7
$
2.1
$
0.3
$
1.6
$
( 0.1
)
The amounts associated with derivative financial instruments that the Company did not designate for hedge accounting were as follows:
_
Statement of Operations
Years ended March 31,
_
Location
2023
2022
2021
Foreign exchange contracts
Net sales
$
( 0.5
)
$
( 0.6
)
$
-
Foreign exchange contracts
Other income (expense) - net
( 2.6
)
( 0.8
)
0.6
Total gains (losses)
$
( 3.1
)
$
( 1.4
)
$
0.6
Note 20: Risks, Uncertainties, Contingencies and Litigation
Supply Chain Disruptions and Inflationary Market Conditions
Market and
economic dynamics, including the impacts of the COVID-19 pandemic, have contributed to 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. The Company is focused on mitigating the negative impacts of labor shortages, supply chain challenges and inflationary market conditions,
including changing raw material, energy and logistic costs, as well as delays and shortages in certain purchased commodities and components. At this time, the Company cannot reasonably estimate the full impact that the supply chain challenges and
other related economic and market dynamics will have on the Company’s business, results of operations and cash flows in the future.
75
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Credit Risk
The Company invests excess
cash primarily in investment quality, short-term liquid debt instruments. Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of accounts receivable. The Company sells a broad
range of products that provide thermal solutions to customers operating throughout the world. In fiscal 2023 and 2022, no customers
accounted for more than ten percent of the Company’s total sales. In fiscal 2021, one vehicular customer accounted for more than ten
percent of the Company’s total sales. Sales to the Company’s top ten customers were 39 percent, 39 percent, and 43 percent of total sales in fiscal 2023, 2022,
and 2021, respectively. At March 31, 2023 and 2022, 37 percent and 29 percent, respectively, of the Company’s trade accounts receivable were due from the Company’s top ten customers. These customers operate primarily in the commercial vehicle, off-highway, automotive and light vehicle, data center cooling, and commercial air conditioning and refrigeration
markets. The Company generally does not require collateral or advanced payments from its customers. The Company has not experienced significant credit losses to customers in the markets served.
The Company manages credit risk through its focus on the following:
•
Cash and investments – reviewing cash deposits and short-term investments to ensure banks have credit ratings acceptable to the Company and
that short-term investments are maintained in secured or guaranteed instruments;
•
Accounts receivable – performing periodic customer credit evaluations and actively monitoring their financial condition and applicable business
news;
•
Pension assets – ensuring that investments within pension plans provide appropriate diversification, monitoring of investment teams, ensuring
that portfolio managers adhere to the Company’s investment policies and directives, and ensuring that exposure to high risk investments is limited; and
•
Insurance – ensuring that insurance providers maintain financial ratings that are acceptable to the Company.
Counterparty Risk
The Company manages counterparty risk through its focus on the following:
•
Customers – performing thorough reviews of customer credit reports and accounts receivable aging reports by internal credit committees;
•
Suppliers – maintaining a supplier risk management program and utilizing industry sources to identify and mitigate high risk situations; and
•
Derivatives – ensuring that counterparties to derivative instruments maintain credit ratings that are acceptable to the Company.
Environmental
The 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 at its 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 $ 17.6 million and $ 18.2
million at March 31, 2023 and 2022, respectively. During 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 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.
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Other Litigation
In the normal course of business, the Company and its subsidiaries are named as defendants in various lawsuits and enforcement proceedings by private
parties, governmental agencies and/or others in which claims are asserted against Modine. The Company believes that any additional loss in excess of amounts already accrued would not have a material effect on the Company’s consolidated balance
sheet, results of operations, and cash flows. In addition, management expects that the liabilities which may ultimately result from such lawsuits or proceedings, if any, would not have a material adverse effect on the Company’s financial position.
Note 21: Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss were as follows:
Foreign
Currency
Translation
Defined
Benefit Plans
Cash Flow
Hedges
Total
Balance, March 31, 2022
$
( 39.1
)
$
( 111.1
)
$
0.7
$
( 149.5
)
Other comprehensive income (loss) before reclassifications
( 18.4
)
2.5
0.4
( 15.5
)
Reclassifications:
Amortization of unrecognized net loss (a)
-
5.3
-
5.3
Realized gains - net (b)
-
-
( 0.3
)
( 0.3
)
Income taxes
-
( 1.1
)
-
( 1.1
)
Total other comprehensive income (loss)
( 18.4
)
6.7
0.1
( 11.6
)
Balance, March 31, 2023
$
( 57.5
)
$
( 104.4
)
$
0.8
$
( 161.1
)
Foreign
Currency
Translation
Defined
Benefit Plans
Cash Flow
Hedges
Total
Balance, March 31, 2021
$
( 31.0
)
$
( 130.8
)
$
0.6
$
( 161.2
)
Other comprehensive income (loss) before reclassifications
( 8.1
)
11.5
1.7
5.1
Reclassifications:
Amortization of unrecognized net loss (a)
-
6.5
-
6.5
Unrecognized net pension loss in disposed business (c)
-
1.7
-
1.7
Realized gains - net (b)
-
-
( 1.6
)
( 1.6
)
Income taxes
-
-
-
-
Total other comprehensive income (loss)
( 8.1
)
19.7
0.1
11.7
Balance, March 31, 2022
$
( 39.1
)
$
( 111.1
)
$
0.7
$
( 149.5
)
(a)
Amounts
are included in the calculation of net periodic benefit cost for the Company’s defined benefit plans, which include pension and other postretirement plans. See Note 18 for additional information about the Company’s pension plans.
(b)
Amounts represent net gains and losses associated with cash flow hedges
that were reclassified to net earnings. See Note 19 for additional information regarding derivative instruments.
(c)
As a result of the sale of the Austrian air-cooled automotive business, 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 fiscal 2022. See Note 1 for additional information.
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 22: Segment and Geographic Information
The Company’s product lines
consist of heat-transfer systems and components. The Company serves commercial, industrial, and building HVAC&R markets and vehicular markets.
The Company’s Climate
Solutions segment provides heat transfer products, heating, ventilating, air conditioning and refrigeration products and data center cooling solutions to global customers. The Company’s 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 coatings products and application services.
Each operating segment is managed by a president and has separate financial results reviewed by the Company’s chief operating decision maker. Financial results, including net sales, gross profit, gross
margin and operating income, together with other considerations, are used by the chief operating decision maker in evaluating the performance of each segment and in making decisions on the allocation of resources among the Company’s various
businesses.
Effective April 1, 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 3 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 believes this simplified segment structure allows it to better focus resources on targeted growth
opportunities and allows for an 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. See Note 3 for additional information regarding net sales by product groups within each segment.
Year ended March 31, 2023
External Sales
Inter-segment
Sales
Total
Net sales:
Climate Solutions
$
1,011.5
$
0.4
$
1,011.9
Performance Technologies
1,286.4
29.8
1,316.2
Segment total
2,297.9
30.2
2,328.1
Corporate and eliminations
-
( 30.2
)
( 30.2
)
Net sales
$
2,297.9
$
-
$
2,297.9
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Year ended March 31, 2022
External Sales
Inter-segment
Sales
Total
Net sales:
Climate Solutions
$
910.1
$
0.4
$
910.5
Performance Technologies
1,140.0
32.4
1,172.4
Segment total
2,050.1
32.8
2,082.9
Corporate and eliminations
-
( 32.8
)
( 32.8
)
Net sales
$
2,050.1
$
-
$
2,050.1
Year ended March 31, 2021
External Sales
Inter-segment
Sales
Total
Net sales:
Climate Solutions
$
731.1
$
0.1
$
731.2
Performance Technologies
1,077.3
31.5
1,108.8
Segment total
1,808.4
31.6
1,840.0
Corporate and eliminations
-
( 31.6
)
( 31.6
)
Net sales
$
1,808.4
$
-
$
1,808.4
Inter-segment sales are accounted for based upon an established markup over production costs. Net sales for Corporate and eliminations primarily
represent the elimination of inter-segment sales.
Years ended March 31,
2023
2022
2021
Gross profit:
_ $’s
% of
sales
_ $’s
% of
sales
_ $’s
% of
sales
Climate Solutions
$
223.6
22.1
%
$
166.3
18.3
%
$
136.6
18.7
%
Performance Technologies
166.1
12.6
%
142.2
12.1
%
157.1
14.2
%
Segment total
389.7
16.7
%
308.5
14.8
%
293.7
16.0
%
Corporate and eliminations
( 0.3
)
-
0.8
-
( 0.3
)
-
Gross profit
$
389.4
16.9
%
$
309.3
15.1
%
$
293.4
16.2
%
Years ended March 31,
Operating income:
2023
2022
2021
Climate Solutions
$
124.1
$
73.4
$
49.9
Performance Technologies
65.6
77.4
( 109.1
)
Segment total
189.7
150.8
( 59.2
)
Corporate and eliminations (a)
( 39.3
)
( 31.6
)
( 38.5
)
Operating income (loss)
$
150.4
$
119.2
$
( 97.7
)
(a)
The operating loss for Corporate includes certain research and development costs,
legal, finance and other general corporate and central services expenses, and other costs that are either not directly attributable to an operating segment or not considered when management evaluates segment performance.
79
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The following is a summary of segment assets, comprised entirely of trade accounts receivable and inventories, and other assets:
March 31,
Assets:
2023
2022
Climate Solutions
$
334.8
$
291.7
Performance Technologies
388.1
357.0
Other (a)
843.0
778.3
Total assets
$
1,565.9
$
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.
The following is a summary of capital expenditures and depreciation and amortization expense by segment:
Years ended March 31,
Capital expenditures:
2023
2022
2021
Climate Solutions
$
24.2
$
9.9
$
7.2
Performance Technologies
25.2
29.2
25.0
Corporate
1.3
1.2
0.5
Total capital expenditures
$
50.7
$
40.3
$
32.7
Years ended March 31,
Depreciation and amortization expense:
2023
2022
2021
Climate Solutions
$
21.7
$
23.6
$
24.9
Performance Technologies (a)
31.8
29.9
42.1
Corporate
1.0
1.3
1.6
Total depreciation and amortization expense
$
54.5
$
54.8
$
68.6
(a)
During fiscal 2021, upon classifying the liquid-
and air-cooled automotive businesses as held for sale, the Company ceased depreciating the long-lived assets within the disposal groups. In fiscal 2022, the Company resumed depreciating the long-lived assets within the liquid-cooled
automotive business when it no longer met the requirements to be classified as held for sale. See Note 2 for additional information.
The following is a summary of net sales by geographic area, based upon the location of the selling unit:
Years ended March 31,
2023
2022
2021
United States
$
1,139.3
$
949.6
$
765.7
Italy
249.5
232.0
188.6
Hungary
210.7
185.2
153.7
China
151.6
166.0
217.6
Brazil
103.6
81.2
48.5
United Kingdom
93.6
118.6
96.4
Other
349.6
317.5
337.9
Net sales
$
2,297.9
$
2,050.1
$
1,808.4
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The following is a summary of property, plant and equipment by geographic area:
March 31,
2023
2022
United States
$
96.4
$
83.6
Hungary
40.8
44.0
China
40.2
45.6
Mexico
34.0
38.5
Italy
32.8
33.2
Other
70.3
70.5
Total property, plant and equipment
$
314.5
$
315.4
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Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Modine Manufacturing Company:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheet of Modine Manufacturing Company and subsidiaries (the Company) as
of March 31, 2023, the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for the year ended March 31, 2023, and the related notes and financial statement schedule II -
Valuation and Qualifying Accounts (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of March 31, 2023, based on criteria established in Internal
Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of
March 31, 2023, and the results of its operations and its cash flows for the year ended March 31, 2023, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of March 31, 2023 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for
its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s
consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB)
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance
about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audit of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our
audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial
reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or
required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The
communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the
critical audit matter or on the accounts or disclosures to which it relates.
Realizability of certain domestic deferred tax assets
As discussed in Notes 1 and 8 to the consolidated financial statements, the Company establishes a valuation allowance if it is more
likely than not that a deferred tax asset, or portion thereof, will not be realized. In making this assessment, the Company considers expectations of future taxable income and tax planning strategies. In addition, the Company considers the duration
of statutory carryforward periods and historical financial results. Valuation allowances as of March 31, 2023 were $61.6 million, a portion of which are related to certain domestic deferred tax assets. The Company recorded a reduction in its
valuation allowance on its deferred tax assets during the year ended March 31, 2023.
We identified the evaluation of the realizability of certain domestic deferred tax assets, specifically certain federal carryforward
assets, as a critical audit matter. Subjective and challenging auditor judgment was required to: (i) evaluate the realizability of certain federal carryforward assets based on the projected future taxable income over the periods in which those
federal carryforward assets will be utilized, and (ii) assess the application of tax laws to utilize the federal carryforward assets.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating
effectiveness of certain internal controls related to the Company’s evaluation of the realizability of the federal carryforward assets, including controls related to the projections of future taxable income and the application of tax laws to
utilize the federal carryforward assets. We evaluated the reasonableness of management’s projections of future taxable income, including positive and negative evidence used, by comparing the projections to:
•
recent financial profitability trends of the Company
•
industry data and economic trends, and
•
evidence obtained in other areas of the audit.
We assessed the Company’s ability to project future earnings based on comparisons of the Company’s previous annual projections to
actual results. We performed a sensitivity analysis over the amount and timing of future taxable income to assess the impact on utilization of the federal carryforward assets. We involved tax professionals with specialized skills and knowledge, who
assisted in assessing the Company’s application of tax laws to utilize the federal carryforward assets and evaluating the recognition and realizability of the carryforward assets.
/s/ KPMG LLP
We have served as the Company’s auditor since 2022.
Milwaukee, Wisconsin
May 25, 2023
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Modine Manufacturing
Company
Opinion on the Financial Statements
We have audited the consolidated balance sheet of Modine Manufacturing Company and its subsidiaries (the “Company”) as of March 31, 2022, and the related
consolidated statements of operations, comprehensive income, cash flows and shareholders’ equity for each of the two years in the period ended March 31, 2022, including the related notes and schedule of valuation and qualifying accounts as of and
for each of the two years in the period ended March 31, 2022 listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present
fairly, in all material respects, the financial position of the Company as of March 31, 2022, and the results of its operations and its cash flows for each of the two years in the period ended March 31, 2022 in conformity with accounting
principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud,
and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
May 26, 2022, except for the change in composition of reportable segments
discussed in Note 22 to the consolidated financial statements, as to which the date is May 25, 2023
We served as the Company’s auditor from 1935 to 2022.
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ITEM 9 .
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE .
Not Applicable