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Item 7. Management’s Discussion and Analysis

2024-05-22 compared with 2023-05-25 · 464 added, 578 removed, 209 unchanged (83% of the section changed)

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We provide trusted products and technologies that help improve our world.

Our broad portfolio of systems and solutions

support our mission of improving indoor air quality, conserving natural resources, lowering harmful emissions, enabling cleaner running vehicles, and using environmentally friendly refrigerants.

We operate in

four continents, in 15 countries, and employ approximately 11,300 persons worldwide.

We sell innovative and environmentally responsible thermal management products and solutions to diversified customers in a wide array of commercial, industrial, and building HVAC&R markets.

In addition, we are a leading provider of

engineered heat transfer systems and high-quality heat transfer components for use in on- and off-highway OEM vehicular applications.

Our primary product groups include i) heat transfer;

ii) HVAC & refrigeration;

Our broad portfolio of systems and solutions support

our mission of improving indoor air quality, conserving natural resources, lowering harmful emissions, enabling cleaner running vehicles, and using environmentally friendly refrigerants.

We operate in four

continents, in 16 countries, and employ approximately 11,400 persons worldwide.

We sell innovative and environmentally responsible thermal management products and solutions to diversified customers in a wide array of commercial,

industrial, and building HVAC&R markets.

In addition, we are a leading provider of engineered heat transfer systems and high-quality heat transfer components for use in on- and off-highway OEM vehicular applications.

Our primary product groups

include i) heat transfer;

ii) HVAC& R ;

iii) data center cooling;

iv) air-cooled;

v) liquid-cooled;

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Company Strategy

Our purpose is to engineer a cleaner, healthier world by providing products and services that improve indoor air quality, reduce water and energy consumption, lower harmful emissions, enable cleaner running vehicles, and use environmentally

friendly refrigerants.

In fiscal 2023, we made significant progress toward transforming Modine.

We originally announced our vision for a “new” Modine in late fiscal 2021.

In fiscal 2022, we onboarded seasoned leaders to drive transformative change, including new

segment presidents for our Climate Solutions and Performance Technologies segments.

Since that time, we have simplified and segmented our organization, aligning teams, led by general managers, around specific strategies and market-based verticals

within our company.

Our new leadership teams have created a high-performance culture and are prioritizing resources on products and markets with the highest growth opportunities and best return profiles.

We have been focused on growth

opportunities in the data center market and have strategically expanded our product offerings in this business.

We are now manufacturing and selling more data center cooling products in North America.

We have also improved our commercial acumen

and have strengthened our business relationships with our best customers.

In addition, by applying 80/20 principles and improving our commercial pricing methodologies, we have improved our profit margins in fiscal 2023, in spite of significant

supply chain challenges and inflationary market conditions.

Entering fiscal 2024, while a level of uncertainty and the possibility of recessionary conditions exist in the global marketplace, we are focused on organic and inorganic growth opportunities in the key markets we

serve and the incremental value we believe we can unlock in Modine by applying 80/20 principles across our businesses.

We are strengthening key customer relationships and pursing strategic growth opportunities, particularly in the data

center, electric vehicles, and HVAC&R markets where we see the best opportunities for profitable growth.

In addition, we are utilizing an 80/20 mindset within our manufacturing facilities and expect to achieve

production efficiency improvements as a result.

refrigerants.

In fiscal 2024, we continued our strategic transformation.

We first announced our vision for a “new” Modine in late fiscal 2021.

In fiscal 2022, we

onboarded seasoned leaders with the requisite experience to drive transformative change, including new segment presidents for our Climate Solutions and Performance Technologies segments.

Since that time, we have simplified and segmented our

organization, aligning teams, led by general managers, around specific strategies and market-based verticals within our company.

Our leadership teams have created a high-performance culture and are prioritizing resources on products and markets with

the highest growth opportunities and best return profiles.

We have been focused on growth opportunities in the Data Center Cooling and Indoor Air Quality businesses and have strategically expanded our product offerings in these businesses.

second quarter of fiscal 2024, we acquired substantially all of the assets of

Napps, a Texas-based manufacturer of air- and water-cooled chillers, condensing units and heat pumps, which expanded our indoor air quality product portfolio.

Additionally, during the fourth quarter of fiscal 2024, we completed the acquisition of

Scott Springfield Mfg.

Inc (“Scott Springfield Manufacturing”), a leading manufacturer of air handling units serving the data center cooling and indoor air quality markets in the U.S.

and Canada, and also purchased liquid immersion cooling technology

from TMGcore, Inc.

We also recently purchased a new manufacturing site in the U.K., with plans to expand our production capacity to support our data center customers.

Simultaneously,

we are rapidly growing our Advanced Solutions business, which provides systems and solutions for zero-emission and hybrid vehicles in the commercial vehicle and off-highway machine markets.

Through our initiatives based upon 80/20 principles, we

have achieved significant improvements in our profit margins since we started our transformational journey.

Entering fiscal 2025, we are focused on organic and inorganic growth opportunities in the key markets we serve and the incremental value we believe we can unlock in Modine by applying 80/20 principles across our

We are strengthening key customer relationships and pursuing strategic growth opportunities, particularly in the data center cooling, commercial HVAC&R, and specialty electric vehicle markets where we see the best

opportunities for profitable growth.

In addition, we will continue to utilize an 80/20 mindset within our manufacturing facilities and expect to achieve production efficiency improvements as a result.

Our ultimate objective for our transformational strategy is to accelerate profitable growth.

We expect to change our mix of business, as we grow certain areas and strategically deemphasize others.

We expect these changes will fuel improvements

in both earnings and cash flow, all while supporting our customers with innovative and environmentally responsible thermal management solutions to succeed in the ever-changing global marketplace.

We expect these changes will fuel improvements in

both earnings and cash flow, all while supporting our customers with innovative and environmentally responsible thermal management solutions to succeed in the ever-changing global marketplace.

Development of New Products and Technology

Every day, we leverage our technical expertise, building on more than 100 years of excellence in thermal management, to advance our purpose.

We are dedicated to utilizing technology and solutions with sustainable

We are dedicated to utilizing technology and solutions with sustainable impacts.

Our ability to provide customizable solutions to meet the ever-evolving needs of our customers is one of our greatest competitive strengths.

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Our thermal solutions enable our customers to stay ahead of new and emerging

regulations, particularly those involving increasingly stringent emissions, fuel economy, and energy efficiency standards.

regulations, particularly those involving increasingly stringent energy efficiency, emissions, and fuel economy standards.

We maintain numerous state-of-the-art technology centers, dedicated to the development and testing of products and technologies.

The centers are located in Racine, Wisconsin;

Leeds, United Kingdom;

Grenada, Mississippi;

Allen, Texas;

United Kingdom;

Pocenia, Italy;

and Bonlanden, Germany.

Söderköping , Sweden;

Mezökövesd, Hungary;

and Sao Paulo, Brazil.

Customers know our reputation for innovation and rely on Modine to provide high quality products and technologies.

Strategic Planning and Corporate Development

We employ both short-term (one-to-three year) and longer-term (five-to-seven year) strategic planning processes, which enable us to continually assess our opportunities, competitive threats, and economic market

We devote significant resources to global strategic planning and development activities to strengthen our competitive position.

We will continue to pursue organic- and external-growth opportunities,

particularly to grow our global, market leading positions in the HVAC&R and data center markets.

In addition, we have a dedicated team focused on products and solutions for electric vehicles, supporting demands for climate-friendly alternative

We have provided our general managers with the tools that they need to be successful, including dedicated resources to create an entrepreneurial environment and to challenge the status quo.

During fiscal 2024, we acquired Scott Springfield Manufacturing, a leading manufacturer of air

handling units serving customers in the U.S.

and Canada, and purchased liquid immersion cooling technology from TMGcore, Inc.

Earlier in the fiscal year, we acquired Napps, a Texas-based manufacturer of air- and water-cooled chillers, condensing

units, and heat pumps.

These investments have expanded our data center cooling and indoor air quality product portfolios and are accelerating our strategic growth.

We are actively engaged in integration activities and expect to realize cost and

revenue synergies.

We will continue to pursue organic- and external-growth opportunities, particularly to grow our global, market leading positions in the HVAC&R and data center cooling markets.

In addition, we have a dedicated team focused on products and

solutions for electric vehicles, supporting demands for climate-friendly alternative powertrains.

We have provided our general managers with the tools that they need to be successful, including dedicated resources to create an entrepreneurial

environment and to challenge the status quo.

Operational and Financial Discipline

We are using 80/20 principles to guide our path forward toward commercial excellence.

Through closely analyzing our customer and product data with our 80/20 mindset, we

focus our commercial and operational actions in areas that drive our profitability and also in areas requiring improvement.

Our Climate Solutions and Performance Technologies segments have strategically aligned their teams around their

primary market-based verticals and are driving transformative change.

The general manager for each vertical is working toward strategic objectives specifically tailored to his or her business and we expect these strategies will continue to

generate earnings and cash flow improvements.

While executing on our strategic initiatives, we have faced obstacles including supply chain disruptions and inflationary market conditions.

We have and will continue to address these challenges head-on through

commercial actions and close engagement with our suppliers.

Through closely analyzing our customer and product data with our 80/20 mindset, we focus our commercial and operational actions in areas

that drive our profitability and also in areas requiring improvement.

Our Climate Solutions and Performance Technologies segments have strategically aligned their teams around their primary market-based verticals and are driving transformative

The general manager for each vertical is working toward strategic objectives specifically tailored to his or her business and we expect these strategies will continue to generate earnings and cash flow improvements.

Our fiscal 2024 annual cash incentive plan for our management team was based upon two performance metrics:

growth in net earnings before interest, taxes, depreciation, amortization, and certain other

adjustments (“Adjusted EBITDA”) and Adjusted EBITDA margin as a percentage of net sales .

growth in net earnings before interest, taxes, depreciation, amortization, and certain other adjustments

(“Adjusted EBITDA”) and Adjusted EBITDA margin as a percentage of net sales .

The incentive plan’s performance goals were established for each operating segment as well for the consolidated company.

addition, we provide a long-term incentive compensation plan for officers and certain key leaders throughout our organization to attract, retain, and motivate these employees who are responsible for driving the long-term success of our company.

The plan is comprised of stock awards, stock options, and performance-based awards.

The performance-based awards for the fiscal 2023 through 2025 performance period are based upon a target three-year average

growth in Adjusted EBITDA and a target three-year average cash flow return on invested capital.

In addition, we

provide a long-term incentive compensation plan for officers and certain key leaders throughout our organization to attract, retain, and motivate these employees who are responsible for driving the long-term success of our company.

The fiscal 2024

plan is comprised of restricted stock awards and performance-based share awards.

The performance-based awards for the fiscal 2024 through 2026 performance period are based upon a target three-year average growth

in Adjusted EBITDA and a target three-year average cash flow return on invested capital.

Segment Information – Strategy, Market Conditions and Trends

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evaluate the performance of each segment and to make decisions on the allocation of resources.

Effective April 1, 2022, we began managing the Company under two operating segments, Climate Solutions and Performance Technologies.

Our segment structure aligns businesses serving similar or complimentary end markets, products and technologies

under common segment management.

This simplified segment structure allows us to better focus resources on targeted growth opportunities and better enables an efficient application of 80/20 principles across all product lines to optimize profit

margins and cash flow.

The Climate Solutions segment includes the previously-reported BHVAC and CIS segments, with the exception of CIS Coatings.

The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and

the CIS Coatings business.

Effective April 1, 2024, we moved our Coatings business, which was previously managed by and reported within the Performance Technologies segment, under the

leadership of the Climate Solutions segment.

Under this refined organizational structure, the Coatings business is better aligned with the Climate Solution’s Heat Transfer Products business, which serves similar HVAC&R markets and customers.

expect that unifying these compl e mentary businesses will allow us to better focus

resources on targeted growth and allow for a more efficient application of 80/20 principles to optimize profit margins and cash flow.

Climate Solutions (43 percent of fiscal 2024 net sales)

Our Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.

The Climate Solutions segment sells heat transfer, HVAC & refrigeration, and data

center cooling solutions to customers in North America, EMEA, and Asia.

Heat transfer products include heat transfer coils used in commercial and residential HVAC and refrigeration applications.

HVAC & refrigeration products include

commercial and residential unit heaters, vertical and horizontal unit ventilators, air conditioning chillers, low global warming potential unit coolers, air-cooled condensers, and dry coolers.

Data center cooling solutions, which are integrated

with system controls, include air- and liquid-cooled chillers, CRAC and CRAH units, and fan walls.

We sell our products and solutions both directly to commercial and industrial OEM and end user customers and through wholesalers, distributors,

consulting engineers, contractors and data center operators for applications such as data centers, schools, greenhouses, healthcare systems, warehouses, residential garages, manufacturing facilities, and other commercial and industrial

The Climate Solutions

segment sells heat transfer, HVAC& R , and data center cooling solutions to customers in North America, EMEA, and Asia.

Heat transfer products include heat

transfer coils used in commercial and residential HVAC &R applications.

products include commercial and residential unit heaters, vertical and horizontal unit ventilators, air conditioning chillers, low global warming potential unit coolers, air-cooled condensers, and dry coolers.

Data center cooling solutions, which

are integrated with system controls, include air- and liquid-cooled chillers, CRAC and CRAH units, and fan walls.

We sell our products and solutions both directly to commercial and industrial OEM and end user customers and through wholesalers,

distributors, consulting engineers, contractors and data center operators for applications such as data centers, schools, greenhouses, healthcare systems, warehouses, residential garages, manufacturing facilities, and other commercial and industrial

applications.

During fiscal 2023, Climate Solutions segment sales increased compared with the prior year, primarily driven by increased sales of data center cooling, heat transfer, and HVAC & refrigeration products.

80/20 principles to each of our businesses within the Climate Solutions segment during fiscal 2023.

For example, we simplified our heat transfer products business by reducing SKUs and have refined our pricing discipline.

Through these efforts, we

achieved improvements in the Climate Solutions segment’s profit margins.

In addition, as part of our strategic growth initiatives, we have expanded our data center business and are manufacturing and selling more data center cooling products in

North America.

Looking ahead, while a level of uncertainty and the possibility of recessionary conditions exist in the global marketplace, we expect growth across the HVAC&R and data center markets we serve during fiscal 2024.

These markets are heavily impacted by construction activity, building regulations, owner/occupant comfort requirements, and the increasing reliance on digital technologies.

We expect particularly strong growth in the data center markets as the

need for digital infrastructure expands.

We also expect the North American school and commercial HVAC markets, to which we sell our indoor air quality products, will experience strong growth during fiscal 2024, driven by federal and local funding

for ventilation improvements for schools.

In addition, we expect the rapid adoption of heat pump technology in Europe to be a market growth driver and are increasing our manufacturing capacity in response.

During fiscal 2024, Climate Solutions segment sales increased compared with the prior year, primarily driven by higher sales of data center cooling products, partially offset by lower sales of heat transfer products, largely due to market weakness

and our strategic exit from lower margin business in connection with 80/20 product rationalization initiatives.

We executed on strategic growth opportunities in areas where we see the best return profiles, including for our Data Center Cooling and

Indoor Air Quality businesses.

During the fourth quarter of fiscal 2024, we completed the acquisition of Scott Springfield Manufacturing, a leading manufacturer of air handling units serving customers in the U.S.

and Canada, and purchased liquid

immersion cooling technology from TMGcore, Inc.

Earlier in the fiscal year, we acquired Napps, a Texas-based manufacturer of air- and water-cooled chillers, condensing units, and heat pumps.

These investments have expanded our data center cooling and

indoor air quality product portfolios and are accelerating our strategic growth.

Looking ahead, we are excited about the growth opportunities in key markets served by the Climate Solutions segment.

We expect particularly strong growth in the data center markets during fiscal 2025, as the need for digital infrastructure

continues to expand.

Through our recent acquisition and investment in liquid immersion cooling technology, we are expanding our product portfolio to support our customers with data center cooling solutions as they manage the demands of high

performance computing.

In addition, we are working to expand our production capacity for data center cooling products and have purchased a new manufacturing site in the U.K.

We also expect the North American

school and commercial HVAC markets, to which we sell our indoor air quality products, will experience strong growth during fiscal 2025, driven by federal and local funding for ventilation improvements for schools.

In addition, after European

regulatory changes and delays this past year, we expect stronger growth in the residential heat pump market in the second half of fiscal 2025 and our manufacturing facilities are poised to support higher production levels.

In fiscal 2025, we will continue to utilize an 80/20 mindset across our Climate Solutions businesses.

We are focused on engaging with key customers to further develop our relationships with them and are pursuing

strategic growth opportunities, particularly for our data center, heating, and indoor air quality products.

We are also focused on growing our refrigeration sales and believe we can become a market leader in more environmentally friendly carbon

dioxide gas coolers and adiabatic solutions in North America and Europe.

In addition to these organic growth opportunities, we plan to pursue acquisitions to further accelerate growth and complement our existing product portfolio.

Finally, we are

also focused on applying the 80/20 principles within our manufacturing facilities and expect to achieve production efficiency improvements as a result.

We are focused on engaging with key customers and are pursuing strategic growth opportunities to gain market share, particularly within the North

American data center, school and commercial HVAC markets.

We are also focused on growing our refrigeration sales and believe we can become a market leader in more environmentally friendly carbon dioxide gas coolers and adiabatic solutions in North

America and Europe.

Finally, we are focused on applying the 80/20 principles within our manufacturing facilities and expect to achieve further production efficiency improvements as a result.

Performance Technologies (57 percent of fiscal 2024 net sales)

The Performance Technologies segment provides products and solutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government

The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.

Air-cooled products consist primarily of powertrain cooling products, such

as radiators, condensers, engine cooling modules, charge air coolers, fan shrouds, and surge tanks.

Liquid-cooled products include engine oil coolers, EGR coolers, liquid charge air coolers, transmission and retarder oil coolers, fuel coolers, and

In addition, the Performance Technologies segment provides advanced solutions, designed to improve battery range and vehicle life, to zero-emission and hybrid commercial vehicle and automotive customers.

These solutions include

battery thermal management systems, electronics cooling packages, and battery chillers.

The advanced solutions provided by the segment also include coating products and application services that extend the life of equipment and components by

protecting against corrosion.

During fiscal 2023, Performance Technologies segment sales increased compared with the prior year, primarily driven by higher sales volume and favorable commercial pricing, including adjustments in response to material price increases.

with the prior year, sales of air-cooled, liquid-cooled, and advanced solutions products each increased.

In fiscal 2023, we focused on training our employees on 80/20 principles and began applying them to our businesses.

Looking ahead, while a level of uncertainty and the possibility of recessionary conditions exist in the global marketplace, we are excited about the growth potential in our key markets and the benefits we

expect to achieve as we roll out 80/20 principles across all of our businesses.

Our Advanced Solutions team is focused on growing sales of its thermal management systems and components for electric vehicles and is engaged with numerous

current and prospective customers.

We believe government policies in the U.S.

The Performance Technologies segment provides products and solutions that enhance the performance of customer applications and develops solutions that provide

mission critical power (Gensets), increase fuel economy and lower emissions in light of increasingly stringent government regulations.

The Performance Technologies segment designs and manufactures air- and liquid-cooled heat exchangers for vehicular,

stationary power, and industrial applications.

Air-cooled products consist primarily of powertrain cooling products, such as radiators, condensers, engine cooling modules, charge air coolers, fan shrouds, and surge tanks;

Liquid-cooled

products include engine oil coolers, EGR coolers, liquid charge air coolers, transmission and retarder oil coolers, chillers, and condensers.

In addition, the Performance Technologies segment provides advanced solutions, designed to improve battery

range and vehicle life, to zero-emission and hybrid commercial vehicle, off-highway machine and automotive customers.

These solutions include battery thermal management systems, electronics cooling packages, and battery chillers.

solutions provided by the segment also include coating products and application services that extend the life of equipment and components by protecting against corrosion.

During fiscal 2024, Performance Technologies segment sales increased compared with the prior year, primarily driven by higher average selling prices and the favorable impact of foreign currency exchange rates.

Compared with the prior

year, sales of air-cooled, liquid-cooled, and advanced solutions products each increased.

In fiscal 2024, we focused on applying 80/20 principles to our businesses.

The Performance Technologies team sharpened their commercial acumen and made strong

progress in simplifying their businesses, and achieved improvements in the segment’s profit margins as a result.

We also completed the sale of three automotive businesses based in Germany to support our strategic prioritization of resources towards higher-margin technologies, and also sold two coatings spray application facilities in the U.S.

In addition, we are working towards closing a technical service center

in Germany to optimize the utilization of our global technical service center capacity.

Looking ahead, we are excited about the growth opportunities in key markets served by the Performance Technologies segment and the

benefits expected to be achieved as management continues to apply 80/20 principles across the segment’s businesses.

Our Advanced Solutions business is dedicated to increasing the performance, durability, and longevity of zero-emission vehicles.

The Advanced Solutions business is focused on market penetration and recently announced an important partnership with Bosch Rexroth, a recognized leader in drive and

control technologies, to bring our EV antage™ thermal management systems to their portfolio of products to provide solutions for electrified off-highway machinery.

believe government policies in the U.S.

and Europe will drive customer investments in electric and alternative powertrains and will support market growth in this area.

In addition, we expect the global

automotive markets to experience moderate growth, as customers look to replenish inventory levels in light of the semiconductor chip shortage and other supply chain challenges.

We are also working to apply our 80/20 mindset to achieve

manufacturing efficiencies and to improve our business mix, focusing on higher profit margin products, applying quoting filters for new customer programs and reducing complexity across our businesses.

In addition, our Air-Cooled Applications business is focused on growing the sales

of Gensets and are offering both aluminum and copper-brass heat exchanger modules.

We believe our aluminum Gensets have both a cost and performance advantage and are prioritizing resources to capitalize on sales growth opportunities related to new

data center construction and demand for Gensets for hospitals and airports.

We will continue applying an 80/20 mindset to achieve further manufacturing efficiencies and to further simplify our business.

We are focusing our resources on higher margin

products and actively working on product line simplification initiatives and expect to achieve incremental improvements to the Performance Technologies segment’s profit margins as a result.

Consolidated Results of Operations

Supply Chain Disruptions and Inflationary Market Conditions

Market and economic dynamics, including the impacts of the military conflict between Russia and Ukraine and the COVID-19 pandemic, have contributed to global supply chain challenges and inflationary market conditions.

We are focused on

mitigating the negative impacts of labor shortages, supply chain challenges and inflationary market conditions, including changes in raw material, energy, logistic, and interest costs, as well as delays and shortages in certain purchased

commodities and components.

We have implemented selling price increases for many of our products in response to raw material and other cost increases and are engaged with suppliers to ensure availability of key raw materials.

We cannot reasonably

estimate the full impact that economic and market dynamics will have on our business, results of operations, or cash flows in the future.

Fiscal 2024 acquisitions

On July 1, 2023, we acquired substantially all of the net operating assets of Napps for consideration totaling $6 million.

Napps is a Texas-based manufacturer of air- and water-cooled chillers, condensing units and heat pumps.

This acquisition

expands our indoor air quality product portfolio and supports our growth strategy and mission of improving indoor air quality.

Napps has historical annual sales of approximately $5 million.

Since the date of the acquisition, we have reported the

financial results of the Napps business within the Climate Solutions segment.

On March 1, 2024, we acquired all of the issued and outstanding shares in the capital of Scott Springfield Manufacturing for consideration totaling $184 million.

Scott Springfield Manufacturing is a Canadian-based manufacturer of air- handling

This acquisition expands our data center and indoor air quality product portfolios and manufacturing footprint and supports our growth strategy.

Prior to being acquired by us, Scott Springfield Manufacturing reported $110 million of net sales

during the year ended December 31, 2023.

Since the date of the acquisition, we have reported the financial results of the Scott Springfield Manufacturing within the Climate Solutions segment.

Fiscal 2024 dispositions

On September 19, 2023, we sold two coatings facilities, located in California and Florida, to Protecall, LLC.

These facilities provide aftermarket application services, in which HVAC units are sprayed with an anti-corrosion protective coating.

other coatings businesses continue to own and license spray-applied coatings used in aftermarket applications and are strategically pursuing growth through product licensing arrangements.

Prior to the disposition, we reported the financial results of

these businesses within the Performance Technologies segment.

In fiscal 2023, net sales of these two businesses totaled $6 million.

As a result of this transaction, we recorded a gain on sale of less than $1 million during the second quarter of

On October 31, 2023, we sold three automotive businesses based in Germany to affiliates of Regent, L.P.

The sale of these businesses, which produce air- and liquid-cooled products for internal combustion diesel and gasoline engines for the European

automotive market, supports our strategic prioritization of resources towards higher-margin technologies.

Prior to the disposition, we reported the financial results of these businesses within the Performance Technologies segment.

During fiscal 2024

and 2023, net sales of these three businesses totaled $54 million and $79 million, respectively.

As a result of the sale, we recorded a $4 million gain on sale during the third quarter of fiscal 2024.

See Note 2 of the Notes to Consolidated Financial Statements for further information regarding acquisitions and dispositions.

Fiscal 2024 highlights

Fiscal 2024 net sales increased $110 million, or 5 percent, from the prior year, primarily due to higher sales in our Performance Technologies and Climate Solutions segments.

Cost of sales increased $168 million, or 10 percent, primarily due

to higher sales volume and higher raw material costs, including underlying metal prices and related premiums, fabrication, freight, and packaging costs.

Gross profit increased $80 million and gross margin improved 180 basis points to 16.9

Cost of sales decreased $27 million, or 1 percent, primarily due to lower

material costs and improved operating efficiencies.

Gross profit increased $137 million and gross margin improved 490 basis points to 21.8 percent.

SG&A expenses increased $40 million, primarily due to higher compensation-related expenses.

Operating income of $150 million during fiscal 2023 increased $31 million from the prior year, primarily due to higher gross profit,

partially offset by the absence of a $56 million net impairment reversal recorded in the prior year that primarily related to the liquid-cooled automotive business.

Upon the termination of a sale agreement with the prospective buyer during the

third quarter of fiscal 2022, the liquid-cooled automotive business reverted back to held and used classification.

See Note 2 of the Notes to Consolidated Financial Statements for further information regarding the liquid-cooled automotive

business, which was classified as held for sale during the first seven months of fiscal 2022.

Operating income of $241 million during fiscal 2024 increased $91 million from the prior year, primarily due to higher earnings in our operating segments, partially offset by higher SG&A and restructuring expenses.

Fiscal 2023 highlights

Fiscal 2022 net sales increased $242 million, or 13 percent, from the prior year, primarily due to higher sales in our Climate Solutions and Performance Technologies segments.

Cost of sales increased $226 million, or 15 percent, from the prior

year primarily due to higher raw material prices and higher sales volume.

Gross profit increased $16 million and gross margin declined 110 basis points to 15.1 percent.

SG&A expenses increased $4 million, primarily due to higher

compensation-related expenses, as the prior-year benefitted from cost-saving actions implemented in response to the COVID-19 pandemic.

Operating income of $119 million during fiscal 2022 represents a $217 million improvement from the prior-year

operating loss of $98 million.

The operating income and operating loss during fiscal 2022 and 2021 include a $56 million net impairment reversal and $167 million of impairment charges, respectively, primarily related to the automotive businesses

that were held for sale.

Fiscal 2023 net sales increased $248 million, or 12 percent, from the prior year, primarily due to higher sales in our Performance Technologies and Climate Solutions segments.

Cost of sales increased $168 million, or 10 percent, primarily due to

higher sales volume and higher raw material costs.

Gross profit increased $80 million and gross margin improved 180 basis points to 16.9 percent.

SG&A expenses increased $19 million, primarily due to higher compensation-related expenses.

Operating income of $150 million during fiscal 2023 increased $31 million from the prior year, primarily due to higher gross profit, partially offset by the absence of a $56 million net impairment reversal recorded in the prior year related to the

liquid-cooled automotive business.

The following table presents our consolidated financial results on a comparative basis for fiscal years 2024, 2023 and 2022.

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Impairment charges (reversals) - net

Loss on sale of assets

Operating income (loss)

(Gain) loss on sale of assets

Operating income

Interest expense

Other expense – net

Earnings (loss) before income taxes

Benefit (provision) for income taxes

Net earnings (loss)

Earnings before income taxes

(Provision) benefit for income taxes

Year ended March 31, 2024 compared with year ended March 31, 2023

Fiscal 2023 net sales of $2,298 million were $248 million, or 12 percent, higher than the prior year, primarily due to higher sales volume in both of our segments and favorable commercial pricing, including adjustments in response to raw

material price increases.

Fiscal 2024 net sales of $2,408 million were $110 million, or 5 percent, higher than the prior year, primarily due to higher average selling prices and a $28 million favorable impact of foreign currency exchange rates.

Sales in the Performance

Technologies and Climate Solutions segments increased $62 million and $43 million, respectively.

Fiscal 2024 cost of sales of $1,882 million decreased $27 million, or 1 percent, primarily due to lower raw material prices, which decreased $50 million, and, to a lesser extent, improved operating efficiencies.

These decreases were partially

offset by a $22 million unfavorable impact of foreign currency exchange rates and higher labor and inflationary costs.

In addition, cost of sales was negatively impacted by an inventory purchase accounting adjustment of $2 million recorded at

Corporate related to the acquisition of Scott Springfield Manufacturing.

As a percentage of sales, cost of sales decreased 490 basis points to 78.2 percent, primarily due to the favorable impact of higher sales, lower material costs, and improved

operating efficiencies, partially offset by higher labor and inflationary costs.

As a result of higher sales and lower cost of sales as a percentage of sales, gross profit increased $137 million and gross margin improved 490 basis points to 21.8 percent.

Fiscal 2024 SG&A expenses increased $40 million, or 17 percent.

As a percentage of sales, SG&A expenses increased by 120 basis points.

The increase in SG&A expenses was primarily driven by higher compensation-related expenses, which

increased approximately $22 million, and increases across other general and administrative expenses, such as higher product development costs, professional service fees, and employee travel expenses.

The compensation-related expenses included higher

incentive compensation expenses driven by improved financial results, as compared with the prior year.

In addition, we recorded $2 million of costs related to the acquisition and integration of Scott Springfield Manufacturing in fiscal 2024.

Restructuring expenses during 2024 increased $10 million compared with the prior year, primarily due to higher severance expenses in the Performance Technologies segment.

We sold three automotive businesses based in Germany on October 31, 2023.

As a result of the sale, we recorded a $4 million gain on sale at Corporate during

Operating income of $241 million in fiscal 2024 increased $91 million compared with the prior year, primarily due to a $137 million increase in gross profit, partially offset by higher SG&A and restructuring expenses.

Interest expense in fiscal 2024 increased $3 million compared with the prior year, primarily due to unfavorable changes in interest rates and borrowings on our revolving credit facility that we used to fund a portion of the purchase price for the

acquisition of Scott Springfield Manufacturing, partially offset by the absence of $1 million of costs recorded in the prior year related to a credit agreement amendment.

The provision for income taxes was $51 million in fiscal 2024, compared with a benefit for income taxes of $28 million in fiscal 2023.

The $79 million change was primarily due to the absence of a $57 million income tax benefit recorded in the prior

year related to the reversal of the valuation allowance on certain deferred tax assets in the U.S.

and higher earnings in the current year, as compared with the prior year.

These drivers, which increased the provision for income taxes, were partially

offset by a $3 million income tax benefit recorded in fiscal 2024 related to the sale of three automotive businesses in Germany.

Year ended March 31, 2023 compared with year ended March 31, 2022

Fiscal 2023 net sales of $2,298 million were $248 million, or 12 percent, higher than the prior year, primarily due to higher sales volume in both of our segments and higher average selling prices, including adjustments in response to raw material

price increases.

These increases were partially offset by a $111 million unfavorable impact of foreign currency exchange rates.

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Fiscal 2023 cost of sales of $1,909 million increased $168 million, or 10 percent, primarily due to higher sales volume and higher raw material prices, which increased $34 million.

These increases were partially offset by a $95 million

favorable impact of foreign currency exchange rates.

As a percentage of sales, cost of sales decreased 180 basis points to 83.1 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially

offset by higher material, labor and other inflationary costs.

These increases were partially offset by a $95 million favorable

impact of foreign currency exchange rates.

As a percentage of sales, cost of sales decreased 180 basis points to 83.1 percent, primarily due to the favorable impact of higher sales, partially offset by higher material, labor and other inflationary

As a result of higher sales and lower cost of sales as a percentage of sales, fiscal 2023 gross profit increased $80 million and gross margin improved 180 basis points to 16.9 percent.

Fiscal 2023 SG&A expenses increased $19 million, yet decreased 30 basis points as a percentage of sales.

The higher SG&A expenses were primarily driven by higher compensation-related expenses, which increased $20 million and included

higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.

These increases were partially offset by an

$8 million favorable impact of foreign currency exchange rates.

In addition, strategic reorganization costs, costs associated with our review of strategic alternatives for our automotive businesses, and environmental charges related to a

previously-closed manufacturing facility in the U.S., which are each recorded at Corporate, decreased $3 million, $2 million, and $2 million, respectively, during fiscal 2023 compared with the prior year.

The higher SG&A expenses were primarily driven by higher compensation-related expenses, which increased $20 million and included higher

incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.

These increases were partially offset by an $8 million

favorable impact of foreign currency exchange rates.

In addition, strategic reorganization costs, costs associated with our review of strategic alternatives for our automotive businesses, and environmental charges related to a previously-closed

manufacturing facility in the U.S., which are each recorded at Corporate, decreased $3 million, $2 million, and $2 million, respectively, during fiscal 2023 compared with the prior year.

Restructuring expenses of $5 million in fiscal 2023 decreased $19 million compared with the prior year, primarily due to lower severance-related expenses in the Performance Technologies segment.

The net impairment reversal of $56 million during fiscal 2022 primarily related to the liquid-cooled automotive business.

In connection with the termination of the agreement to sell this business in the third quarter of fiscal 2022, we

reversed a significant amount of previously-recorded impairment charges within the Performance Technologies segment.

The net impairment reversal of $56 million during fiscal 2022 primarily related to the liquid-cooled automotive business within the Performance Technologies segment.

In connection with the termination of an agreement to sell this business, we

reversed a significant amount of previously-recorded impairment charges during fiscal 2022.

We sold our Austrian air-cooled automotive business on April 30, 2021.

As a result of the sale, we recorded a $7 million loss on sale at Corporate during fiscal 2022.

Operating income of $150 million during fiscal 2023 increased $31 million from the prior year, primarily due to an $80 million increase in gross profit, a $19 million decrease in restructuring expenses, and the absence of the $7 million loss on

the sale of the Austrian air-cooled automotive business in the prior year.

These drivers, which favorably impacted operating income in fiscal 2023, were partially offset by the absence of the $56 million net impairment reversal recorded in the

prior year and higher SG&A expenses.

sale of the Austrian air-cooled automotive business in the prior year.

These drivers, which favorably impacted operating income in fiscal 2023, were partially offset by the absence of the $56 million net impairment reversal recorded in the prior year

and higher SG&A expenses.

Interest expense in fiscal 2023 increased $5 million compared with the prior year, primarily due to unfavorable changes in interest rates.

In addition, we amended and extended our U.S.

credit agreement that provides for a multi-currency

revolving credit facility and U.S.

credit agreement that provides for a multi-currency revolving

credit facility and U.S.

dollar- and euro- denominated term loans maturing in October 2027, along with shorter-duration swingline loans.

In connection with this credit agreement modification, we recorded $1 million of costs as interest

expense during fiscal 2023.

In connection with this credit agreement modification, we recorded $1 million of costs as interest expense during

The benefit for income taxes was $28 million in fiscal 2023, compared with a provision for income taxes of $15 million in fiscal 2022.

The $43 million change was primarily due to a $57 million income tax benefit recorded in the current year

related to the reversal of the valuation allowance on certain deferred tax assets in the U.S., partially offset by the absence of a net $11 million income tax benefit related to valuation allowances on deferred tax assets in foreign jurisdictions

in the prior year.

Year Ended March 31, 2022 Compared with Year Ended March 31, 2021

Fiscal 2022 net sales of $2,050 million were $242 million, or 13 percent, higher than the prior year, primarily due to higher sales volume in each of our segments, and favorable commercial pricing, including adjustments in response to raw

material price increases.

Sales in the Climate Solutions and Performance Technologies segments increased $180 million and $63 million, respectively.

Fiscal 2022 cost of sales of $1,741 million increased $226 million, or 15 percent, primarily due to higher raw material prices, which increased $148 million, and higher sales volume.

In addition, cost of sales in fiscal 2021 was favorably

impacted by cost-saving actions taken in response to the COVID-19 pandemic.

These factors, which caused an increase in cost of sales compared with the prior year, were partially offset by lower depreciation expense in the Performance Technologies

segment and improved operating efficiencies.

As a percentage of sales, cost of sales increased 110 basis points to 84.9 percent.

As a result of higher sales and higher cost of sales as a percentage of sales, fiscal 2022 gross profit increased $16 million and gross margin declined 110 basis points to 15.1 percent.

Fiscal 2022 SG&A expenses increased $4 million.

The increase in SG&A expenses was primarily due to higher compensation-related expenses, as the prior year was favorably impacted by cost-saving actions implemented to mitigate the

negative impacts of COVID-19.

In addition, environmental charges related to a previously-owned manufacturing facility in the U.S.

increased $3 million.

These increases were partially offset by lower costs related to our review of strategic

alternatives for the automotive businesses and lower strategic reorganization costs, which decreased $4 million and $3 million, respectively.

The lower strategic reorganization costs primarily resulted from lower severance expenses for executive

management positions.

Restructuring expenses of $24 million in fiscal 2022 increased $11 million compared with the prior year, primarily due to higher severance-related expenses in the Performance Technologies segment, partially offset by lower severance-related

expenses in the Climate Solutions segment.

In fiscal 2021, we recorded $167 million of impairment charges to write down the long-lived assets in the liquid-cooled and Austrian air-cooled automotive businesses when they were classified as held for sale.

In fiscal 2022, we adjusted the

long-lived assets in the liquid-cooled automotive business to the lower of carrying or fair value once they no longer met the held for sale classification criteria and, as a result, recorded a net impairment reversal of $56 million.

We sold our Austrian air-cooled automotive business on April 30, 2021.

As a result of the sale, we recorded a $7 million loss on sale at Corporate during fiscal 2022.

Operating income of $119 million during fiscal 2022 represents an improvement of $217 million from the prior-year operating loss of $98 million.

The operating income and operating loss during fiscal 2022 and 2021 included the significant

impairment reversal and impairment charges within the Performance Technologies segment.

In addition, as compared with the prior year, the fiscal 2022 operating income was favorably impacted by higher gross profit.

Operating income was negatively

impacted by higher restructuring expenses, the loss on sale of the Austrian air-cooled automotive business, and higher SG&A expenses.

The provision for income taxes was $15 million and $90 million in fiscal 2022 and 2021, respectively.

The $75 million decrease was primarily due to the absence of $117 million of income tax charges recorded in fiscal 2021 to increase the

valuation allowances on deferred tax assets in the U.S.

and in certain foreign jurisdictions and a net $11 million income tax benefit recorded in fiscal 2022 related to valuation allowances on deferred tax assets in foreign jurisdictions.

drivers, which decreased the provision for income taxes, were partially offset by the absence of income tax benefits totaling $47 million recorded in the prior year, including $38 million related to the impairment charges recorded for the held for

sale automotive businesses and $9 million resulting from the allocation of the income tax provision between net earnings and other comprehensive income.

The $43 million change was primarily due to a $57 million income tax benefit recorded in fiscal 2023 related to

the reversal of the valuation allowance on certain deferred tax assets in the U.S., partially offset by the absence of a net $11 million income tax benefit related to valuation allowances on deferred tax assets in foreign jurisdictions in the prior

Segment Results of Operations

Effective April 1, 2022, we began managing the Company under two operating segments, Climate Solutions and Performance Technologies.

Our new segment structure aligns businesses serving similar or complimentary end markets, products and

technologies under common segment management.

This simplified segment structure allows us to better focus resources on targeted growth opportunities and better enables an efficient application of 80/20 principles across all product lines to

optimize profit margins and cash flow.

The Climate Solutions segment includes the previously-reported BHVAC and CIS segments, with the exception of CIS Coatings.

The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and

the CIS Coatings business.

The segment realignment had no impact on our consolidated financial position, results of operations, and cash flows.

We have recast the segment financial information for fiscal 2022 and 2021 to conform to the fiscal 2023 presentation.

Effective April 1, 2024, we moved our Coatings business, which was previously managed by and reported within the Performance Technologies segment, under the

leadership of the Climate Solutions segment.

Under this refined organizational structure, the Coatings business is better aligned with the Climate Solution’s Heat Transfer Products business, which serves similar HVAC&R markets and customers.

expect that unifying these compl e mentary businesses will allow us to better focus resources on targeted growth and allow for a more efficient application of 80/20

principles to optimize profit margins and cash flow.

Beginning for fiscal 2025, we will report financial results under the new segment structure.

Climate Solutions

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Year ended March 31, 2024 compared with year ended March 31, 2023

Climate Solutions net sales increased $101 million, or 11 percent, in fiscal 2023 compared with the prior year, primarily due to higher sales volume and favorable commercial pricing.

These increases were partially offset by a $52 million

unfavorable impact of foreign currency exchange rates.

Compared with the prior year, sales of data center cooling, heat transfer, and HVAC & refrigeration products increased $58 million, $33 million, and $11 million, respectively.

Climate Solutions net sales increased $43 million, or 4 percent, in fiscal 2024 compared with the prior year, primarily due to higher sales volume and a $14

million favorable impact of foreign currency exchange rates.

The higher sales volume includes $8 million of incremental sales from Scott Springfield Manufacturing, which we acquired on March 1, 2024.

Compared with the prior year, sales of data

center cooling products increased $120 million, primarily due to higher sales to both hyperscale and colocation customers.

Sales of heat transfer and HVAC& R

products decreased $77 million and $1 million, respectively.

The decrease in sales of heat transfer products was largely due to market weakness and lower customer demand compared with the prior year and the strategic exit from lower-margin business

in connection with 80/20 product rationalization initiatives.

Climate Solutions cost of sales decreased $9 million, or 1 percent, in fiscal 2024, primarily due to lower raw material prices, which decreased $19 million, and improved operating efficiencies.

These decreases were partially offset by increases

resulting from higher sales volume, a $10 million unfavorable impact of foreign currency exchanges rates, and higher labor and inflationary costs and warranty expenses.

As a percentage of sales, cost of sales decreased 400 basis points to 73.9

percent, primarily due to the favorable impact of higher sales and improved operating efficiencies.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $51 million and gross margin improved 400 basis points to 26.1 percent.

Climate Solutions SG&A expenses increased $9 million compared with the prior year.

As a percentage of sales, SG&A expenses increased by 40 basis points.

The increase in SG&A expenses includes higher compensation-related expenses and

increases across other general and administrative expenses.

In addition, SG&A expenses included $1 million of incremental amortization expense related to intangible assets recorded for the acquisition of Scott Springfield Manufacturing.

Restructuring expenses increased $1 million in fiscal 2024, primarily due to higher equipment transfer costs for product line transfers intended to achieve production efficiency improvements in connection with our 80/20 initiatives.

Operating income of $167 million during fiscal 2024 increased $43 million from the prior year, primarily due to higher gross profit, partially offset by higher SG&A expenses.

Year ended March 31, 2023 compared with year ended March 31, 2022

Climate Solutions net sales increased $101 million, or 11 percent, in fiscal 2023 compared with the prior year, primarily due to higher sales volume and

higher average selling prices.

These increases were partially offset by a $52 million unfavorable impact of foreign currency exchange rates.

Compared with the prior year, sales of data center cooling, heat transfer, and HVAC& R products increased $36 million, $36 million, and $30 million, respectively.

Climate Solutions cost of sales increased $44 million, or 6 percent, in fiscal 2023, primarily due to higher sales volume, partially offset by a $44 million favorable impact of foreign currency exchange rates.

As a percentage of sales, cost of

sales decreased 380 basis points to 77.9 percent, primarily due to the favorable impact of higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher labor and inflationary costs.

sales decreased 380 basis points to 77.9 percent, primarily due to the favorable impact of higher sales and improved operating efficiencies, partially offset by higher labor and inflationary costs.

As a result of higher sales and lower cost of sales as a percentage of sales, gross profit increased $58 million and gross margin improved 380 basis points to 22.1 percent.

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expenses, including commission expenses, and increases in other general and administrative expenses that have been impacted by inflationary market conditions.

These increases were partially offset by a $4 million favorable impact of foreign

currency exchange rate changes.

These increases were partially offset by a $4 million favorable impact of foreign currency

exchange rate changes.

Restructuring expenses totaling $2 million during fiscal 2023 were consistent with the prior year and primarily consisted of severance-related expenses.

Operating income in fiscal 2023 increased $51 million to $124 million, primarily due to higher gross profit, partially offset by higher SG&A expenses.

Year Ended March 31, 2022 Compared with Year Ended March 31, 2021

Climate Solutions net sales increased $180 million, or 25 percent, in fiscal 2022 compared with the prior year, primarily due to higher sales volume and, to a lesser extent, favorable commercial pricing, including adjustments in response to raw

material price increases.

Sales of heat transfer, HVAC & refrigeration, and data center cooling products increased $101 million, $46 million, and $32 million, respectively.

Climate Solutions cost of sales increased $149 million, or 25 percent, in fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased $67 million.

As a percentage of sales, cost of sales increased 40 basis

points to 81.7 percent, primarily due to higher material costs, partially offset by favorable impacts of higher sales volume and improved operating efficiencies.

As a result of higher sales and higher cost of sales as a percentage of sales, gross profit increased $29 million and gross margin declined 40 basis points to 18.3 percent.

Climate Solutions SG&A expenses increased $8 million compared with the prior year, yet decreased 130 basis points as a percentage of sales.

The increase in SG&A expenses was primarily due to higher compensation-related expenses, which

increased $6 million and included higher commission expenses.

Restructuring expenses during fiscal 2022 decreased $3 million, primarily due to lower severance expenses.

The fiscal 2022 severance expenses primarily related to targeted headcount reductions in Europe and China.

The fiscal 2021 severance

expenses primarily related to plant consolidation activities in China and targeted headcount reductions in North America.

Operating income in fiscal 2022 of $73 million increased $23 million, primarily due to higher gross profit, partially offset by higher SG&A expenses.

Performance Technologies

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Impairment charges (reversals) - net

Operating income (loss)

Operating income

Year ended March 31, 2024 compared with year ended March 31, 2023

Performance Technologies net sales increased $144 million, or 12 percent, in fiscal 2023 compared with the prior year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price

Performance Technologies net sales increased $62 million, or 5 percent, in fiscal 2024 compared with the prior year, primarily due to higher average selling prices and a $14 million favorable impact of foreign currency exchange rates.

increases were partially offset by lower sales volume, including $25 million of lower sales from the three Germany automotive businesses that we sold on October 31, 2023.

Sales of advanced solutions, air-cooled and liquid-cooled products increased $37

million, $23 million, and $8 million, respectively.

Performance Technologies cost of sales decreased $23 million, or 2 percent, in fiscal 2024, primarily due to lower raw material prices, which decreased $31 million, and lower sales volume.

These decreases were partially offset by higher labor and

inflationary costs and a $12 million unfavorable impact of foreign currency exchange rates.

As a percentage of sales, cost of sales decreased 560 basis points to 81.8 percent, primarily due to the favorable impact of higher sales and lower material

costs, partially offset by higher labor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $85 million and gross margin improved 560 basis points to 18.2 percent.

Performance Technologies SG&A expenses increased $18 million, or 18 percent, compared with the prior year.

As a percentage of sales, SG&A expenses increased by 100 basis points.

The increase in SG&A expenses was primarily due to higher

compensation-related expenses, which increased $10 million, and increases across other general and administrative expenses.

Restructuring expenses during fiscal 2024 totaled $12 million, an increase of $9 million compared with the prior year, primarily due to higher severance-related expenses associated with the pending closure of a technical service center in Europe.

Operating income in fiscal 2024 increased $57 million to $123 million, primarily due to higher gross profit, partially offset by higher SG&A and restructuring expenses.

Year ended March 31, 2023 compared with year ended March 31, 2022

Performance Technologies net sales increased $144 million, or 12 percent, in fiscal 2023 compared with the prior year, primarily due to higher sales volume and higher average selling prices, including adjustments in response to raw material price

These increases were partially offset by a $59 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, the absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.

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These increases were partially offset by a $52 million favorable impact of foreign currency exchange rates.

As a percentage of sales, cost of sales decreased 50 basis points to 87.4 percent,

primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher material, labor and inflationary costs .

As a percentage of sales, cost of sales decreased 50 basis points to 87.4 percent, primarily due to the favorable impact of higher sales volume and higher average selling prices, partially offset by higher material, labor and inflationary costs .

As a result of higher sales and lower cost of sales as a percentage of sales, gross profit increased $24 million and gross margin improved 50 basis points to 12.6 percent.

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As a percentage of sales, SG&A expenses decreased by 100 basis points.

The decrease in SG&A expenses was primarily due to a $4 million

favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, partially offset by higher general and administrative expenses that have been impacted by inflationary market conditions.

The decrease in SG&A expenses was primarily due to a $4 million favorable

impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, partially offset by higher general and administrative expenses that have been impacted by inflationary market conditions.

Restructuring expenses during fiscal 2023 totaled $3 million, a decrease of $19 million compared with the prior year.

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Operating income in fiscal 2023 decreased $11 million to $66 million, primarily due to the absence of the significant net impairment reversal recorded in the prior year, partially offset by higher gross profit and lower restructuring expenses.

Year Ended March 31, 2022 Compared with Year Ended March 31, 2021

Performance Technologies net sales increased $63 million, or 6 percent, in fiscal 2022 compared with the prior year, primarily due to favorable commercial pricing, including adjustments in response to raw material price increases, and to a

lesser extent, higher sales volume.

In regard to the higher sales volume, sales in the prior year were negatively impacted by the COVID-19 pandemic in fiscal 2021.

Sales increased in fiscal 2022 to off-highway and commercial vehicle customers, as

those underlying markets recovered.

Sales to automotive customers, however, decreased in fiscal 2022, primarily due to $58 million of lower sales from our Austrian air-cooled automotive business, which we sold in the first quarter of fiscal 2022,

and the negative impacts of the semiconductor chip shortage on the global automotive market.

Compared with the prior year, sales of air-cooled and advanced solutions products increased $52 million and $21 million, respectively.

liquid-cooled products decreased $11 million.

Performance Technologies cost of sales increased $78 million, or 8 percent, primarily due to higher raw material prices, which increased $81 million, and to a lesser extent, higher sales volume.

These drivers, which increased cost of sales, were

partially offset by lower depreciation expenses in the segment’s automotive businesses, which decreased $9 million.

We ceased depreciating the property, plant and equipment assets within the liquid-cooled and Austrian air-cooled automotive

businesses when they were classified as held for sale during the second half of fiscal 2021.

Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment

assets in the liquid-cooled automotive business.

As a percentage of sales, cost of sales increased 210 basis points to 87.9 percent, primarily due to the higher material prices.

As a result of higher sales and higher cost of sales as a percentage of sales, gross profit decreased $15 million and gross margin declined 210 basis points to 12.1 percent.

Performance Technologies SG&A expenses increased $6 million compared with the prior year.

The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $7 million, partially

offset by lower development and other administrative costs.

Restructuring expenses during fiscal 2022 totaled $22 million, an increase of $15 million compared with the prior year.

The increase was primarily driven by higher severance expenses in Europe related to targeted headcount reductions.

The fiscal 2022 net impairment reversal of $56 million primarily related to assets in our liquid-cooled automotive business.

We remeasured the previously impaired long-lived assets within the liquid-cooled automotive business to the lower of

their carrying or fair value once they were no longer held for sale.

The fiscal 2021 impairment charges totaling $167 million related to assets in the liquid-cooled and Austrian air-cooled automotive businesses, which were first classified as held

for sale in fiscal 2021.

See Note 2 of the Notes to Consolidated Financial Statements for further information.

Operating income of $77 million during fiscal 2022 represents a $186 million improvement from the prior-year operating loss of $109 million.

The operating income and operating loss during fiscal 2022 and 2021 were largely driven by the

significant net impairment reversal and impairment charges, respectively.

In addition, as compared with the prior year, operating income was unfavorably impacted by lower gross profit and higher restructuring expenses.

Liquidity and Capital Resources

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subsidiaries are available for general corporate use;

however, these funds may be

subject to foreign withholding taxes if repatriated.

however, these funds may be subject to

foreign withholding taxes if repatriated.

We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

Our primary contractual obligations include pension obligations, debt and related interest payments, lease obligations, and obligations for capital expenditures.

Our pension liabilities totaled $42 million as of March 31, 2023.

As a result of

funding relief provisions within the American Rescue Plan Act of 2021, we do not expect to make cash contributions to our U.S.

pension plans during fiscal 2024.

Net Cash Provided by Operating Activities

Our primary contractual obligations include debt and related interest payments, lease obligations, pension obligations, and obligations for capital expenditures.

Our global pension liabilities totaled $29 million as of March 31, 2024.

contribute approximately $9 million to our global pension plans during fiscal 2025.

Operating activities

Net cash provided by operating activities in fiscal 2024 was $215 million, an increase of $107 million from $108 million in the prior year.

This increase in operating cash flow was primarily due to the favorable impact of higher earnings and, to a

lesser extent, favorable net changes in working capital as compared with the prior year.

The favorable changes in working capital include an increase in customer deposits received in connection with sales contracts with long inventory lead times.

Net cash provided by operating activities in fiscal 2023 was $108 million, an increase of $96 million from $12 million in the prior year.

This increase in operating cash flow was primarily due to the favorable impact of higher earnings and

favorable net changes in working capital, as compared with the prior year.

While inventories have increased $44 million from the prior year, the increase has been less significant than the increase in the prior year.

In fiscal 2023, the Company

increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.

In fiscal 2022, the higher inventory levels largely resulted from increased raw material prices and impacts from global supply

constraints and challenges, which continued to impact our businesses in fiscal 2023.

In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as

compared with the prior year.

Net cash provided by operating activities in fiscal 2022 was $12 million, a decrease of $138 million from $150 million in the prior year.

This decrease in operating cash flow was primarily due to unfavorable net changes in working capital,

including higher inventory and accounts receivable levels and higher payments for incentive compensation and employee benefits as compared with the prior year.

Inventory increased $61 million from March 31, 2021 to March 31, 2022.

Investing activities

Capital expenditures

Capital expenditures of $88 million during fiscal 2024 increased $37 million compared with fiscal 2023.

Our capital spending in fiscal 2023 in the Performance Technologies and Climate Solutions segments totaled $25 million and $24 million,

Our capital spending in fiscal 2024 in the Climate Solutions and Performance Technologies segments totaled $51 million and $36 million,

respectively.

Capital expenditures in the Performance Technologies segment include tooling and equipment purchases in conjunction with new and renewal programs with customers.

Capital spending in the Climate Solutions segment include investments

supporting our strategic growth initiatives, including expanding our data center business.

In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275 million revolving credit facility and term loan facilities maturing in October 2027.

This credit agreement

modified our then existing $250 million revolver and term loan facilities, which would have matured in June 2024.

Our total debt outstanding decreased $25 million to $353 million at March 31, 2023 compared with the prior year, primarily due to repayments during fiscal 2023.

Capital spending in the Climate Solutions segment includes investments supporting our strategic growth initiatives.

We are growing our data center business and recently purchased a new manufacturing site in the U.K., where we plan to

expand production capacity for data center cooling products.

In addition, we opened a second facility in Serbia and are manufacturing coils for commercial and residential heat pump applications.

Capital expenditures in the Performance Technologies

segment include tooling and equipment purchases in conjunction with new and renewal programs with customers.

Business and asset acquisitions

During fiscal 2024, we made cash payments totaling $186 million to acquire Scott Springfield Manufacturing and Napps.

In addition, we paid $12 million to purchase intellectual property and other specific assets from TMGcore, Inc.

These investments

support our strategy to grow our data center cooling and indoor air quality product offerings in our Climate Solutions segment.

See Note 2 of the Notes to Consolidated Financial Statements for additional information regarding acquisitions.

Financing activities

Our total debt outstanding increased $79 million to $432 million at March 31, 2024 compared with the prior year, primarily due to incremental borrowings on our revolving credit facility, which we used to fund a portion of the purchase price of Scott

Springfield Manufacturing.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant, which are discussed further below.

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consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).

We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of

at least three times consolidated interest expense.

We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at

least three times consolidated interest expense.

As of March 31, 2024, we were in compliance with our debt covenants.

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Share repurchase program

During fiscal 2023, we repurchased $7 million of our common stock.

As of March 31, 2023, we had $45 million of authorized share repurchases remaining under our current repurchase program, which expires in November 2024.

Our decision whether

and to what extent to repurchase additional shares depends on a number of factors, including business conditions, other cash priorities, and stock price.

We repurchased $13 million and $7 million of our common stock during fiscal 2024 and 2023, respectively.

As of March 31, 2024, we had $32 million of authorized share repurchases remaining under our current repurchase program, which expires in

November 2024.

Our decision whether and to what extent to repurchase additional shares depends on a number of factors, including business conditions, other cash priorities, and stock price.

Critical Accounting Policies

The following critical accounting policies reflect the more significant judgments and estimates used in preparing our consolidated financial statements.

Application of these policies results in accounting estimates that have the greatest

potential for a significant impact on our financial statements.

The following discussion of these judgments and estimates is intended to supplement the significant accounting policies presented in Note 1 of the Notes to Consolidated Financial

In addition, recently issued accounting pronouncements that either have or could materially impact our financial statements are disclosed in Note 1 of the Notes to Consolidated Financial Statements.

Application of these policies results in accounting estimates that have the greatest potential

for a significant impact on our financial statements.

The following discussion of these judgments and estimates is intended to supplement the significant accounting policies presented in Note 1 of the Notes to Consolidated Financial Statements.

addition, recently issued accounting pronouncements that either have or could materially impact our financial statements are disclosed in Note 1 of the Notes to Consolidated Financial Statements.

Revenue recognition

We recognize revenue based upon consideration specified in a contract and as we satisfy performance obligations by transferring control over our products to our customers, which may be at a point in time or over time.

The majority of our

revenue is recognized at a point in time, based upon shipment terms.

The majority of our revenue is

recognized at a point in time, based upon shipment terms.

A limited number of our customer contracts provide an enforceable right to payment for performance completed to date.

For these contracts, we recognize revenue over time based

upon our estimated progress toward the satisfaction of the contract’s performance obligations.

For these contracts, we recognize revenue over time based upon our

estimated progress toward the satisfaction of the contract’s performance obligations.

We record an allowance for credit losses and we accrue for estimated warranty costs at the time of sale.

We base these estimates upon historical

experience, current business trends and economic conditions, and risks specific to the underlying accounts receivable or warranty claims.

We base these estimates upon historical experience, current

business trends and economic conditions, and risks specific to the underlying accounts receivable or warranty claims.

Impairment of long-lived assets

We perform impairment evaluations of long-lived assets, including property, plant and equipment and intangible assets, whenever business conditions or events indicate that those assets may be impaired.

We consider factors such as operating

losses, declining financial outlooks and market conditions when evaluating the necessity for an impairment analysis.

In the event the net asset values exceed undiscounted cash flows expected to be generated by the assets, we write down the assets

to fair value and record an impairment charge.

We consider factors such as operating losses,

declining financial outlooks and market conditions when evaluating the necessity for an impairment analysis.

In the event the net asset values exceed undiscounted cash flows expected to be generated by the assets, we write down the assets to fair

value and record an impairment charge.

We estimate fair value in various ways depending on the nature of the underlying assets.

Fair value is generally based upon appraised value, estimated salvage value, or selling prices under

negotiation, as applicable.

Fair value is generally based upon appraised value, estimated salvage value, or selling prices under negotiation, as

The most significant long-lived assets we evaluated for impairment indicators were property, plant and equipment and intangible assets, which totaled $366 million and $188 million, respectively, at March 31, 2024.

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equipment, the most significant assets evaluated are buildings and improvements and machinery and equipment.

Our most significant intangible assets evaluated are customer relationships, trade names, and acquired technology, the majority of which

are related to our Climate Solutions segment.

We evaluate impairment at the lowest level of separately identifiable cash flows, which is generally at the manufacturing plant level.

We monitor manufacturing plant financial performance to determine

whether indicators exist that would require an impairment evaluation for the facility.

This includes significant adverse changes in plant profitability metrics;

Our most significant intangible assets evaluated are customer relationships, trade names, and acquired technology.

The majority of our

intangibles assets are related to our Climate Solutions segment and include $102 million of intangibles recently recorded from our acquisition of Scott Springfield Manufacturing.

We evaluate impairment at the lowest level of separately identifiable

cash flows, which is generally at the manufacturing plant level.

We monitor manufacturing plant financial performance to determine whether indicators exist that would require an impairment evaluation for the facility.

This includes significant

adverse changes in plant profitability metrics;

substantial changes in the mix of customer products manufactured in the plant;

in manufacturing strategy;

and the shifting of programs to other facilities under a manufacturing realignment strategy.

changes in manufacturing strategy;

and the shifting of programs to other facilities under a manufacturing realignment

When such indicators are present, we perform an impairment evaluation.

During fiscal 2022, we recorded a net impairment reversal of $56 million, primarily related to assets that were held for sale in the Performance Technologies segment.

In fiscal 2021, we recorded $167 million of impairment charges to write down

the long-lived assets in the liquid- and air-cooled automotive businesses when they were classified as held for sale.

In fiscal 2022, we adjusted the long-lived assets in the liquid-cooled automotive business to the lower of carrying or fair value

when they no longer met the held for sale classification criteria.

In fiscal 2022, we adjusted the long-lived assets in the liquid-cooled automotive

business to the lower of carrying or fair value when they no longer met the held for sale classification criteria.

S ee Note 2 of the Notes to the Consolidated Financial Statements for additional information.

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We test goodwill for impairment at a reporting unit level.

Goodwill resulting from recent acquisitions generally represents the highest risk of impairment,

which typically decreases as the businesses are integrated into the Company and positioned for future operating and financial performance.

Goodwill resulting from recent acquisitions generally represents the highest risk of impairment, which

typically decreases as the businesses are integrated into the Company and positioned for future operating and financial performance.

We test goodwill for impairment by comparing the fair value of each reporting unit with its carrying value.

We determine the fair value of a reporting unit based upon the present value of estimated future cash flows.

determine the fair value of a reporting unit based upon the present value of estimated future cash flows.

If the fair value of a reporting unit exceeds the carrying value of the reporting unit’s net assets, goodwill is not impaired.

if the carrying value of the reporting unit’s net assets exceeds its fair value, we would conclude goodwill is impaired and would record an impairment charge equal to the amount that the reporting unit’s carrying value exceeds its fair value.

Determining the fair value of a reporting unit involves judgment and the use of estimates and assumptions, which include assumptions regarding the revenue growth rates and operating profit margins used to calculate estimated future cash flows

and risk-adjusted discount rates.

However, if the

carrying value of the reporting unit’s net assets exceeds its fair value, we would conclude goodwill is impaired and would record an impairment charge equal to the amount that the reporting unit’s carrying value exceeds its fair value.

risk-adjusted discount rates.

We determine the expected future revenue growth rates and operating profit margins after consideration of our historical revenue growth rates and earnings levels, our assessment of future market potential and our

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These events or circumstances include lower than forecasted revenues, market trends that fall below our current expectations, actions of key customers, increases in discount rates, and continued inflationary market conditions.

including the impacts associated with the military conflict in Ukraine and the COVID-19 pandemic.

We cannot predict the occurrence of certain events or changes in circumstances that might adversely affect the carrying value of goodwill.

At March 31, 2023, our goodwill totaled $166 million related to our Climate Solutions and Performance Technologies segments.

We conducted goodwill impairment tests as of March 31, 2023 by applying a fair value-based test and determined the fair

value of the reporting units in each of our operating segments exceeded their respective book value.

cannot predict the occurrence of certain events or changes in circumstances that might adversely affect the carrying value of goodwill.

At March 31, 2024, our goodwill totaled $231 million.

We conducted goodwill impairment tests as of March 31, 2024 by applying a fair value-based test and determined the fair value of the reporting units in each of our operating segments exceeded

their respective book value.

A 10 percent decrease in the estimated fair value of each reporting unit would not have resulted in a different conclusion.

From time to time, we make strategic acquisitions that have a material impact on our consolidated results of operations or financial position.

We allocate the purchase price of acquired businesses to the identifiable tangible and intangible

assets acquired and liabilities assumed in the transaction based upon their estimated fair values as of the acquisition date.

We determine the estimated fair values using information available to us and engage third-party valuation specialists

when necessary.

We allocate the purchase price of acquired businesses to the identifiable tangible and intangible assets

acquired and liabilities assumed in the transaction based upon their estimated fair values as of the acquisition date.

We determine the estimated fair values using information available to us and engage third-party valuation specialists when

The estimates we use to determine the fair value of long-lived assets, such as intangible assets, can be complex and require significant judgments.

While we use our best estimates and assumptions, our estimates are inherently

uncertain and subject to refinement.

As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to

Upon conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statement of operations.

also estimate the useful lives of intangible assets to determine the amount of amortization expense to record in future periods.

We periodically review the estimated useful lives assigned to our intangible assets to determine whether such

estimated useful lives continue to be appropriate.

While we use our best estimates and assumptions, our estimates are inherently uncertain and

subject to refinement.

Upon conclusion

of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statement of operations.

We also estimate the useful lives of

intangible assets to determine the amount of amortization expense to record in future periods.

We periodically review the estimated useful lives assigned to our intangible assets to determine whether such estimated useful lives continue to be

During fiscal 2024, we acquired Scott Springfield Manufacturing and Napps.

See Note 2 of the Notes to Consolidated Financial Statements for additional information regarding these acquisitions.

Pension obligations

Our calculation of the expense and liabilities of our pension plans is dependent upon various assumptions.

At March 31, 2023, our pension liabilities totaled $42 million.

The most significant assumptions include the discount rate, long-term

expected return on plan assets, and mortality rates.

At March 31, 2024, our global pension liabilities totaled $29 million.

The most significant assumptions include the discount rate, expected

return on plan assets, and mortality rates.

We base our selection of assumptions on historical trends and economic and market conditions at the time of valuation.

In accordance with U.S.

GAAP, actual results that differ from these

assumptions are accumulated and amortized over future periods.

These differences impact future benefit cost.

GAAP, actual results that differ from these assumptions are

accumulated and amortized over future periods.

These differences impact future pension expense.

Our domestic pension plans are closed to new participants;

therefore, participants in these plans are not accruing benefits based upon

their current service as the plans do not include increases in annual earnings or for future service in calculating the average annual earnings and years of credited service under the pension plan formula.

For the following discussion regarding sensitivity of assumptions, all amounts presented are in reference to our domestic pension plans, since our domestic plans comprise all of our pension plan assets and the majority of our pension plan

To determine the expected rate of return on pension plan assets, we consider such factors as (a) the actual return earned on plan assets, (b) historical rates of return on the various asset classes in the plan portfolio, (c) projections of

returns on those asset classes, (d) the amount of active management of the assets, (e) capital market conditions and economic forecasts, and (f) administrative expenses paid with the plan assets.

The long-term rate of return utilized in fiscal

2023 and 2022 was 7.0 percent and 7.5 percent, respectively.

therefore, participants in these plans are not accruing benefits based upon their current

service as the plans do not include increases in annual earnings or for future service in calculating the average annual earnings and years of credited service under the pension plan formula.

The primary non-U.S.

plans are maintained in Germany and

Italy and are also closed to new participants and are substantially unfunded.

To determine the expected rate of return on pension plan assets, we consider such factors as ( i ) the actual return earned on plan assets, ( ii ) historical rates of return on the various asset classes in the plan portfolio, ( iii ) projections of returns on those asset classes, ( iv ) the amount of active

management of the assets, ( v ) capital market conditions and economic forecasts, and ( vi )

administrative expenses paid with the plan assets.

The rate of return on plan assets utilized in fiscal 2024 and 2023 was 6.5 percent and 7.0 percent, respectively.

For fiscal 2025, we have assumed a rate of 5.5 percent.

A change of 25 basis points in the expected rate of return on assets would impact our fiscal 2024 pension expense by less than $1

The discount rate reflects rates available on long-term, high-quality fixed-income corporate bonds on the measurement date of March 31.

For fiscal 2023 and 2022, for purposes of determining pension expense, we used a discount rate of 3.9 and

A change of 25 basis

points in the expected rate of return on plan assets would impact our fiscal 2025 pension expense by less than $1 million.

The discount rate reflects rates available on high-quality fixed-income corporate bonds on the measurement date of March 31.

For fiscal 2024 and 2023, for purposes of determining pension expense, we used a discount rate of 5.2 percent and 3.9

percent, respectively.

We determined these rates based upon a yield curve that was created following an analysis of the projected cash flows for our plans.

See Note 18 of the Notes to Consolidated Financial Statements for additional

A change in the assumed discount rate of 25 basis points would impact our fiscal 2024 pension expense and projected benefit obligation by less than $1 million and approximately $4 million, respectively.

See Note 18 of the Notes to Consolidated Financial Statements for additional information.

change in the assumed discount rate of 25 basis points would impact our fiscal 2025 pension expense and projected benefit obligation by less than $1 million and approximately $4 million, respectively.

We operate in numerous taxing jurisdictions;

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taxing authorities.

Due to the application of complex and sometimes ambiguous tax laws and rulings in the

jurisdictions in which we do business, there is an inherent level of uncertainty within our worldwide tax provisions.

Despite our belief that our tax return positions are consistent with applicable tax laws, it is possible that taxing authorities

could challenge certain positions.

Due to the application of complex and sometimes ambiguous tax laws and rulings in the jurisdictions in

which we do business, there is an inherent level of uncertainty within our worldwide tax provisions.

Despite our belief that our tax return positions are consistent with applicable tax laws, it is possible that taxing authorities could challenge

certain positions.

Our deferred tax assets and liabilities reflect temporary differences between the amount of assets and liabilities for financial and tax reporting purposes.

We adjust these amounts to reflect changes in tax rates expected to be in effect when

the temporary differences reverse.

We adjust these amounts to reflect changes in tax rates expected to be in effect when the

temporary differences reverse.

We record a valuation allowance if we determine it is more likely than not that the net deferred tax assets in a particular jurisdiction will not be realized.

This determination, which is made on a legal

entity-by-legal entity basis, involves judgment and the use of significant estimates and assumptions, including expectations of future taxable income and tax planning strategies.

We believe the assumptions that we used are appropriate and result

in a reasonable determination regarding the future realizability of deferred tax assets.

However, future events or circumstances, such as lower-than-expected taxable income or unfavorable changes in the financial outlook of our operations in

certain jurisdictions, could cause us to record additional valuation allowances.

This determination, which is made on a legal entity-by-legal

entity basis, involves judgment and the use of significant estimates and assumptions, including expectations of future taxable income and tax planning strategies.

We believe the assumptions that we used are appropriate and result in a reasonable

determination regarding the future realizability of deferred tax assets.

However, future events or circumstances, such as lower-than-expected taxable income or unfavorable changes in the financial outlook of our operations in certain jurisdictions,

could cause us to record additional valuation allowances.

See Note 8 of the Notes to Consolidated Financial Statements for additional information regarding income taxes.

Loss reserves

We maintain liabilities and reserves for a number of loss exposures, including environmental remediation costs, product warranties, self-insurance costs, estimated credit losses associated with trade receivables, regulatory compliance matters,

and litigation.

Establishing loss reserves for these exposures requires the use of estimates and judgment to determine the risk exposure and ultimate potential liability.

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performance or achievements may differ materially from those expressed or implied in these statements, because of certain risks and uncertainties, including, but not limited to, those described under “Risk Factors” in Item 1A.

report and identified in our other public filings with the U.S.

of this report

and identified in our other public filings with the U.S.

Securities and Exchange Commission.

Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the global economy and financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and

other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the military conflict between Russia and Ukraine;

The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including foreign currency

exchange rate fluctuations;

The impact of potential adverse developments or disruptions in the global economy and financial markets, including impacts related to inflation, energy costs, supply chain challenges, tariffs, sanctions and other trade issues or cross-border

trade restrictions (and any potential resulting trade war), and military conflicts, including the current conflicts in Ukraine and in the Middle East and heightened tension in the Red Sea;

rate fluctuations;

increases in interest rates;

recession and recovery therefrom;

and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade that have been or may be

implemented in the U.S.

The impact of potential further price increases associated with raw materials, including aluminum, copper, steel and stainless steel (nickel), and other purchased component inventory including, but not limited to, increases in the

underlying material cost based upon the London Metal Exchange and related premiums or fabrication costs.

These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and

significant fluctuations in demand.

This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, including through our quotation process or through contract

provisions for prospective price adjustments, as well as the inherent lag in timing of such contract provisions;

Our ability to mitigate increased labor costs and labor shortages;

and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade that have been or may be implemented

The impact of potential price increases associated with raw materials, including aluminum, copper, steel and stainless steel (nickel), and other purchased component inventory including, but not limited to, increases in the underlying

material cost based upon the London Metal Exchange and related premiums or fabrication costs.

These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant

fluctuations in demand.

prospective price adjustments, as well as the inherent lag in timing of such contract provisions;

Our ability to be at the forefront of technological advances in order to differentiate ourselves from our competitors and provide innovative products and services to our customers, and the impacts of any changes in or the adoption rate of

technologies that we expect to drive sales growth, including those related to data center cooling and electric vehicles;

Our ability to mitigate increases in labor costs and labor shortages;

The impact of public health threats, such as COVID-19, on the national and global economy, our business, suppliers (and the supply chain), customers, and employees;

The impact of current and future environmental laws and regulations on our business and the businesses of our customers, including our ability to take advantage of opportunities to supply alternative new technologies to meet

environmental and/or energy standards and objectives.

The impact of legislation, regulations, and government incentive programs, including those addressing climate change, on demand for our products and the markets we serve, including our ability to take advantage of opportunities to supply

alternative new technologies to meet environmental and/or energy standards and objectives.

Operational Risks

The impact of problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness

to supply our volume demands if their production capacity becomes constrained;

The overall health of and price-reduction pressure from our vehicular customers in light of economic and market-specific factors, the potential lower overall win rate for sales programs with contractual price reductions as a result of

pricing strategies to ensure satisfactory profit margins for the duration of the programs, and the potential impact on us from any deterioration in the stability or performance of any of our major customers;

Our ability to maintain current customer relationships and compete effectively for new business, including our ability to achieve profit margins acceptable to us by offsetting or otherwise addressing any cost increases associated with

supply chain challenges and inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims;

The impact of delays or modifications initiated by major customers with respect to program launches, product applications or requirements;

Our ability to consistently structure our operations in order to develop and maintain a competitive cost base with appropriately skilled and stable labor, while also positioning ourselves geographically, so that we can continue to

support our customers with the technical expertise and market-leading products they demand and expect from Modine;

Our ability to effectively and efficiently manage our cost structure in response to sales volume increases or decreases and to complete restructuring activities and realize the anticipated benefits of those activities;

supply our volume demands if their production capacity becomes constrained;

The overall health of and pricing pressure from our customers in light of economic and market-specific factors and the potential impact on us from any deterioration in the stability or performance of any of our major customers;

chain challenges and inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any product or program launches, product transfer challenges and warranty claims;

The impact of delays or modifications initiated by major customers with respect to product or program launches, product applications or requirements;

our customers with the technical expertise and market-leading products they demand and expect from Modine;

Our ability to effectively and efficiently manage our operations in response to sales volume changes, including maintaining adequate production capacity to meet demand in our growing businesses while also completing restructuring activities

and realizing the anticipated benefits thereof;

Costs and other effects of the investigation and remediation of environmental contamination;

including when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, in light of tight global labor markets;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions;

Our ability to protect our proprietary information and intellectual property from theft or attack by internal or external sources;

The impact of a substantial disruption or material breach of our information technology systems, and any related delays, problems or costs;

Increasingly complex and restrictive laws and regulations, including those associated with being a U.S.

public company and others present in various jurisdictions in which we operate, and the costs associated with compliance therewith;

The impact of the material weakness identified in our internal control over financial reporting related to IT system access in Europe on our financial reporting process;

Increasingly complex and restrictive laws and regulations and the costs associated with compliance therewith, including state and federal labor regulations, laws and regulations associated with being a U.S.

public company, and other laws and

regulations present in various jurisdictions in which we operate;

Increasing emphasis by customers, investors, and employees on environmental, social and corporate governance matters may impose additional costs on us, adversely affect our reputation or expose us to new risks;

Work stoppages or interference at our facilities or those of our major customers and/or suppliers;

The constant and increasing pressures associated with healthcare and associated insurance costs;

Costs and other effects of litigation, claims, or other obligations.

Costs and other effects of litigation, claims, or other obligations, including those that may be asserted against us in connection with divested businesses.

Strategic Risks

Our ability to successfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles to our business, through which we are focused on reducing complexity and growing businesses with strong

market drivers;

Our ability to identify and execute on organic growth opportunities and acquisitions, and to efficiently and successfully integrate acquired businesses;

Our ability to successfully execute strategies to reduce costs and improve operating margins;

The potential impacts from actions by activist shareholders, including disruption of our business and related costs.

Our ability to successfully realize anticipated benefits, including improved profit margins and cash flow, from strategic initiatives and our continued application of 80/20 principles across our businesses;

Our ability to accelerate growth by identifying and executing on organic growth opportunities and acquisitions, and to efficiently and successfully integrate acquired businesses.

Financial Risks

Our ability to fund our global liquidity requirements efficiently for our current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets

or extended recessionary conditions in the global economy;

Our ability to fund our global liquidity requirements efficiently for our current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the

global economy;

The impact of increases in interest rates in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local taxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided

by interest expense, as defined in our credit agreements);

Costs arising from the integration of Scott Springfield Manufacturing and the timing and impact of potential purchase accounting adjustments;

interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results;

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we do not assume any obligation to update any forward-looking statements.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .

In the normal course of business, we are subject to market exposure from changes in foreign currency exchange rates, interest rates, commodity prices, credit risk and other market changes.

Foreign Currency Risk

We are subject to the risk of changes in foreign currency exchange rates due to our operations in foreign countries.

We have manufacturing facilities in Brazil, China, India, Mexico, and throughout Europe.

We also have joint ventures in China

and South Korea.

We sell and distribute products throughout the world and also purchase raw materials from suppliers in foreign countries.

As a result, our financial results are affected by changes in foreign currency exchange rates and economic

conditions in the foreign markets in which we do business.

Whenever possible, we attempt to mitigate foreign currency risks on transactions with customers and suppliers in foreign countries by entering into contracts that are denominated in the

functional currency of the entity engaging in the transaction.

In addition, for certain transactions that are denominated in a currency other than the engaging entity’s functional currency, we may enter into

foreign currency derivative contracts to further manage our foreign currency risk.

In fiscal 2023, we recorded a net gain of less than $1 million within our statement of operations related to foreign currency derivative contracts.

addition, our consolidated financial results are impacted by the translation of revenue and expenses in foreign currencies into U.S.

These translation impacts are primarily affected by changes in exchange rates between the U.S.

European currencies, primarily the euro, and changes between the U.S.

dollar and the Brazilian real.

In fiscal 2023, approximately 50 percent of our sales were generated in countries outside the U.S.

A change in foreign currency exchange rates

will positively or negatively affect our sales;

however, this impact will be offset, usually to a large degree, with a corresponding effect on our cost of sales and other expenses.

In fiscal 2023, changes in foreign currency exchange rates

unfavorably impacted our sales by $111 million;

however, the impact on our operating income was only $7 million.

Foreign currency exchange rate risk can be estimated by measuring the impact of a near-term adverse movement of 10 percent in foreign

currency exchange rates.

If these rates were 10 percent higher or lower during fiscal 2023, there would not have been a material impact on our fiscal 2023 earnings.

We maintain foreign currency-denominated debt obligations and intercompany loans that are subject to foreign currency exchange risk.

We seek to mitigate this risk through maintaining offsetting positions between external and intercompany loans;

however, from time to time, we also enter into foreign currency derivative contracts to manage the currency exchange rate exposure.

These derivative instruments are typically not accounted for as hedges, and

accordingly, gains or losses on the derivatives are recorded in other income and expense in the consolidated statements of operations and typically offset the foreign currency changes on the outstanding loans.

Interest Rate Risk

We seek to reduce the potential volatility of earnings that could arise from changes in interest rates.

We generally utilize a mixture of debt maturities and both fixed-rate and variable-rate debt to manage exposure to changes in interest

Interest on both our term loans and borrowings under our primary multi-currency revolving credit facility, including swingline borrowings, is variable and is currently based primarily on either SOFR or EURIBOR, plus 137.5 to 175 basis

points, depending on our leverage ratio.

As a result, we are subject to risk of fluctuations in SOFR and EURIBOR and changes in our leverage ratio, which would affect the variable interest rate on our term loans and revolving credit facility and

could create variability in interest expense.

As of March 31, 2023, our outstanding borrowings on variable-rate term loans totaled $216 million.

There were no outstanding borrowings on our revolving credit facility as of March 31, 2023.

Based upon our outstanding debt with variable

interest rates at March 31, 2023, a 100-basis point increase in interest rates would increase our annual interest expense in fiscal 2024 by approximately $2 million.

Commodity Price and Supply Risk

To produce the products we sell, we purchase raw materials and supplies including aluminum, copper, steel and stainless steel (nickel), refrigerants, and gases such as natural gas, helium, and nitrogen.

In addition, we also purchase components

and parts that are integrated into our end products.

We seek to mitigate commodity price risk primarily by adjusting product pricing in response to applicable price increases.

Our contracts with certain vehicular customers contain provisions that provide for prospective price adjustments based

upon changes in raw material prices.

These prospective price adjustments generally lag behind the actual raw material price fluctuations by three months or longer, and typically the contract provisions are limited to the underlying material cost

based upon the London Metal Exchange and exclude additional cost elements, such as related premiums and fabrication.

In instances where the risk is not covered contractually, we seek to adjust product pricing in

response to price increases, including through our quotation process and through price list increases.

In fiscal 2023, we continued to experience a significant increase in raw material prices and price increases on other goods and services in connection with global supply chain challenges and inflationary market

In response, we implemented selling price increases for our products.

Nevertheless, we are still subject to the risk of further price increases on commodities, components, and other goods and services that we purchase.

Regarding supply risk in light of current supply chain challenges, we are engaged with our suppliers to ensure availability of purchased commodities and components and we have added key suppliers to our

supply base during the last year.

However, we are still dependent upon limited sources of supply for certain components used in the manufacture of our products, including aluminum, copper, steel and stainless steel (nickel).

Even with this

expanded supply base, we are exposed to the risk of suppliers of certain raw materials not being able or willing to meet strong customer demand, as they may not increase their output capacity as quickly as customers increase their orders, the

impact of trade laws and tariffs, and increased prices being charged by raw material suppliers.

We also purchase parts from suppliers that use our tooling to create the parts.

In most instances, and for financial reasons, we do not have duplicate tooling for the manufacture of the purchased parts.

As a result, we are exposed to the risk

of a supplier being unable to provide the quantity or quality of parts that we require.

Even in situations where suppliers are manufacturing parts without the use of our tooling, we face the challenge of obtaining consistently high-quality parts

from suppliers that are financially stable.

We utilize a supplier risk management program that leverages internal and third-party tools to identify and mitigate higher-risk supplier situations.

Credit risk represents the possibility of loss from a customer failing to make payment according to contract terms.

Our principal credit risk consists of outstanding trade accounts receivable.

At March 31, 2023, 37 percent of our trade

accounts receivable was concentrated with our 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

and are influenced by similar market and general economic factors.

In the past, credit losses from our customers have not been significant, nor have we experienced a significant increase in credit losses in connection with the current inflationary

market conditions.

We manage credit risk through a focus on the following:

Cash and investments – We review cash deposits and short-term investments to ensure banks have acceptable credit ratings, and short-term investments are maintained in secured or guaranteed

We consider our holdings in cash and investments to be stable and secure at March 31, 2023;

Trade accounts receivable – Prior to granting credit, we evaluate each customer, taking into consideration the customer’s financial condition, payment experience and credit information.

credit is granted, we actively monitor the customer’s financial condition and applicable business news;

Pension assets – We have retained outside advisors to assist in the management of the assets in our pension plans.

In making investment decisions, we utilize an established risk management

protocol that focuses on protection of the plan assets against downside risk.

We ensure that investments within these plans provide appropriate diversification, the investments are monitored by investment teams, and portfolio managers

adhere to the established investment policies.

We believe the plan assets are subject to appropriate investment policies and controls;

Insurance – We monitor our insurance providers to ensure they maintain financial ratings that are acceptable to us.

We have not identified any concerns in this regard based upon our reviews.

In addition, we are exposed to risks associated with price reduction pressure applied by OEM customers.

If contractual price downs are unavoidable, we contemplate them in our overall strategy and adjust pricing as necessary to provide profit

margins that are acceptable to us.

Economic and Market Risk

Economic risk represents the possibility of loss resulting from economic instability in certain areas of the world, such as that caused by geopolitical uncertainly or pandemics, or downturns in markets in which we operate.

We sell a broad range

of thermal solution systems to customers operating in diverse markets, including the commercial, industrial, and building HVAC&R and commercial vehicle, off-highway, and automotive and light vehicle markets.

Considering our global presence, we also encounter risks imposed by potential trade restrictions, including tariffs, embargoes, sanctions, and the like.

We continue to pursue non-speculative opportunities to mitigate these economic risks, and

capitalize, when possible, on changing market conditions.

We pursue new market opportunities after careful consideration of the potential associated risks and benefits.

Successes in new markets are dependent upon our ability to commercialize our

Current examples of new and emerging markets for us include those related to electric vehicles, data centers, indoor air quality, and aftermarket coatings.

Our investments in these areas are subject to the risks associated with

technological success, customer and market acceptance, and our ability to meet the demands of our customers as these markets grow.

Hedging and Foreign Currency Forward Contracts

We use derivative financial instruments as a tool to manage certain financial risks.

We prohibit the use of leveraged derivatives.

Commodity Derivatives

From time to time, we enter into over-the-counter forward contracts related to forecasted purchases of aluminum and copper.

Our strategy is to reduce our exposure to changing market prices of these commodities.

We periodically designate

certain commodity forward contracts as cash flow hedges for accounting purposes.

For these designated hedges, we record unrealized gains and losses related to the change in the fair value of the contracts in other comprehensive income (loss)

within shareholders’ equity and subsequently recognize the gains and losses within cost of sales as the underlying inventory is sold.

In fiscal 2023, 2022, and 2021, net gains and losses recognized in cost of sales related to commodity forward

contracts were approximately $1 million or less in each year.

Foreign Currency Forward Contracts

We use derivative financial instruments in a limited way to mitigate foreign currency exchange risk.

We periodically enter into foreign currency forward contracts to hedge specific foreign currency-denominated assets and liabilities as well as

forecasted transactions and designate certain hedges of forecasted transactions as cash flow hedges for accounting purposes.

For these designated hedges, we record unrealized gains and losses related to the change in the fair value of the

contracts in other comprehensive income (loss) within shareholders’ equity and subsequently recognize 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

In fiscal 2023, 2022, and 2021, net gains and losses recognized in sales and cost of sales related to foreign currency forward contracts were $1 million or less in each year.

We have not designated forward contracts related to foreign

currency-denominated assets and liabilities as hedges.

Accordingly, for these non-designated contracts, we record unrealized gains and losses related to the change in the fair value of the contracts in other income and expense.

Gains and losses

on these non-designated foreign currency forward contracts are offset by foreign currency gains and losses associated with the related assets and liabilities.

Counterparty Risks

We manage counterparty risks by ensuring that counterparties to derivative instruments maintain credit ratings acceptable to us.

At March 31, 2023, all counterparties had a sufficient long-term credit rating.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis