Item 8. Financial Statements and Supplementary Data
ITEM 8 .
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA .
MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended March 31, 2024, 2023 and 2022
(In millions, except per share amounts)
2024
2023
2022
Net sales
$
2,407.8
$
2,297.9
$
2,050.1
Cost of sales
1,882.2
1,908.5
1,740.8
Gross profit
525.6
389.4
309.3
Selling, general and administrative expenses
273.9
234.0
215.1
Restructuring expenses
15.0
5.0
24.1
Impairment charges (reversals) – net
-
-
( 55.7
)
(Gain) loss on sale of assets
( 4.0
)
-
6.6
Operating income
240.7
150.4
119.2
Interest expense
( 24.1
)
( 20.7
)
( 15.6
)
Other expense – net
( 2.0
)
( 4.4
)
( 2.1
)
Earnings before income taxes
214.6
125.3
101.5
(Provision) benefit for income taxes
( 51.2
)
28.3
( 15.2
)
Net earnings
163.4
153.6
86.3
Net earnings attributable to noncontrolling interest
( 1.9
)
( 0.5
)
( 1.1
)
Net earnings attributable to Modine
$
161.5
$
153.1
$
85.2
Net earnings per share attributable to Modine shareholders:
Basic
$
3.08
$
2.93
$
1.64
Diluted
$
3.03
$
2.90
$
1.62
Weighted-average shares outstanding:
Basic
52.4
52.3
52.0
Diluted
53.4
52.8
52.5
The notes to consolidated financial statements are an integral part of these statements.
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MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended March 31, 2024, 2023 and 2022
(In millions)
2024
2023
2022
Net earnings
$
163.4
$
153.6
$
86.3
Other comprehensive income (loss):
Foreign currency translation
( 5.6
)
( 18.9
)
( 8.3
)
Defined benefit plans, net of income taxes of $ 1.6 , $ 1.1 and $ 0 million
3.7
6.7
19.7
Cash flow hedges, net of income taxes of ($ 0.2 ), $ 0 and $ 0 million
( 0.7
)
0.1
0.1
Total other comprehensive income (loss)
( 2.6
)
( 12.1
)
11.5
Comprehensive income
160.8
141.5
97.8
Comprehensive income attributable to noncontrolling interest
( 1.6
)
-
( 0.9
)
Comprehensive income attributable to Modine
$
159.2
$
141.5
$
96.9
The notes to consolidated financial statements are an integral part of these statements.
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MODINE MANUFACTURING COMPANY
CONSOLIDATED BALANCE SHEETS
March 31, 2024 and 2023
(In millions, except per share amounts)
2024
2023
ASSETS
Cash and cash equivalents
$
60.1
$
67.1
Trade accounts receivable – net
422.9
398.0
Inventories
357.9
324.9
Other current assets
53.1
56.4
Total current assets
894.0
846.4
Property, plant and equipment – net
365.7
314.5
Intangible assets – net
188.3
81.1
Goodwill
230.9
165.6
Deferred income taxes
75.1
83.7
Other noncurrent assets
97.5
74.6
Total assets
$
1,851.5
$
1,565.9
LIABILITIES AND SHAREHOLDERS’ EQUITY
Short-term debt
$
12.0
$
3.7
Long-term debt – current portion
19.7
19.7
Accounts payable
283.4
332.8
Accrued compensation and employee benefits
101.6
89.8
Other current liabilities
129.1
61.1
Total current liabilities
545.8
507.1
Long-term debt
399.9
329.3
Deferred income taxes
30.0
4.8
Pensions
27.7
40.2
Other noncurrent liabilities
92.6
84.9
Total liabilities
1,096.0
966.3
Commitments and contingencies (see Note 20)
Shareholders’ equity:
Preferred stock, $ 0.025 par value, authorized 16.0 million shares, issued – none
-
-
Common stock, $ 0.625 par value, authorized 80.0 million shares, issued 56.1 million and 55.4 million
shares
35.0
34.6
Additional paid-in capital
283.7
270.8
Retained earnings
659.0
497.5
Accumulated other comprehensive loss
( 163.4
)
( 161.1
)
Treasury stock, at cost, 3.7 million and 3.3 million shares
( 66.7
)
( 49.0
)
Total Modine shareholders’ equity
747.6
592.8
Noncontrolling interest
7.9
6.8
Total equity
755.5
599.6
Total liabilities and equity
$
1,851.5
$
1,565.9
The notes to consolidated financial statements are an integral part of these statements.
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MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended March 31, 2024, 2023 and 2022
(In millions)
2024
2023
2022
Cash flows from operating activities:
Net earnings
$
163.4
$
153.6
$
86.3
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization
56.1
54.5
54.8
Impairment charges (reversals) – net
-
-
( 55.7
)
(Gain) loss on sale of assets
( 4.0
)
-
6.6
Stock-based compensation expense
10.8
6.6
5.7
Deferred income taxes
6.2
( 59.6
)
( 3.8
)
Other – net
6.1
4.8
3.1
Changes in operating assets and liabilities:
Trade accounts receivable
( 8.3
)
( 40.7
)
( 55.6
)
Inventories
( 17.3
)
( 49.4
)
( 70.7
)
Accounts payable
( 59.1
)
10.2
55.1
Accrued compensation and employee benefits
15.2
6.4
9.8
Other assets
12.0
19.6
( 2.4
)
Other liabilities
33.5
1.5
( 21.7
)
Net cash provided by operating activities
214.6
107.5
11.5
Cash flows from investing activities:
Expenditures for property, plant and equipment
( 87.7
)
( 50.7
)
( 40.3
)
Business acquisitions, net of cash acquired (see Note 2)
( 186.2
)
-
-
Purchase of TMGcore, Inc. technology and related assets (see Note 2)
( 12.0
)
-
-
Proceeds from (payments for) dispositions of assets
( 0.8
)
0.3
( 7.6
)
Proceeds from maturities of short-term investments
3.3
3.4
3.6
Purchases of short-term investments
-
( 3.4
)
( 3.9
)
Disbursements for loan origination (see Note 2)
-
-
( 4.7
)
Other – net
-
-
1.9
Net cash used for investing activities
( 283.4
)
( 50.4
)
( 51.0
)
Cash flows from financing activities:
Borrowings of debt
332.5
374.3
351.8
Repayments of debt
( 260.4
)
( 403.4
)
( 306.7
)
Borrowings (repayments) on bank overdraft facilities – net
6.3
3.0
( 4.3
)
Purchase of treasury stock under share repurchase program
( 13.3
)
( 7.3
)
-
Dividend paid to noncontrolling interest
( 0.5
)
( 0.6
)
( 0.9
)
Other – net
( 1.9
)
0.7
( 0.7
)
Net cash provided by (used for) financing activities
62.7
( 33.3
)
39.2
Effect of exchange rate changes on cash
( 0.8
)
( 2.0
)
( 0.4
)
Net (decrease) increase in cash, cash equivalents and restricted cash
( 6.9
)
21.8
( 0.7
)
Cash, cash equivalents and restricted cash – beginning of year
67.2
45.4
46.1
Cash, cash equivalents and restricted cash – end of year
$
60.3
$
67.2
$
45.4
The notes to consolidated financial statements are an integral part of these statements.
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MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the years ended March 31, 2024, 2023 and 2022
(In millions)
Common stock
Additional
paid-in
Retained
Accumulated
other
comprehensive
Treasury
stock, at
Non-
controlling
Shares
Amount
capital
earnings
loss
cost
interest
Total
Balance, March 31, 2021
54.3
$
33.9
$
255.0
$
259.2
$
( 161.2
)
$
( 38.2
)
$
7.4
$
356.1
Net earnings
-
-
-
85.2
-
-
1.1
86.3
Other comprehensive income (loss)
-
-
-
-
11.7
-
( 0.2
)
11.5
Stock options and awards
0.5
0.3
0.9
-
-
-
-
1.2
Purchase of treasury stock
-
-
-
-
-
( 1.8
)
-
( 1.8
)
Stock-based compensation expense
-
-
5.7
-
-
-
-
5.7
Dividend paid to noncontrolling interest
-
-
-
-
-
-
( 0.9
)
( 0.9
)
Balance, March 31, 2022
54.8
34.2
261.6
344.4
( 149.5
)
( 40.0
)
7.4
458.1
Net earnings
-
-
-
153.1
-
-
0.5
153.6
Other comprehensive loss
-
-
-
-
( 11.6
)
-
( 0.5
)
( 12.1
)
Stock options and awards
0.6
0.4
2.6
-
-
-
-
3.0
Purchase of treasury stock
-
-
-
-
-
( 9.0
)
-
( 9.0
)
Stock-based compensation expense
-
-
6.6
-
-
-
-
6.6
Dividend paid to noncontrolling interest
-
-
-
-
-
-
( 0.6
)
( 0.6
)
Balance, March 31, 2023
55.4
34.6
270.8
497.5
( 161.1
)
( 49.0
)
6.8
599.6
Net earnings
-
-
-
161.5
-
-
1.9
163.4
Other comprehensive loss
-
-
-
-
( 2.3
)
-
( 0.3
)
( 2.6
)
Stock options and awards
0.7
0.4
2.1
-
-
-
-
2.5
Purchase of treasury stock
-
-
-
-
-
( 17.7
)
-
( 17.7
)
Stock-based compensation expense
-
-
10.8
-
-
-
-
10.8
Dividend paid to noncontrolling interest
-
-
-
-
-
-
( 0.5
)
( 0.5
)
Balance, March 31, 2024
56.1
$
35.0
$
283.7
$
659.0
$
( 163.4
)
$
( 66.7
)
$
7.9
$
755.5
The notes to consolidated financial statements are an integral part of these statements.
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 1: Significant Accounting Policies
Nature of operations
Modine Manufacturing Company (“Modine” or the “Company”) specializes in providing innovative and environmentally responsible thermal management products and
solutions to diversified global markets and customers in a wide array of commercial, industrial, and building heating, ventilating, air conditioning, and refrigeration (“HVAC&R”) markets. In addition, the Company is a leading provider of
engineered heat transfer systems and high-quality heat transfer components for use in on- and off-highway original equipment manufacturer (“OEM”) vehicular applications. The Company’s primary product groups include i) heat transfer; ii) HVAC& R ; iii) data center cooling; iv) air-cooled; v) liquid-cooled; and vi) advanced solutions.
Acquisitions and dispositions
The Company accounts for acquired businesses using the acquisition method. Under the acquisition method, the Company records
assets acquired and liabilities assumed at their respective fair values. If the assets acquired do not constitute a business, the Company accounts for the transaction as an asset acquisition. For asset purchases, the Company allocates the
purchase price to the underlying assets based on their relative fair values.
During fiscal 2024, the Company acquired
Scott Springfield Mfg. Inc., a Canadian-based manufacturer of air handling units, and substantially all of the net operating assets of Napps Technology Corporation, a Texas-based manufacturer of air- and water-cooled chillers, condensing units
and heat pumps. In addition, the Company purchased intellectual property related to liquid immersion cooling technology from TMGcore, Inc. Also during fiscal 2024, the Company sold three automotive businesses based in Germany and two coatings
facilities in the United States.
During fiscal 2022, the Company sold its
Austrian air-cooled automotive business and a previously-closed manufacturing facility in the U.S.
See Note 2 for information regarding the
Company’s acquisitions and dispositions .
Basis of presentation
The Company prepares its consolidated financial statements in conformity with generally accepted accounting principles (“GAAP”) in the United States.
These principles require management to make certain estimates and assumptions in determining assets, liabilities, revenue, expenses and related disclosures. Actual amounts could differ materially from those estimates.
Consolidation principles
The consolidated financial statements include the accounts of Modine Manufacturing Company and its majority-owned or Modine-controlled subsidiaries.
The Company eliminates intercompany transactions and balances in consolidation.
Revenue recognition
The Company recognizes revenue based upon consideration specified in a contract and as it satisfies performance obligations by transferring control
over its products to its customers, which may be at a point in time or over time. The majority of the Company’s revenue is recognized at a point in time, based upon shipment terms. A portion of the Company’s revenue is recognized over time, based
upon estimated progress toward satisfaction of the contractual performance obligations. See Note 3 for additional information.
Shipping and handling costs
The Company records shipping and handling costs incurred upon the shipment of products to its customers in cost of sales, and related amounts billed to
these customers in net sales.
Trade accounts receivable
The Company records trade receivables at the invoiced amount. Trade receivables do not bear interest if paid according to the original terms. The Company
maintains an allowance for credit losses, representing its estimate of expected losses associated with its trade accounts receivable. The Company bases its estimate using historical loss experience and considers the aging of the receivables and risks
specific to customers where appropriate. At March 31, 2024 and 2023, the allowance for credit losses was $ 2.7 million and $ 2.2 million, respectively. The changes to the Company’s allowance for credit losses during fiscal 2024 and 2023 were not material and primarily consisted
of current-period provisions, write-offs charged against the allowance, recoveries collected, and foreign currency translation.
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The Company enters into supply chain financing programs from time to time to sell accounts receivable, without recourse, to third-party financial
institutions. Sales of accounts receivable are reflected as a reduction of accounts receivable on the consolidated balance sheets and the proceeds are included in cash flows from operating activities in the consolidated statements of cash flows.
During fiscal 2024, 2023, and 2022, the Company sold $ 130.2 million, $ 150.6 million, and $ 126.4 million, respectively, of accounts receivable to
accelerate cash receipts. During fiscal 2024, 2023, and 2022, the Company recorded costs totaling $ 1.6 million, $ 1.2 million, and $ 0.3 million, respectively, related to selling accounts receivable in the consolidated statements of
operations.
Warranty
The Company provides product warranties for specific product lines and accrues for estimated future warranty costs in the period in which the sale is
recorded. The Company records warranty expense, within cost of sales, based upon historical and current claims data or based upon estimated future claims. Accrual balances, which are recorded within other current liabilities, are monitored and
adjusted if it is probable that expected claims will differ from previous estimates. See Note 15 for additional information.
Tooling
The Company accounts for production tooling costs as a component of property, plant and
equipment when it owns title to the tooling and amortizes the capitalized cost to cost of sales over the estimated life of the asset, which is generally three years . At March 31, 2024 and 2023 , Company-owned tooling totaled $ 16.1 million and $ 17.1 million , respectively.
In certain instances, tooling is owned by the customer. At the time customer-owned
tooling is completed and customer acceptance is obtained, the Company records tooling revenue and related production costs within net sales and cost of sales, respectively, in the consolidated statements of operations. If the customer has agreed to reimburse the Company, unbilled customer-owned tooling costs
are recorded as a receivable within other current assets. No significant arrangements exist where customer-owned tooling costs were not accompanied by guaranteed reimbursement. At March 31, 2024 and 2023 , customer-owned tooling receivables totaled $ 7.6 million and $ 10.9 million , respectively.
Stock-based compensation
The Company recognizes stock-based compensation using the fair value method. Accordingly, compensation expense for stock options, restricted stock and
performance-based stock awards is calculated based upon the fair value of the instruments at the time of grant and is recognized as expense over the respective vesting periods. See Note 5 for additional information.
Research and development
The Company expenses research and development costs as incurred within selling, general,
and administrative (“SG&A”) expenses. During fiscal 2024, 2023, and 2022 , research and development costs totaled $ 42.0 million, $ 44.0 million, and $ 50.3 million, respectively.
Translation of foreign currencies
The Company translates assets and liabilities of foreign subsidiaries into U.S. dollars at the period-end exchange rates and translates income and
expense items at the monthly average exchange rate for the period in which the transactions occur. The Company reports resulting translation adjustments within accumulated other comprehensive income (loss) within shareholders’ equity. The Company
includes foreign currency transaction gains or losses in the statement of operations within other income and expense.
Derivative instruments
The Company enters into derivative financial instruments from time to time to manage certain financial risks. The Company enters into forward contracts
to reduce exposure to changing future purchase prices for aluminum and copper and into foreign currency exchange contracts to hedge specific foreign currency-denominated assets and liabilities as well as forecasted transactions. The Company
designates certain derivative financial instruments as cash flow hedges for accounting purposes. These instruments are used to manage financial risks and are not speculative. See Note 19 for additional information.
Income taxes
The Company determines deferred tax assets and liabilities based upon the difference between the amounts reported in the financial statements and the
tax basis of assets and liabilities, using enacted tax rates in effect in the years in which the differences are expected to reverse. The Company establishes a valuation allowance if it is more likely than not that a deferred tax asset, or portion
thereof, will not be realized. The Company records the tax effects of global intangible low-taxed income (“GILTI”) as a period expense in the applicable tax year. The Company uses the portfolio approach for releasing income tax effects from
accumulated other comprehensive income (loss). See Note 8 for additional information.
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Earnings per share
The Company calculates basic earnings per share based upon the weighted-average number of common shares outstanding during the period, while the
calculation of diluted earnings per share includes the dilutive effect of potential common shares outstanding during the period. The calculation of diluted earnings per share excludes potential common shares if their inclusion would have an
anti-dilutive effect. See Note 9 for additional information.
Cash and cash equivalents
The Company considers all highly-liquid investments with original maturities of three months or less to be cash equivalents.
Short-term investments
The Company invests in time deposits with original maturities of more than three months but not more than one year. The Company records these
short-term investments at cost, which approximates fair value, within other current assets in the consolidated balance sheets. As of March 31, 2023, the Company’s short-term investments totaled $ 3.5 million. The Company had no short-term investments as of March 31, 2024.
Inventories
The Company values inventories using a first-in, first-out or weighted-average basis, at the lower of cost and net realizable value.
Property, plant and equipment
The Company records property, plant and equipment at cost. For financial reporting
purposes, the Company computes depreciation using the straight-line method over the expected useful lives of the assets. The Company expenses maintenance and repair costs as incurred. The Company capitalizes costs of improvements. Upon the sale or
other disposition of an asset, the Company removes the cost and related accumulated depreciation from the accounts and includes the gain or loss in the consolidated statements of operations. Capital expenditures of $ 22.7 million , $ 13.6 million, and $ 9.0 million were accrued within accounts payable at March 31, 2024, 2023 and 2022 , respectively.
Leases
The Company’s most significant leases represent leases of real estate, such as manufacturing facilities, warehouses, and office buildings. The Company
also leases manufacturing and information technology equipment and vehicles. The Company recognizes right-of-use (“ROU”) assets and lease liabilities at the lease commencement date, based upon the present value of lease payments over the lease
term. See Note 16 for additional information.
Goodwill
The Company does not amortize goodwill; rather, it tests for impairment annually unless conditions exist that would require a more frequent
evaluation. The Company performs an assessment of the fair value of its reporting units for goodwill impairment testing based upon, among other things, the present value of expected future cash flows. The Company performed its goodwill impairment
tests as of March 31, 2024 and determined the fair value of each of its reporting units exceeded the respective book value. See Note 14 for additional information.
I mpairment of held and used long-lived assets
The Company reviews held and used long-lived assets, including property, plant and equipment and intangible assets, for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset may not be fully recoverable. In these instances, the Company compares the undiscounted future cash flows expected to be generated from the asset with its carrying value. If
the asset’s carrying value exceeds expected future cash flows, the Company measures and records an impairment loss, if any, as the amount by which the carrying value of the asset exceeds its fair value. The Company estimates fair value using a
variety of valuation techniques, including discounted cash flows, market values and comparison values for similar assets.
Assets held for sale
The Company classifies an asset as held for sale when (i) management approves and commits to a formal plan to actively market the asset for sale at a reasonable price in
relation to its fair value; (ii) the asset is available for immediate sale in its present condition; (iii) an active program to locate a buyer and other actions required to complete the sale have been initiated; (iv) the sale of the asset is expected
to be completed within one year; and (v) it is unlikely that significant changes will be made to the plan. Upon classification as held for sale, the Company records the carrying value of the asset at the lower of its carrying value or its estimated
fair value, less costs to sell. In addition, the Company ceases to record depreciation for assets held for sale. The Company had no
assets classified as held for sale as of March 31, 2024 and 2023.
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Deferred compensation trusts
The Company maintains deferred compensation trusts to fund future obligations under its non-qualified deferred compensation plans. The trusts’
investments in third-party debt and equity securities are presented within other noncurrent assets in the consolidated balance sheets.
Self-insurance reserves
The Company retains a portion of the financial risk for certain insurance coverage, including property, general liability, workers compensation, and
employee healthcare, and therefore maintains reserves that estimate the impact of unreported and under-reported claims that fall below various stop-loss limits and deductibles under its insurance policies. The Company maintains reserves for the
estimated settlement cost of known claims, as well as estimates of incurred but not reported claims. The Company charges costs of claims, including the impact of changes in reserves due to claim experience and severity, to cost of sales or SG&A
expenses. The Company reviews and updates the amount of its insurance-related reserves on a quarterly basis.
Environmental liabilities
The Company records liabilities for environmental assessments and remediation activities in the period in which its responsibility is probable and the
costs can be reasonably estimated. The Company records environmental indemnification assets from third parties, including prior owners, when recovery is probable. To the extent that the required remediation procedures change, or additional
contamination is identified, the Company’s estimated environmental liabilities may also change. See Note 20 for additional information.
S upplemental cash flow information
Years ended March 31,
2024
2023
2022
Interest paid
$
23.3
$
18.4
$
14.1
Income taxes paid
46.9
31.9
21.8
See Note 16 for
supplemental cash flow information related to the Company’s leases.
New accounting guidance
Supplier finance programs
In September 2022, the Financial Accounting Standards Board (“FASB”) issued new guidance regarding disclosure of supplier finance programs including the key terms, outstanding obligations, and where such
obligations are presented within the financial statements. In addition, beginning for fiscal 2025, a roll forward of obligations under such programs is required annually. The new guidance does not impact the recognition, measurement or financial
statement presentation of supplier finance program obligations. The Company adopted this guidance as of April 1, 2023. In addition, the Company early adopted the disclosure requirements regarding roll forward information.
The Company facilitates a voluntary supplier finance program through a financial institution that allows certain suppliers in the U.S. and Europe to request early payment for invoices, at a discount, from the financial institution. The Company or
the financial institution may terminate the supplier finance program upon 90 days’ notice. The Company’s obligations to its suppliers,
including amounts due and payment terms, are consistent, irrespective of whether a supplier participates in the program. The Company is not party to the arrangements between the participating suppliers and the financial institution. Under this
program, the Company confirms the validity of supplier invoices to the financial institution and remits payments to it based on the original payment terms, which typically range from 60 to 120 days. The outstanding obligations under this program are included
within accounts payable in the consolidated balance sheets.
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The following table presents a roll forward of the Company’s obligations associated with its supplier finance program during fiscal 2024.
Obligations outstanding, March 31, 2023
$
21.2
Invoices submitted
109.7
Invoices paid
( 107.3
)
Obligations outstanding, March 31, 2024
$
23.6
Segment reporting disclosures
In November 2023, the FASB issued new disclosure guidance for reportable segments. The new guidance will require disclosure of significant segment expenses, which are
expenses that are (i) significant to the segment, (ii) regularly provided to the chief operating decision maker (“CODM”) and (iii) included in the reported measure of segment profit or loss. In addition, the new guidance will require companies to
disclose the title and position of their CODM and expand interim disclosures to include the majority of the annual segment disclosures. The definition of and method for determining reportable segments is unchanged. The new disclosure requirements
will become effective for the Company’s fiscal 2025 annual financial statements. The Company is currently evaluating potential impacts of the new disclosure requirements, but does not expect the guidance will have a material impact on its
consolidated financial statements.
Note 2: Acquisitions and Dispositions
Acquisition of Scott Springfield Mfg. Inc.
On March 1, 2024, the Company acquired all of the issued and outstanding shares in the capital of Scott Springfield Mfg.
Inc. (“Scott Springfield Manufacturing”) for consideration totaling $ 184.1 million ($ 183.8 million net of cash acquired.) The final purchase price is pending and will be adjusted for net working capital and certain other items, as defined by the purchase
agreement. The Company paid $ 181.4 million upon transaction closing and expects to pay the seller $ 2.4 million during the first half of fiscal 2025, primarily for the working capital adjustment. The Company utilized its revolving credit facility and
cash on hand to fund the purchase price.
Based in Calgary, Canada, Scott Springfield Manufacturing is a leading manufacturer of air handling units to customers in
the data center, telecommunications, healthcare, and aerospace markets. This acquisition expands the Company’s product offerings and customer base in the high-growth data center and indoor air quality markets in the U.S. and Canada. Prior to
being acquired by the Company, Scott Springfield Manufacturing reported approximately $ 110.0 million of net sales during the year ended
December 31, 2023. Since the date of the acquisition, March 1, 2024, the Company has reported the financial results of the Scott Springfield Manufacturing business within the Climate Solutions segment. For the one month in fiscal 2024 that the Company owned Scott Springfield Manufacturing, it included $ 7.9 million of net sales of the acquired business within its consolidated statement of operations. Operating income attributable to the acquired business in fiscal 2024 was not significant
and included the impact of the inventory fair value adjustment, as further described below. In addition, the Company recorded $ 2.1
million of costs directly related to the acquisition and integration of Scott Springfield Manufacturing as SG&A expenses within the consolidated statement of operations during the year ended March 31, 2024. These costs principally consisted of
fees for i) transaction advisors, ii) legal, accounting, and other professional services, and iii) incremental costs directly associated with integration activities.
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The Company has preliminarily
allocated the purchase price of Scott Springfield Manufacturing to the identifiable tangible and intangible assets acquired and the liabilities assumed based upon their estimated fair values as of the acquisition date, as follows:
Cash and cash
equivalents
$
0.3
Trade accounts
receivable
27.5
Inventories
20.9
Property, plant and
equipment
6.0
Intangible assets
102.3
Goodwill
65.2
Other assets
4.0
Accounts payable
( 8.6
)
Accrued compensation
and employee benefits
( 1.3
)
Deferred income taxes
( 24.4
)
Other liabilities
( 7.8
)
Purchase price
$
184.1
At the time the March 31, 2024 financial statements were finalized, the Company was continuing its review of the fair value estimates for certain assets
acquired, including intangible assets, and liabilities assumed. As part of its purchase accounting and integration activities, the Company is in the process of assessing, refining and harmonizing the internal controls and accounting processes of
the acquired business with those of the Company. As part of this process, the Company is continuing to review the appropriateness of accruals and reserves, including those related to accounts receivable, inventory, and product warranties. In
addition, the final determination of the purchase price is pending calculations of working capital and other adjustments. As such, the allocation of purchase
price above is considered preliminary. The Company expects to complete its accounting for the acquisition of Scott Springfield Manufacturing during the first half of fiscal 2025.
The Company primarily based its fair value estimates upon third-party valuations
using assumptions developed by management and other information compiled by management, including, but not limited to, future expected cash flows. The Company allocated the excess of the purchase price over the net assets recognized to goodwill in
the amount of $ 65.2 million, none of which is expected to be deductible for income tax purposes. Goodwill represents the future economic
benefits arising from other assets acquired that could not be individually identified and separately recognized. Specifically, the goodwill recorded as part of the acquisition includes Scott Springfield Manufacturing’s workforce and anticipated
future revenue and cost synergies.
Below is a summary of the methodologies and significant assumptions used in
estimating the fair value of certain classes of acquired assets. The fair values were primarily based upon significant inputs that are not observable in the market and thus represent Level 3 measurements. See Note 4 for information regarding
Level 3 fair value measurements.
Inventories: The Company determined the fair value of acquired inventory by estimating the selling price of finished goods inventory, less an estimate of costs to be incurred to complete work-in-process inventory. For raw materials
acquired, the Company estimated the cost of replacement. As a result, the Company wrote-up acquired inventory by $ 3.2 million. The
Company charged $ 1.6 million of this write-up to cost of sales in March 2024 and expects to charge the remaining $ 1.6 million to cost of sales during the first quarter of fiscal 2025, as the remaining underlying inventory is sold.
Property, plant and equipment: The Company valued property, plant and equipment primarily utilizing the cost and market approaches. The cost approach considers the amount required to replace an asset by constructing or purchasing a new asset with
similar utility and adjusting the value in consideration of depreciation as of the acquisition date. The cost approach relies on assumptions regarding replacement costs and the age and estimated remaining useful lives of the assets. The market
approach considers values on secondary equipment markets for similar assets. The fair value of property, plant and equipment will be recognized as depreciation expense in our results of operations over the expected remaining useful lives of the
assets.
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Intangible assets: The Company determined the fair value of acquired intangible assets by using variations of the income approach. These methods generally forecast expected future net cash flows discretely associated with each of the
identified intangible assets and adjust the forecasts to present value by applying a discount rate intended to reflect risk factors associated with the cash flows and the time value of money. Acquired intangible assets were as follows:
Gross
Weighted-
Carrying
Average
Value
Useful Life
Customer relationships
$
66.9
12
years
Order backlog
22.6
1 year
Trade name
12.8
10 years
Total intangible assets acquired
$
102.3
Customer relationships represent the estimated fair value of Scott Springfield
Manufacturing’s business relationship with existing customers. Order backlog represents the estimated fair value of open purchase orders as of the acquisition date. The fair values for the customer relationship and order backlog intangible assets
were determined using the multi-period excess earnings method, in which the value is derived by projecting the future anticipated after-tax cash flows attributable to the customer relationships and order backlog. Key inputs used in the valuation
included future revenue growth rates, customer attrition rates, and discount rates.
The Company determined the value of the acquired Scott Springfield Manufacturing
trade name using the relief-from-royalty method, a variation of the income approach, which applies an assumed royalty rate to revenue expected to be derived under the acquired trade name. The fair value was estimated to be the present value of the
royalties saved because the Company owns the trade name.
The following unaudited supplemental pro forma information presents the Company’s consolidated results of operations as though the acquisition of Scott
Springfield Manufacturing had occurred at the beginning of fiscal 2023. This pro forma financial information is presented for illustrative purposes only and is not considered to be indicative of the operating results that would have been achieved
had the acquisition been completed as of the date indicated or the operating results that may be obtained in the future.
Years ended March 31,
2024
2023
Net
sales
$
2,507.5
$
2,346.2
Net earnings attributable to Modine
164.3
126.3
The supplemental pro forma financial information above is based upon the Company’s historical results and the historical results of Scott Springfield
Manufacturing, which have been translated from Canadian dollars to U.S. dollars using the historical average foreign exchange rates. The proforma information includes adjustments for: (i) annual amortization and depreciation expense totaling
approximately $ 20.0 million for fiscal 2023 and approximately $ 9.0 million for fiscal 2024 for acquired tangible and intangible assets, (ii) estimated annual interest expense of approximately $ 6.0 million resulting from acquisition-related borrowings, and (iii) the estimated income tax impacts related to the pro forma adjustments, considering the statutory tax
rates within Canada. In addition, the pro forma financial information assumes that both $ 2.0 million of acquisition-related transaction
costs, not including costs for integration-related activities, and $ 3.2 million of inventory purchase accounting adjustments were incurred
during fiscal 2023. The pro forma financial information does not reflect any expected revenue or cost synergies.
Purchase of TMGcore, Inc. intellectual property
In January 2024, the Company purchased intellectual property and other specific
assets from TMGcore, Inc., a specialist in single- and two-phase liquid immersion cooling technology for data centers. The Company expects to utilize the liquid cooling immersion technology to support its growth strategy of expanding its global
data center product offerings. The initial purchase price of the assets was $ 12.0 million. The Company allocated $ 11.4 million to acquired technology, which it will amortize over a 10-year useful life, and the remaining $ 0.6 million to property, plant and
equipment. Additional contingent consideration may be payable to the seller in fiscal 2029. The amount of any additional consideration is dependent upon future financial metrics associated with the acquired technology. At this time, the Company
cannot estimate the amount or range of additional consideration that may be payable to the seller in fiscal 2029. In line with asset acquisition accounting rules under U.S. GAAP, the Company will record an accrual for the contingent consideration
if and when it becomes probable and estimable.
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Acquisition of Napps Technology Corporation
On July 1, 2023, the Company acquired substantially all of the net operating assets
of Napps Technology Corporation (“Napps”) for consideration totaling $ 5.8 million. The Company paid $ 4.8 million during fiscal 2024 and, based upon the terms of the agreement, expects to pay the remaining $ 1.0 million to the seller one year after closing.
Napps is a Texas-based manufacturer of air- and water-cooled chillers, condensing
units and heat pumps. This acquisition expands the Company’s indoor air quality product portfolio and supports its growth strategy and mission of improving indoor air quality. Since the date of the acquisition, the Company has reported the
financial results of the Napps business within the Climate Solutions segment. For the fiscal year ended March 31, 2024, the Company included $ 4.5
million of net sales within its consolidated statement of operations attributable to nine months of Napps operations.
The Company has completed the purchase price allocation for its acquisition of
Napps. The purchase price of $ 5.8 million was allocated to the identifiable tangible and intangible assets acquired and the liabilities
assumed based upon their estimated fair values as of the acquisition date. The Company engaged a third-party valuation specialist to assist in determining the fair value of the acquired intangible assets. The valuation analysis considered the
expected future cash flows of the acquired business. The Company recorded $ 2.9 million of intangible assets, including customer
relationship and acquired technology assets. The Company is amortizing the acquired intangible assets using a weighted-average life of approximately ten years . The Company allocated the excess of the purchase price over the net assets recognized to goodwill in the amount of $ 1.0
million, which is deductible for income tax purposes.
The Company’s allocation of the purchase price was as follows:
Trade accounts receivable
$
1.2
Inventories
1.3
Property, plant and equipment and other assets
0.1
Intangible assets
2.9
Goodwill
1.0
Accounts payable and other liabilities
( 0.7
)
Purchase price
$
5.8
Disposition of two coatings facilities
In September 2023, the Company 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. The Company’s other coatings businesses continue to own and license its spray-applied coatings used in aftermarket applications and are strategically pursuing growth through product licensing
arrangements. Prior to the disposition, the Company reported the financial results of these businesses within the Performance Technologies segment. In fiscal 2023, the net sales of these two businesses totaled $ 6.4 million. As a result of this
transaction, the Company wrote-off $ 0.7 million of goodwill attributable to the disposed businesses and recorded a gain on sale of less
than $ 0.1 million during fiscal 2024.
Disposition of Germany automotive businesses
On October 31, 2023, the Company sold three automotive businesses based in Germany (the “disposal group”) 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, is in line with the Company’s strategic prioritization of resources towards higher-margin technologies. The Company determined the disposal group did not
qualify as a discontinued operation for reporting purposes under U.S. GAAP. As part of its evaluation, the Company considered anticipated future sales in Europe to automotive and other vehicular customers with similar product offerings and using
similar heat-transfer technology within the Performance Technologies segment.
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The net transaction price for the sale of the disposal group was less than $ 1.0 million. As a result of the sale, the Company recorded a $ 4.0 million gain on sale during fiscal 2024, primarily driven by the net liability position of the disposal group at the time of sale. In addition, the gain on sale includes the write-off of $ 0.6 million of net actuarial gains related to the disposal group’s pension plans. The Company reported the $ 4.0 million gain on the gain on sale of assets line within the consolidated statement of operations.
Prior to the disposition, the Company reported the financial results of the
disposal group within its Performance Technologies segment. Net sales of the disposal group included within the Company’s consolidated statements of operations for fiscal 2024 and 2023 totaled $ 54.2 million and $ 79.0 million, respectively.
Automotive business previously held for sale
During fiscal 2022, in connection with the termination of an agreement to sell
the liquid-cooled automotive business within its Performance Technologies segment, the Company determined that the business no longer met the requirements to be classified as held for sale. The Company remeasured the long-lived assets reverting
back to held and used classification at the lower of their (i) carrying value, as if held for sale classification had not been met; or (ii) fair value at the date of the decision not to sell. The long-lived assets primarily consisted of
property, plant and equipment assets and were fully impaired while classified as held for sale. For purposes of the remeasurement, the Company engaged third-party valuation specialists to assist in estimating the fair values of the assets. The
Company primarily used the market and cost valuation approaches and utilized third-party information from various industry-accepted sources, including applicable government-published statistics and data from appraisal and resale service
providers. As a result of the remeasurement, the Company recorded a net impairment reversal of $ 56.0 million during fiscal 2022 within
the impairment charges (reversals) line on the consolidated statement of operations. In addition, the Company resumed depreciating the property, plant and equipment assets of the liquid-cooled automotive business based on the remeasured asset
values during the third quarter of fiscal 2022.
Disposition of Austrian air-cooled automotive business
During fiscal 2022 the
Company sold its Austrian air-cooled automotive business to Schmid Metall GmbH. As a result of this transaction, the Company recorded a loss of $ 6.6
million during fiscal 2022, which included the write-off of $ 1.7 million of net actuarial losses related to its pension plan. The
Company reported this loss within the loss on sale of assets line on the consolidated statement of operations. Upon transaction closing, $ 5.9
million of cash within the business transferred to the buyer. Later in fiscal 2022, the Company paid the buyer $ 2.4 million upon the
finalization of a purchase price adjustment for net working capital and certain other items. Financial results of this business, prior to the disposition, are reported within the Performance Technologies segment. For the one month in fiscal 2022 that the Company owned this business, it included $ 5.3 million of net sales
within its consolidated statement of operations.
In connection with the sale of this business, the Company provided the buyer with
a 5 -year, € 4.0
million loan facility. Borrowings under the agreement currently bear interest at 7.8 percent. During fiscal 2022, the Company
disbursed € 4.0 million ($ 4.7
million) to the buyer under this facility. At both March 31, 2024 and 2023, the Company recorded the loan receivable within other noncurrent assets on its consolidated balance sheet because the Company expects to receive the principal repayment
more than twelve months from the balance sheet date.
Disposition of previously-closed facility in fiscal 2022
During fiscal 2022, the Company sold a previously-closed manufacturing facility
in the U.S. and received net cash proceeds of $ 0.7 million. As a result of the sale, the Company recorded an impairment charge of $ 0.3 million within the Climate Solutions segment to write down the property to fair value less costs to sell.
Note 3: Revenue Recognition
The Company generates revenue from selling innovative thermal management products and solutions to diversified global markets and customers. The Company
recognizes revenue based upon consideration specified in a contract and as it satisfies performance obligations by transferring control over its products to its customers, which may be at a point in time or over time. The majority of the Company’s
revenue is recognized at a point in time, based upon shipment terms. The Company records an allowance for credit losses and accrues for estimated warranty costs at the time of sale. These estimates are based upon historical experience, current
business trends, and current economic conditions. The Company accounts for shipping and handling activities as fulfil l ment costs rather than separate performance
obligations and records shipping and handling costs in cost of sales and related amounts billed to customers in net sales. The Company establishes payment terms with its customers based upon industry and regional practices, which typically do not
exceed 90 days . As the Company expects to receive payment from its customers within one year from the time of sale, it disregards the
effects of the time value of money in its determination of the transaction price. The Company has not disclosed the value of unsatisfied performance obligations because the revenue associated with customer contracts for which the original expected
performance period is greater than one year is immaterial.
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The following is a description of the Company’s principal revenue-generating activities:
Climate Solutions
The Climate Solutions segment principally generates revenue from selling heat transfer products, HVAC& R products, and data center cooling solutions. Heat transfer products include heat recovery and round tube plate fin coils. Heating products include unit heaters, roof-mounted direct- and
indirect-fired makeup air units, duct furnaces, infrared units and perimeter heating products. Indoor air quality products include ventilation and air conditioning products, such as single packaged unit ventilators, modular chillers, air handler
units, condensing units and ceiling cassettes. Refrigeration products include evaporator unit coolers, remote condensers and fluid, gas, dry, and brine coolers. In addition, the segment provides products to the industrial power generation
markets. Data center cooling products include IT cooling solutions, including precision air conditioning units for data center applications; computer room air conditioning and computer room air handler units; hybrid fan coils; fan walls;
chillers; condensers; condensing units; and liquid cooling solutions for high-density computing.
Heating products are manufactured in the U.S. and are largely sold to independent distributors, who in turn market the heating products to end customers. Because these
products are sold to many different customers without contractual or practical limitations, the Climate Solutions segment recognizes revenue at the time control is transferred to the customer, generally the independent distributor, based upon
shipping terms, which is generally upon shipment.
Ventilation and air conditioning products are highly-specified to a customer’s needs; the majority of the underlying sales contracts do not provide the Company with an
enforceable right to payment for performance completed to date. As a result, the Climate Solutions segment recognizes revenue for the majority of its products at the time control is transferred to the customer based upon shipping terms, which is
generally upon shipment.
For the sale of heat transfer products, refrigeration products, and data center cooling solutions, individual customer purchase orders generally represent the Company’s
contract with its customers. With the exception of a small number of customers, the applicable customer contracts do not provide the Company with an enforceable right to payment for performance completed to date. As a result, the Climate Solutions
segment recognizes revenue for these products primarily at the time control is transferred to the customer based upon shipping terms, which is generally upon shipment.
For sales to customers whose contract cancellation terms provide an enforceable right to payment for customized products and solutions, the Climate Solutions segment
recognizes revenue over time based upon its estimated progress toward satisfaction of the performance obligations. The segment measures progress by evaluating the production status toward completion of ordered products not yet shipped to its
customers.
Performance Technologies
The Performance Technologies segment provides products and solutions that enhance the performance of customer applications and develops solutions that
provide mission critical power, 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; and cooling
module generator sets. 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. The advanced solutions provided by the segment also include coating products and application services that extend the life of equipment and components by protecting against corrosion.
While the Performance Technologies segment provides customized production and service parts to customers under multi-year programs, these programs typically do not contain
contractually-guaranteed volumes to be purchased by the customer. As a result, individual purchase orders typically represent the quantities ordered by the customer. With the exception of a small number of customers, the terms within the customer
agreement, purchase order, or customer-owned tooling contract do not provide the Company with an enforceable right to payment for performance completed to date. As a result, the Performance Technologies segment recognizes revenue primarily at the
time control is transferred to the customer based upon shipping terms, which is generally upon shipment.
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
In regard to the Performance Technologies customers with contractual cancellation terms that provide an enforceable right to payment for performance completed to date, the
Company recognizes revenue over time based upon its estimated progress toward satisfaction of the performance obligations. The Performance Technologies segment measures progress by evaluating the production status of ordered products not yet shipped
to the customer.
For sales of coatings
products, in which the customers control the equipment being enhanced by the coating application, the Performance Technologies segment recognizes revenue over time based upon its estimated progress toward satisfaction of the performance
obligations. The segment measures progress by evaluating the production status toward completion of ordered products or services not yet shipped to its customers.
For certain customer programs, the Company agrees to provide annual price reductions based upon contract terms. For these scheduled price reductions, the Company evaluates
whether the provisions represent a material right to the customer, and if so, defers associated revenue as a result.
At times, the Company makes up-front incentive payments to certain customers related to future sales under multi-year programs. The Company capitalizes these incentive
payments, which it expects to recover through future sales, and amortizes the assets as a reduction to revenue when the related products are sold to customers.
Disaggregation of revenue
The tables below present
revenue for each of the Company’s operating segments, Climate Solutions and Performance Technologies. Each segment’s revenue is disaggregated by product group, by geographic location and based upon the timing of revenue recognition.
Beginning in fiscal 2024 and in connection with the Company’s strategic transformation and continued application of 80/20 principles across its
businesses, the Company has refined its reporting of disaggregated revenue within the Climate Solutions segment to be more consistent with how the segment has aligned its teams around three market-based verticals: i) heat transfer products; ii)
HVAC& R ; and iii) data center cooling. For the refined fiscal 2024 presentation, the Company reports revenue based upon the respective product lines and
related customer relationships managed by each market-based vertical team. See Note 22 for additional information regarding the Company’s operating segments. The disaggregated revenue information presented in the tables below for fiscal 2023
and 2022 has been recast to be comparable with the fiscal 2024 presentation.
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Year ended March 31, 2024
Climate
Solutions
Performance
Technologies
Segment
Total
Product groups:
Heat transfer
$
419.9
$
-
$
419.9
HVAC&R
340.5
-
340.5
Data center cooling
294.2
-
294.2
Air-cooled
-
681.2
681.2
Liquid-cooled
-
491.6
491.6
Advanced solutions
-
180.4
180.4
Inter-segment sales
-
24.8
24.8
Net sales
$
1,054.6
$
1,378.0
$
2,432.6
Geographic location:
Americas
$
607.9
$
764.2
$
1,372.1
Europe
420.3
420.3
840.6
Asia
26.4
193.5
219.9
Net sales
$
1,054.6
$
1,378.0
$
2,432.6
Timing of revenue recognition:
Products transferred at a point in time
$
1,015.3
$
1,313.4
$
2,328.7
Products transferred over time
39.3
64.6
103.9
Net sales
$
1,054.6
$
1,378.0
$
2,432.6
Year ended March 31, 2023
Climate
Solutions
Performance
Technologies
Segment
Total
Product groups:
Heat transfer
$
496.7
$
-
$
496.7
HVAC&R
341.0
-
341.0
Data center cooling
173.8
-
173.8
Air-cooled
-
658.6
658.6
Liquid-cooled
-
483.9
483.9
Advanced solutions
-
143.9
143.9
Inter-segment sales
0.4
29.8
30.2
Net sales
$
1,011.9
$
1,316.2
$
2,328.1
Geographic location:
Americas
$
580.9
$
702.0
$
1,282.9
Europe
406.0
408.5
814.5
Asia
25.0
205.7
230.7
Net sales
$
1,011.9
$
1,316.2
$
2,328.1
Timing of revenue recognition:
Products transferred at a point in time
$
959.8
$
1,242.3
$
2,202.1
Products transferred over time
52.1
73.9
126.0
Net sales
$
1,011.9
$
1,316.2
$
2,328.1
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Year ended March 31, 2022
Climate
Solutions
Performance
Technologies
Segment
Total
Product groups:
Heat transfer
$
460.4
$
-
$
460.4
HVAC&R
311.5
-
311.5
Data center cooling
138.2
-
138.2
Air-cooled
-
572.3
572.3
Liquid-cooled
-
448.3
448.3
Advanced solutions
-
119.4
119.4
Inter-segment sales
0.4
32.4
32.8
Net sales
$
910.5
$
1,172.4
$
2,082.9
Geographic location:
Americas
$
485.9
$
585.6
$
1,071.5
Europe
396.7
375.7
772.4
Asia
27.9
211.1
239.0
Net sales
$
910.5
$
1,172.4
$
2,082.9
Timing of revenue recognition:
Products transferred at a point in time
$
889.3
$
1,093.7
$
1,983.0
Products transferred over time
21.2
78.7
99.9
Net sales
$
910.5
$
1,172.4
$
2,082.9
Contract balances
Contract assets and contract liabilities from contracts with customers were as follows:
March 31, 2024
March 31, 2023
Contract assets
$
12.9
$
19.3
Contract liabilities
79.4
21.5
Contract assets, included within other current assets in the consolidated balance sheets, primarily consist of capitalized costs related to customer-owned tooling
contracts, wherein the customer has guaranteed reimbursement, and assets recorded for revenue recognized over time, which represent the Company’s rights to consideration for work completed but not yet billed. The $ 6.4 million decrease in contract assets during fiscal 2024 primarily resulted from a decrease in capitalized costs related to customer-owned tooling
contracts and contract assets for revenue recognized over time.
Contract liabilities, included within other current liabilities in the consolidated balance sheets, consist of payments received in advance of satisfying performance
obligations under customer contracts, including contracts for data center cooling products and customer-owned tooling. The $ 57.9 million
increase in contract liabilities during fiscal 2024 primarily resulted from payments received in advance of the Company’s satisfaction of performance obligations, largely associated with contracts with long inventory lead times.
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 4: Fair Value Measurements
Fair value is defined as the price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for
the asset or liability in an orderly transaction between market participants. Fair value measurements are classified under the following hierarchy:
•
Level 1 – Quoted prices for identical instruments in active markets.
•
Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and
model-derived valuations in which all significant inputs are observable in active markets.
•
Level 3 – Model-derived valuations in which one or more significant inputs are not observable.
When available, the Company uses quoted market prices to determine fair value and classifies such measurements as Level 1. In some cases, where market
prices are not available, the Company uses observable market-based inputs to calculate fair value, in which case the measurements are classified as Level 2. If quoted or observable market prices are not available, the Company determines fair value
based upon valuation models that use, where possible, market-based data such as interest rates, yield curves or currency rates. These measurements are classified as Level 3.
The carrying values of cash, cash equivalents, restricted cash, short-term investments, trade accounts receivable, accounts payable, and short-term debt approximate fair
value due to the short-term nature of these instruments. In addition, the Company assesses the fair value of a disposal group for each reporting period it is held for sale. See Note 2 for additional information regarding assets held for sale. The
fair value of the Company’s long-term debt is disclosed in Note 17.
The Company holds investments in deferred compensation trusts to fund obligations under certain non-qualified deferred compensation plans. The Company records the fair
value of these investments within other noncurrent assets on its consolidated balance sheets. The Company classifies money market investments held by the trusts within Level 2 of the valuation hierarchy. The Company classifies all other investments
held by the trusts within Level 1 of the valuation hierarchy, as it uses quoted market prices to determine the investments’ fair value. The Company’s deferred compensation obligations, which are recorded as other noncurrent liabilities, are recorded
at the fair values of the investments held by the trust. At March 31, 2024 and 2023, the fair values of the investments and obligations for the Company’s deferred compensation plans each totaled $ 4.1 million and $ 2.3 million, respectively.
Plan assets related to the Company’s pension plans were classified as follows:
March 31, 2024
Level 1
Level 2
Total
Money market investments
$
-
$
6.7
$
6.7
Fixed income securities
-
45.3
45.3
Pooled equity funds
7.0
-
7.0
U.S. government and agency securities
-
57.0
57.0
Other
1.1
5.7
6.8
Fair value excluding investments measured at net asset value
8.1
114.7
122.8
Investments measured at net asset value
27.7
Total fair value
$
150.5
March 31, 2023
Level 1
Level 2
Total
Money market investments
$
-
$
1.9
$
1.9
Pooled equity funds
34.9
-
34.9
Other
-
0.4
0.4
Fair value excluding investment measured at net asset value
34.9
2.3
37.2
Investments measured at net asset value
116.1
Total fair value
$
153.3
63
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The Company determined the fair value of money market investments to approximate their net asset values, without discounts for credit quality or
liquidity restrictions, and classified them within Level 2 of the valuation hierarchy. The Company determined the fair value of pooled equity funds based upon quoted prices from active markets and classified them within Level 1 of the valuation
hierarchy. The Company determined the fair value of fixed income securities and U.S. government and agency securities based upon recent bid prices or the average of recent bid and asking prices when available and, if not available, the Company
valued them through matrix pricing models developed by sources considered by management to be reliable. The Company classified these assets within Level 2 of the valuation hierarchy. As of March 31, 2024 and 2023, the Company held no Level 3 assets within its pension plans.
As a practical expedient, the Company valued certain investments, including pooled
equity, fixed income and real estate funds, using their net asset value (“NAV”) per unit, and therefore, has not classified these investments within the fair value hierarchy. The terms and conditions for redemptions vary for the investments valued
at NAV. The real estate investment fund may be redeemed quarterly with a 90-day notice period. Other investments valued at NAV do not have significantly-restrictive redemption frequency or notice period requirements. The Company does not intend to sell or otherwise dispose of these
investments at prices different than the NAV per unit.
Note 5: Stock-Based Compensation
The Company’s stock-based incentive programs consist of the following: ( i )
a long-term incentive plan (“LTIP”) for officers and other executives that authorizes grants of stock awards, stock options, and performance-based awards granted for retention and performance, ( ii ) a discretionary equity program for other management and key employees, and ( iii ) stock awards for non-employee directors. The
Company’s Board of Directors and the Human Capital and Compensation Committee, as applicable, have discretionary authority to set the terms of the stock-based awards. Grants to employees during fiscal 2024 were issued under the Company’s Amended
and Restated 2020 Incentive Compensation Plan. In fiscal 2024, the Company granted performance-based stock awards and restricted stock awards. In fiscal 2023 and 2022, the Company granted performance cash awards, restricted stock awards, and
stock options. At present, the Company settles equity-based grants through the issuance of new common shares. As of March 31, 2024, approximately 1.5 million shares authorized under the Amended and Restated 2020
Incentive Compensation Plan remain available for future grants. Employee participants have the opportunity to deliver back to the Company the number of shares from the vesting of stock awards sufficient to satisfy the individual’s minimum tax
withholding obligations. These shares are held as treasury shares. The Company recorded stock-based compensation expense of $ 10.8
million , $ 6.6 million , and $ 5.7 million in fiscal 2024, 2023 , and 2022, respectively.
Stock options
The Company recorded $ 1.0 million , $ 1.2 million , and $ 1.1 million of compensation expense related to stock options in fiscal 2024, 2023 , and
2022, respectively. The grant date fair value of stock options that vested during fiscal 2024, 2023 , and 2022, was $ 1.2 million , $ 1.0 million , and $ 0.9 million , respectively. As of March 31, 2024 , the total compensation expense not yet recognized related to non-vested stock options was $ 1.1 million and the weighted-average period in which the remaining expense is expected to be
recognized was 1.2 years.
The Company estimated the fair value of option awards on the date of grant using the Black-Scholes option valuation model and the following
assumptions:
Years ended March 31,
2023
2022
Fair value of options
$
6.99
$
8.79
Expected life of awards in years
6.0
6.1
Risk-free interest rate
3.0
%
1.1
%
Expected volatility of the Company’s stock
57.8
%
56.5
%
Expected dividend yield on the Company’s stock
0.0
%
0.0
%
Stock options expire no later than 10 years after the grant date and have an exercise price equal to the fair market value of
Modine’s common stock on the date of grant. The risk-free interest rate was based upon yields of U.S. Treasury zero-coupon issues with a term corresponding to the expected life of the options. The expected volatility assumption was based upon
changes in the Company’s historical common stock prices over the same time period as the expected life of the awards. The expected dividend yield is zero, as the Company currently does not anticipate paying dividends over the expected life of the
options. The expected lives of the awards are based upon historical patterns and the terms of the options. The Company did no t
grant options in fiscal 2024. Based upon the terms of the fiscal 2023 awards, stock options vest 33 percent, 33 percent, and 34 percent per year for three years , respectively. Stock option grants preceding the fiscal 2023 grant vest 25 percent per year for four years .
64
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
A summary of stock option activity for fiscal 2024 was as follows:
Shares
Weighted-average
exercise price
Weighted-average
remaining contractual
term (years)
Aggregate
intrinsic value
Outstanding, beginning of year
0.9
$
12.28
Granted
-
-
Exercised
( 0.2
)
11.08
Forfeited or expired
( 0.1
)
11.13
Outstanding, end of year
0.6
$
12.78
6.7
$
51.9
Exercisable, March 31, 2024
0.4
$
13.00
6.2
$
29.8
The aggregate intrinsic value represents the difference between the closing price of Modine’s common shares on the last trading day of fiscal 2024 over
the exercise price of the stock options, multiplied by the number of options outstanding or exercisable. The aggregate intrinsic value is not recorded for financial statement purposes, and this value will change based upon daily changes in the price
of Modine’s common shares.
Additional information related to stock options exercised is as follows:
Years ended March 31,
2024
2023
2022
Intrinsic value of stock options exercised
$
12.4
$
1.5
$
0.1
Proceeds from stock options exercised
2.6
2.9
1.4
Restricted stock
The Company recorded $ 5.3 million, $ 5.4 million, and $ 5.0 million of compensation expense related to restricted stock in fiscal 2024, 2023, and
2022, respectively. The grant date fair value of restricted stock awards that vested during fiscal 2024, 2023, and 2022 was $ 4.6 million, $ 4.7 million, and $ 4.4 million, respectively. At March 31, 2024, the Company had $ 7.1 million of unrecognized compensation expense related to non-vested restricted stock, which it expects to recognize over a weighted-average period of 1.5 years. The Company values restricted stock awards using the
closing market price of its common shares on the date of grant. Based upon the terms of the annual awards, restricted stock awards vest 33
percent, 33 percent, and 34
percent per year for three years , respectively. Restricted stock award grants preceding the fiscal 2023 grant vest 25 percent per year for four years .
Restricted stock awards granted to non-employee directors in fiscal 2024 vest one year from the time of grant.
65
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
A summary of restricted stock activity for fiscal 2024 was as follows:
Shares
Weighted-average
price
Non-vested balance, beginning of year
0.8
$
12.95
Granted
0.2
37.59
Vested
( 0.4
)
12.96
Forfeited
( 0.1
)
13.14
Non-vested balance, end of year
0.5
$
21.08
Restricted stock – performance-based shares
The Company granted performance-based stock awards in fiscal 2024. The Company granted performance - based
cash awards in fiscal 2023 and 2022 in lieu of performance-based stock awards. For performance-based stock awards, the Company values the awards using the closing market price of its common shares on the date of grant. In fiscal 2024, the Company
recorded $ 4.5 million of compensation expense related to performance-based stock awards. During fiscal 2023 all performance-based awards
were cash-based, therefore, the Company did no t recognize compensation expense related to performance-based stock awards. In fiscal 2022,
the Company recorded a $ 0.4 million benefit related to the performance-based stock awards granted in fiscal 2020. The payout earned for
the fiscal 2020 awards was less than previously estimated. At March 31, 2024, the Company had $ 10.8 million of total unrecognized compensation expense related to non-vested performance-based
stock awards, which is expected to be recognized over a weighted-average period of 2.0
years.
The payouts earned under the performance portion of the award program are based upon the attainment of certain financial targets over a three-year period and are paid after the end of that three-year
performance period, if the performance targets have been achieved. The performance metrics for the performance-based awards granted in fiscal 2024, 2023, and 2022 are based upon both a target three-year average consolidated cash flow return on invested capital and a target three-year average growth in consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”) at the end of the three-year performance period, commencing with the fiscal year of grant.
Note 6: Restructuring Activities
During fiscal 2024,
restructuring and repositioning expenses primarily consisted of severance expenses. During fiscal 2024, the Company recorded $ 12.9 million
of severance expenses, of which $ 11.5 million were recorded in the Performance Technologies segment and primarily relate to the pending
closure of a technical service center in Europe. In addition, the Company incurred equipment transfer costs within the Climate Solutions and Performance Technology segments. These restructuring activities are part of the Company’s transformational
initiatives supported by 80/20 principles and include product line transfers intended to achieve production efficiency improvements in its manufacturing facilities.
During fiscal 2023,
restructuring and repositioning expenses primarily consisted of severance-related expenses for targeted headcount reductions in each the Climate Solutions and Performance Technologies segments and supported the Company’s objective of reducing
operational and SG&A cost structures. In addition, the Performance Technologies and Climate Solutions segments incurred equipment transfer costs in Europe and closure costs related to a previously-leased facility in the U.S., respectively.
During fiscal 2022, the Company committed to restructuring actions to reduce SG&A and operational expenses, particularly within the Performance Technologies
segment. During fiscal 2022, the Company recorded $ 22.1 million of severance expenses, of which $ 20.3 million were recorded in the Performance Technologies segment and primarily related to
targeted headcount reductions in Europe . In addition, the Company implemented targeted headcount reductions
in the Climate Solutions segment. Also in fiscal 2022, the Company incurred equipment transfer costs within the Performance Technologies segment.
66
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Restructuring and repositioning expenses were as follows:
Years ended March 31,
2024
2023
2022
Employee severance and related benefits
$
12.9
$
3.5
$
22.1
Other restructuring and repositioning expenses
2.1
1.5
2.0
Total
$
15.0
$
5.0
$
24.1
Other restructuring and repositioning expenses primarily consist of equipment transfer and plant consolidation costs.
The Company accrues severance in accordance with its written plans, procedures, and relevant statutory requirements. Changes in accrued severance were
as follows:
Years ended March 31,
2024
2023
Beginning balance
$
10.6
$
20.2
Additions
12.9
3.5
Payments
( 7.8
)
( 12.4
)
Disposition (a)
( 2.5
)
-
Effect of exchange rate changes
( 0.2
)
( 0.7
)
Ending balance
$
13.0
$
10.6
(a)
The Company sold three automotive businesses based in Germany during the third quarter of fiscal 2024. See Note 2 for additional information regarding the sale.
Note 7 : Other Income and Expense
Other income and expense consisted of the following:
Years ended March 31,
2024
2023
2022
Interest income
$
4.3
$
1.3
$
0.4
Foreign currency transactions (a)
( 3.0
)
( 3.7
)
( 1.4
)
Net periodic benefit cost (b)
( 3.3
)
( 2.0
)
( 1.1
)
Total other expense - net
$
( 2.0
)
$
( 4.4
)
$
( 2.1
)
(a)
Foreign currency transactions primarily consist of foreign currency transaction gains and losses on the re-measurement or settlement of foreign currency-denominated assets and liabilities, including
transactions denominated in a foreign currency and intercompany loans ,
along with gains and losses on foreign currency exchange contracts.
(b)
Net periodic benefit cost for the
Company’s pension and postretirement plans is exclusive of service cost .
67
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 8: Income Taxes
The U.S. and foreign components of earnings before income taxes and the provision or benefit for income taxes consisted of the following:
Years ended March 31,
2024
2023
2022
Components of earnings before income taxes:
United States
$
37.2
$
12.5
$
0.4
Foreign
177.4
112.8
101.1
Total earnings before income taxes
$
214.6
$
125.3
$
101.5
Income tax provision (benefit):
Federal:
Current
$
1.6
$
1.5
$
0.1
Deferred
7.1
( 47.5
)
-
State:
Current
2.4
2.3
1.1
Deferred
( 0.9
)
( 11.4
)
-
Foreign:
Current
41.0
27.5
17.8
Deferred
-
( 0.7
)
( 3.8
)
Total income tax provision (benefit)
$
51.2
$
( 28.3
)
$
15.2
The reconciliation between the U.S. federal statutory rate and the Company’s effective tax rate was as follows:
Years ended March 31,
2024
2023
2022
Statutory federal tax
21.0
%
21.0
%
21.0
%
State taxes, net of federal benefit
0.5
( 0.1
)
1.4
Taxes on non-U.S. earnings and losses
3.7
5.8
3.5
Valuation allowances
2.5
( 42.9
)
( 8.8
)
Tax credits and benefits
( 2.6
)
( 4.5
)
( 3.4
)
Compensation
0.3
0.7
0.6
Tax rate or law changes
-
( 0.2
)
0.6
Uncertain tax positions, net of settlements
( 0.2
)
0.4
( 0.2
)
Notional interest deductions
( 1.2
)
( 1.7
)
( 2.7
)
Dividends and taxable foreign inclusions
0.4
0.9
1.6
Other
( 0.5
)
( 2.0
)
1.4
Effective tax rate
23.9
%
( 22.6
%)
15.0
%
68
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The Company’s fiscal 2024 effective tax rate was favorably impacted by a $ 3.1
million tax benefit related to the sale of three automotive businesses based in Germany , which is presented in the table above within dividends and taxable foreign inclusions. The Company’s fiscal 2023 effective tax rate was favorably impacted by an income tax benefit related to the reversal of a valuation
allowance on deferred tax assets in the U.S. The effective tax rate in fiscal 2022 was significantly impacted by an impairment reversal related to the liquid-cooled automotive business and income tax charges or benefits related to valuation
allowances. See Note 2 for information regarding the sale of the three automotive businesses in fiscal 2024 and the impairment
reversal in fiscal 2022. The income tax charges or benefits related to valuation allowances are described below.
The Company records valuation allowances against its net deferred tax assets to the extent it determines it is more likely than not that such assets
will not be realized in the future. Each quarter, the Company evaluates the probability that its deferred tax assets will be realized and determines whether valuation allowances or adjustments thereto are needed. This determination involves
judgment and the use of significant estimates and assumptions, including expectations of future taxable income and tax planning strategies. In addition, the Company considers the duration of statutory carryforward periods and historical financial
results.
Based upon its analyses during fiscal 2024, the Company recorded net tax expense to increase deferred tax asset valuation allowances by $ 5.4 million.
Based upon its analyses during fiscal 2023, the Company reversed the valuation allowance related to certain deferred tax assets in the U.S. and, as a
result, recorded an income tax benefit of $ 57.3 million. The Company had previously maintained a full valuation allowance against net deferred tax assets in the U.S. since fiscal 2021. During fiscal 2023, the Company determined it was more likely than not that these deferred tax assets in the
U.S. would be realized after consideration of both positive and negative objectively verifiable evidence. The Company placed substantial weight on its fiscal 2022
and 2023 earnings, which resulted in a significant cumulative three-year income position. The Company also considered forecasted future
earnings in certain key businesses. The Company maintained, however, a valuation allowance on the portion of the deferred tax assets in the U.S. related to certain federal and state tax attributes that are not expected to be realized prior to
expiration. In addition, the Company recorded net tax expense to increase other deferred tax asset valuation allowances by $ 3.6 million.
Based upon its analyses during fiscal 2022, the Company determined it was more likely than not that the deferred tax assets in certain foreign jurisdictions would be
realized. As a result, the Company reversed the valuation allowances related to these deferred tax assets and recorded income tax benefits totaling $ 13.0
million. The Company’s analyses included consideration of the termination of a sale agreement for the liquid-cooled automotive business and the related impairment reversal. Separately, the Company determined it was more likely than not that the
deferred tax assets in a foreign jurisdiction would not be realized. As a result, the Company recorded an income tax charge of $ 1.6
million. Together, these valuation allowance adjustments resulted in a net income tax benefit of $ 11.4 million during fiscal 2022. In
addition, the Company recorded net tax expense to increase other deferred tax asset valuation allowances by $ 2.5 million.
At March 31, 2024, valuation allowances against deferred tax assets in the U.S. and in certain foreign jurisdictions totaled $ 42.9 million and $ 20.1 million,
respectively. The Company will maintain the valuation allowances in each applicable tax jurisdiction until it determines it is more likely than not the deferred tax assets will be realized, thereby eliminating the need for a valuation allowance.
Future events or circumstances, such as lower taxable income or unfavorable changes in the financial outlook of the Company’s operations in the U.S. and certain foreign jurisdictions, could necessitate the establishment of further valuation
allowances.
69
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The tax effects of temporary differences that gave rise to deferred tax assets and liabilities were as follows:
March 31,
2024
2023
Deferred tax assets:
Accounts receivable
$
0.7
$
0.9
Inventories
6.3
6.0
Plant and equipment
12.0
17.2
Lease liabilities
19.1
15.9
Pension and employee benefits
27.7
24.1
Net operating and capital losses
45.9
55.4
Credit carryforwards
45.3
49.0
Research and experimental expenditures
12.2
8.0
Other, principally accrued liabilities
11.2
13.2
Total gross deferred tax assets
180.4
189.7
Less: valuation allowances
( 63.0
)
( 61.6
)
Net deferred tax assets
117.4
128.1
Deferred tax liabilities:
Plant and equipment
7.2
7.5
Lease assets
18.8
15.7
Goodwill
4.8
4.8
Intangible assets
40.9
20.1
Other
0.6
1.1
Total gross deferred tax liabilities
72.3
49.2
Net deferred tax assets
$
45.1
$
78.9
Unrecognized tax benefits were as follows:
Years ended March 31,
2024
2023
Beginning balance
$
9.7
$
9.3
Gross increases - tax positions in prior period
0.5
0.2
Gross decreases - tax positions in prior period
-
( 0.1
)
Gross increases - tax positions in current period
1.3
0.9
Lapse of statute of limitations
( 2.3
)
( 0.6
)
Ending balance
$
9.2
$
9.7
The Company’s liability for unrecognized tax benefits as of March 31, 2024 was $ 9.2 million and, if recognized, $ 7.3 million would have an
effective tax rate impact. The Company does not expect a significant change in unrecognized tax benefits during fiscal 2025.
The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense. During fiscal 2024, 2023 and
2022, interest and penalties accrued on the consolidated balance sheets and included within income tax expense in the consolidated statements of operations were not significant.
70
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The Company files income tax returns in multiple jurisdictions and is subject to examination by taxing authorities throughout the world. At March 31, 2024, the Company was under
income tax examination in a number of jurisdictions. The Company’s major tax jurisdictions include the United States and Italy. For the United States, fiscal 2021 through fiscal 2023 remain subject to examination. For Italy, fiscal 2018 through fiscal 2023 remain subject
to examination.
At March 31, 2024, the Company had federal and state tax credits of $ 58.3 million that, if not utilized against U.S. taxes, will expire between fiscal 2025 and 2044 . The Company also had state and local tax loss carryforwards totaling $ 138.6 million. If not utilized against state apportioned taxable income, certain state and local carryforwards will expire between fiscal 2025 and 2044 , while some will not expire
due to an unlimited carryforward period. In addition, the Company had tax loss and foreign attribute carryforwards totaling $ 236.3 million
in various tax jurisdictions throughout the world. Certain of the carryforwards in foreign jurisdictions are offset by valuation allowances. If not utilized against taxable income, $ 61.7 million of these carryforwards will expire between fiscal 2025
and 2034 , and $ 174.6
million, mainly related to Germany and Italy, will not expire due to an unlimited carryforward period.
The Company’s practice and intention is to reinvest, with certain insignificant exceptions, the earnings of its non-U.S. subsidiaries outside of the
U.S., and therefore, the Company has not recorded foreign withholding taxes or deferred income taxes for these earnings. The Company has estimated the net amount of unrecognized foreign withholding tax and deferred tax liabilities would total
approximately $ 16.0 million if the accumulated foreign earnings were distributed; however, the actual tax cost would be dependent on
circumstances existing when remittance occurs.
Note 9: Earnings Per Share
The components of basic and diluted earnings per share were as follows:
Years ended March 31,
2024
2023
2022
Basic Earnings Per Share:
Net earnings attributable to Modine
$
161.5
$
153.1
$
85.2
Weighted-average shares outstanding – basic
52.4
52.3
52.0
Net earnings per share – basic
$
3.08
$
2.93
$
1.64
Diluted Earnings Per Share:
Net earnings attributable to Modine
$
161.5
$
153.1
$
85.2
Weighted-average shares outstanding – basic
52.4
52.3
52.0
Effect of dilutive securities
1.0
0.5
0.5
Weighted-average shares outstanding – diluted
53.4
52.8
52.5
Net earnings per share – diluted
$
3.03
$
2.90
$
1.62
For fiscal 2024 there were no
anti-dilutive securities that impacted the calculation of diluted earnings per share. For fiscal 2023 and 2022, the calculation of diluted earnings per share each excluded 0.5 million stock options, respectively, because they were anti-dilutive. For fiscal 2023 and 2022, the calculation of diluted earnings per share each excluded 0.2 million restricted stock awards, respectively, because they were anti-dilutive.
71
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 10: Cash, Cash Equivalents and Restricted Cash
Cash, cash equivalents and restricted cash consisted of the following:
March 31,
2024
2023
Cash and cash equivalents
$
60.1
$
67.1
Restricted cash
0.2
0.1
Total cash, cash equivalents and restricted cash
$
60.3
$
67.2
Restricted cash, which is reported within other current assets and other noncurrent
assets in the consolidated balance sheets, consists primarily of deposits for contractual guarantees or commitments required for rents, import and export duties, and commercial agreements.
Note 11: Inventories
Inventories consisted of the following:
March 31,
2024
2023
Raw materials
$
207.8
$
218.3
Work in process
64.5
49.9
Finished goods
85.6
56.7
Total inventories
$
357.9
$
324.9
Note 12: Property, Plant and Equipment
Property, plant and equipment, including depreciable lives, consisted of the following:
March 31,
2024
2023
Land
$
16.3
$
16.4
Buildings and improvements ( 10 - 40 years)
280.7
264.0
Machinery and equipment ( 3 - 15 years)
824.4
853.3
Office equipment ( 3 - 10 years)
97.0
93.6
Construction in progress
67.6
47.5
1,286.0
1,274.8
Less: accumulated depreciation
( 920.3
)
( 960.3
)
Net property, plant and equipment
$
365.7
$
314.5
Depreciation expense totaled $ 46.9 million, $ 46.5 million, and $ 46.4 million for
fiscal 2024, 2023, and 2022, respectively.
Gains and losses related to the disposal of property, plant and equipment are recorded within SG&A expenses. For fiscal 2024 and 2023, losses
related to the disposal of property, plant and equipment totaled $ 0.3 million and $ 0.1 million, respectively. For fiscal 2022, gains related to the disposal of property, plant and equipment totaled $ 0.1 million.
72
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 13: Intangible Assets
Intangible assets consisted of the following:
March 31, 2024
March 31, 2023
Gross
Net
Gross
Net
Carrying
Accumulated
Intangible
Carrying
Accumulated
Intangible
Value
Amortization
Assets
Value
Amortization
Assets
Customer relationships
$
150.5
$
( 26.3
)
$
124.2
$
60.3
$
( 23.4
)
$
36.9
Trade names
62.8
( 18.5
)
44.3
50.1
( 15.9
)
34.2
Acquired technology
32.5
( 12.7
)
19.8
22.6
( 12.6
)
10.0
Total intangible assets
$
245.8
$
( 57.5
)
$
188.3
$
133.0
$
( 51.9
)
$
81.1
During the second quarter of fiscal 2024, the Company recorded customer relationship and acquired technology intangible assets totaling $ 2.9 million related to the Napps acquisition. During the fourth quarter of fiscal 2024, the Company recorded intangible assets totaling $ 102.3 million and $ 11.4 million related to
the Scott Springfield Manufacturing acquisition and the purchase of intellectual property from TMGcore, Inc., respectively. The intangible assets recorded for the Scott Springfield Manufacturing acquisition are comprised of customer relationships,
including backlog, and trade names. The Company recorded acquired technology as part of its purchase of certain assets from TMGcore, Inc. See Note 2 for additional information.
The Company recorded $ 9.2 million, $ 8.0 million, and $ 8.4 million of
amortization expense during fiscal 2024, 2023, and 2022, respectively. The Company estimates that it will record approximately $ 29.0
million, $ 18.0 million, $ 17.0
million, $ 17.0 million, and $ 16.0
million of annual amortization expense in fiscal 2025 through 2029, respectively.
Note 14: Goodwill
The following table presents a roll forward of the carrying value of goodwill from March
31, 2022 to March 31, 2024 .
Climate
Solutions
Performance
Technologies
Total
Balance, March 31, 2022
$
108.1
$
60.0
$
168.1
Effect of exchange rate changes
( 2.4
)
( 0.1
)
( 2.5
)
Balance, March 31, 2023
105.7
59.9
165.6
Acquisition (disposition) (a)
66.2
( 0.7
)
65.5
Effect of exchange rate changes
( 0.1
)
( 0.1
)
( 0.2
)
Balance, March 31, 2024
$
171.8
$
59.1
$
230.9
(a)
During fiscal 2024, the Company recorded $ 65.2 million and $ 1.0 million of goodwill in connection
with its acquisition of Scott Springfield Manufacturing and Napps, respectively. In addition, the Company wrote-off $ 0.7 million
of goodwill in connection with the sale of two coatings facilities. See Note 2 for additional information.
The Company tests goodwill for impairment annually, as of March 31, or more frequently if events or circumstances change that would, more likely than not, reduce the fair
value of a reporting unit below its carrying value. To test goodwill for impairment, the Company determines the fair value of each reporting unit based upon the present value of estimated future cash flows and compares the fair value of each
reporting unit with its carrying value. The Company’s determination of fair value involves judgment and the use of estimates and assumptions, including assumptions regarding the revenue growth rates and operating profit margins used to calculate
estimated future cash flows and risk-adjusted discount rates.
As a result of its annual goodwill impairment tests performed as of March 31, 2024, the Company determined that the fair value of each of its reporting
units exceeded their respective book values.
At both March 31, 2024 and 2023, accumulated goodwill impairment losses totaled $ 40.8 million within the Performance Technologies segment .
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 15: Product Warranties and Other Commitments
Product warranties
Many of the Company’s products are covered under a warranty period ranging from one to five years . The Company records a
liability for product warranty obligations at the time of sale and adjusts its warranty accruals if it becomes probable that expected claims will differ from previous estimates.
Changes in accrued warranty costs were as follows:
Years ended March 31,
2024
2023
Beginning balance
$
6.9
$
6.3
Warranties recorded at time of sale
6.6
5.4
Adjustments to pre-existing warranties
2.2
0.9
Settlements
( 5.3
)
( 5.6
)
Acquisition of business (a)
0.4
-
Disposition of businesses (a)
( 0.2
)
-
Effect of exchange rate changes
0.1
( 0.1
)
Ending balance
$
10.7
$
6.9
(a)
The Company acquired Scott Springfield Manufacturing during fiscal 2024. The Company sold three automotive businesses based in Germany during fiscal 2024. See Note 2 for additional information.
Indemnification agreements
From time to time, the Company provides indemnification agreements
related to the sale or purchase of an entity or facility. These indemnification agreements cover customary representations and warranties typically provided in conjunction with such transactions, including income, sales, excise or other tax matters,
environmental matters and other third-party claims. The indemnification periods provided generally range from less than one year to fifteen years . In addition, standard indemnification provisions reside in many commercial agreements to which the Company is a party and relate to
responsibility in the event of potential third-party claims. The fair value of the Company’s outstanding indemnification obligations at March 31, 2024 was not material.
Commitments
At
March 31, 2024, the Company had capital expenditure commitments of $ 20.2 million. Significant commitments include tooling and equipment
expenditures for new and renewal programs with vehicular customers in the Performance Technologies segment and equipment expenditures to support expanding manufacturing capacity in the Climate Solutions segment. The Company utilizes inventory
arrangements with certain vendors in the normal course of business under which the vendors maintain inventory stock at the Company’s facilities or at outside facilities. Title passes to the Company at the time goods are withdrawn for use in
production. The Company has agreements with the vendors to use the material within a specific period of time. In some cases, the Company bears the risk of loss for the inventory because Modine is required to insure the inventory against damage
and/or theft. This inventory is included within the Company’s consolidated balance sheets as raw materials inventory.
Note 16: Leases
The Company determines if an arrangement is a lease at contract inception. The lease
term begins upon lease commencement, which is when the Company takes possession of the asset, and may include options to extend or terminate the lease when it is reasonably certain that such options will be exercised. The Company uses the lease term
within its determination of the appropriate lease classification, either as an operating lease or as a finance lease, and to calculate straight-line lease expense for its operating leases.
74
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
ROU assets represent the Company’s right to use an underlying asset for the lease term
and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. The Company recognizes ROU assets and lease liabilities at the lease commencement date, based upon the present value of lease payments over the
lease term. As its lease agreements typically do not provide an implicit interest rate, the Company primarily uses an incremental borrowing rate to calculate the ROU asset and lease liability. In determining the incremental borrowing rate, the
Company considers its current collateralized borrowing rate, the term of the lease, and the economic environment where the lease activity is concentrated. The Company believes this method effectively estimates a borrowing rate that it could obtain
for a debt instrument with similar terms as the lease agreement.
Based upon its accounting policy, the Company does not separate lease and non-lease
components for any asset class. In addition, the Company does not record short-term leases (i.e. leases with an initial term of 12 months or less) on its consolidated balance sheets.
Certain leases require the Company to pay taxes, insurance, maintenance, and other
operating expenses associated with the leased asset. Such amounts are not included in the measurement of the lease liability to the extent they are variable in nature. These variable lease costs are recognized as variable lease expense when incurred.
The depreciable life of the ROU assets and related leasehold improvements are limited by the expected lease term, unless the lease contains a provision to transfer title to the Company or a purchase option that the Company expects to execute.
The Company’s most significant leases represent leases of real estate, such as
manufacturing facilities, warehouses, and offices. In addition, the Company leases manufacturing and IT equipment and vehicles. The Company’s most significant leases have remaining lease terms of 1 to 10 years. Certain leases contain renewal options for varying
periods, which are at the Company’s discretion. If reasonably certain of exercise, the Company includes the renewal periods within the calculation of ROU assets and lease liabilities. The Company’s lease agreements do not contain material residual
value guarantees or material restrictive covenants.
Lease assets and liabilities
The
following table provides a summary of leases recorded on the consolidated balance sheets.
Balance Sheet Location
March 31, 2024
March 31, 2023
Lease Assets
Operating lease ROU assets
Other noncurrent assets
$
76.0
$
59.1
Finance lease ROU assets (a)
Property, plant and equipment - net
6.5
7.1
Lease
Liabilities
Operating lease liabilities
Other current liabilities
$
15.3
$
11.8
Operating lease liabilities
Other noncurrent liabilities
62.1
48.9
Finance lease liabilities
Long-term debt - current portion
0.4
0.4
Finance lease liabilities
Long-term debt
1.9
2.3
(a)
Finance lease ROU assets were recorded net of accumulated amortization of $ 3.7 million and $ 3.2 million as of March 31, 2024 and 2023, respectively.
Components of lease expense
The Company records operating lease expense as either cost of sales or SG&A
expenses within its consolidated statements of operations, depending upon the nature and use of the ROU assets. The Company records finance lease expense as depreciation expense within cost of sales or SG&A expenses, depending upon the nature
and use of the ROU assets, and as interest expense in its consolidated statements of operations.
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The components of lease expense were as follows:
Years ended March 31,
2024
2023
2022
Operating lease expense (a)
$
24.2
$
21.9
$
20.0
Finance lease expense:
Depreciation of ROU assets
0.5
0.5
0.5
Interest on lease liabilities
0.1
0.1
0.2
Total lease expense
$
24.8
$
22.5
$
20.7
(a)
In fiscal 2024, 2023, and 2022 operating lease expense included short-term lease expense of $ 5.4
million, $ 5.7 million, and $ 4.2
million respectively. Variable lease expense was not significant.
Supplemental cash flow information
Years ended March 31,
2024
2023
2022
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases
$
16.9
$
14.6
$
15.7
Financing cash flows for finance leases
0.5
0.5
0.6
ROU assets obtained in exchange for lease liabilities:
Operating leases
$
29.2
$
21.2
$
7.8
Finance leases
-
-
0.1
Lease term and discount rates
March 31, 2024
March 31, 2023
Weighted-average remaining lease term:
Operating leases
7.9 years
8.3 years
Finance leases
4.9 years
5.8 years
Weighted-average discount rate:
Operating leases
4.4
%
3.7
%
Finance leases
4.7
%
4.6
%
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Maturity of lease liabilities
Future minimum rental payments for leases with initial non-cancellable lease terms in
excess of one year were as follows at March 31, 2024:
Fiscal Year
Operating Leases
Finance Leases
2025
$
18.2
$
0.5
2026
15.8
0.5
2027
12.3
0.5
2028
10.4
0.5
2029
8.8
0.5
2030 and beyond
24.4
-
Total lease payments
89.9
2.5
Less: interest
( 12.5
)
( 0.2
)
Present value of lease liabilities
$
77.4
$
2.3
The table above excludes approximately $ 23.0 million of future lease payments associated with a 10-year
operating lease of a manufacturing facility within the Climate Solutions segment that commenced in the first quarter of fiscal 2025.
Note 17: Indebtedness
Long-term
debt consisted of the following:
Fiscal year
of maturity
March 31, 2024
March 31, 2023
Term loans
2028
$
204.5
$
215.7
5.9 % Senior Notes
2029
100.0
100.0
Revolving credit facility
2028
90.0
-
5.8 % Senior Notes
2027
25.0
33.3
Finance lease obligations
2.3
2.7
421.8
351.7
Less: current portion
( 19.7
)
( 19.7
)
Less: unamortized debt issuance costs
( 2.2
)
( 2.7
)
Total long-term debt
$
399.9
$
329.3
Long-term debt, including the current portion of long-term debt, matures as follows:
Fiscal Year
2025
$
19.7
2026
44.7
2027
44.7
2028
287.3
2029
25.4
Total
$
421.8
77
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The Company maintains a credit agreement with a syndicate of banks that provides for a multi-currency $ 275.0 million revolving credit facility and U.S. dollar- and euro-denominated term loan facilities maturing in October 2027. In addition, the credit agreement provides for
shorter-duration swingline loans. Borrowings under the revolving credit, swingline and term loan facilities bear interest at a variable rate, based upon the applicable reference rate and including a margin percentage dependent upon the Company’s
leverage ratio, as described below. At March 31, 2024, the weighted-average interest rate for revolving credit facility borrowings and the term loans was 6.8
and 6.5 percent, respectively. Based upon the terms of the credit agreement, the Company classifies borrowings under its revolving
credit and swingline facilities as long-term and short-term debt, respectively, on its consolidated balance sheets.
At March 31, 2024, the Company’s borrowings under its revolving credit and swingline facilities totaled $ 90.0 million and $ 2.0 million, respectively, and domestic letters of credit totaled $ 5.6 million. As a result, available borrowing capacity under the Company’s revolving credit facility was $ 177.4
million as of March 31, 2024. At March 31, 2023 the Company had no outstanding borrowings under its revolving credit and swingline
facilities.
The Company also maintains credit agreements for its foreign subsidiaries. The outstanding short-term borrowings related to these foreign credit agreements totaled $ 10.0 million and $ 3.7 million at March 31, 2024 and 2023, respectively.
Indebtedness under the Company’s credit agreement and Senior Note agreements is secured by liens on substantially all domestic assets. These agreements require compliance with various covenants that may limit the Company’s ability to incur
additional indebtedness; grant liens; make investments, loans, or guarantees; engage in certain transactions with affiliates; and make restricted payments, including dividends. In addition, the agreements may require prepayment in the event of
certain asset sales.
Financial covenants within its credit agreements include a leverage ratio, which requires the Company to limit its consolidated indebtedness, less a portion of its cash balances, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted
EBITDA”.) The Company must also maintain a ratio of Adjusted EBITDA of at least three times consolidated interest expense. As of March
31, 2024, the Company was in compliance with its debt covenants.
The Company estimates the fair value of long-term debt using discounted future cash flows at rates offered to the Company for similar debt instruments of comparable maturities. As of March 31, 2024 and 2023, the carrying value of the Company’s
long-term debt approximated fair value, with the exception of the Senior Notes, which had an aggregate fair value of approximately $ 120.9
million and $ 125.9 million, respectively. The fair value of the Company’s long-term debt is categorized as Level 2 within the fair value
hierarchy. Refer to Note 4 for the definition of a Level 2 fair value measurement.
Note 18: Pension and Employee Benefit Plans
Defined contribution employee benefit plans
The Company maintains a domestic 401(k) plan that allows employees to contribute a portion of their salary to help them save for retirement. The
Company currently matches employee contributions up to 4.5 percent of their compensation. The Company’s expense for defined contribution
employee benefit plans during fiscal 2024, 2023, and 2022 was $ 8.3 million, $ 6.9 million, and $ 6.4 million,
respectively.
In addition, the Company maintains non-qualified deferred compensation plans for eligible employees, and various non-U.S. subsidiaries have
government-required defined contribution plans in place, under which they contribute a percentage of employee earnings into accounts, consistent with local laws.
Statutory termination plans
Certain non-U.S. subsidiaries have statutory termination indemnity plans covering eligible employees. The benefits under these plans are based upon
years of service and final average compensation levels or a monthly retirement benefit amount. These programs are substantially unfunded in accordance with local laws.
Pension plans
The Company maintains non-contributory defined benefit pension plans that cover eligible domestic employees. These plans are closed to new
participants. The primary domestic plans cover most domestic employees hired on or before December 31, 2003 and provide benefits based primarily upon years of service and average compensation for salaried and some hourly employees. Benefits for
other hourly employees are based upon a monthly retirement benefit amount. Currently, the Company’s domestic pension plans do not include increases in annual earnings or future service in calculating the average annual earnings and years of credited
service under the pension plan benefit formula. Certain non-U.S. subsidiaries of the Company also have legacy defined benefit plans which cover a smaller number of active employees and are substantially unfunded. The primary non-U.S. plans are
maintained in Germany and Italy and are closed to new participants. The Company previously maintained certain pension plans in Germany and Austria that conveyed to the buyers of the Germany automotive businesses and Austrian air-cooled automotive
business during fiscal 2024 and 2022, respectively; see Note 2 for additional information.
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
In connection with funding relief provisions within the American Rescue Plan Act of 2021, the
Company made $ 0.9 million cash contributions to its U.S. pension plans during fiscal 2024 and no cash contributions in fiscal 2023. The Company contributed $ 3.5
million to its U.S. pension plans during fiscal 2022. In addition, the Company contributed $ 1.8 million, $ 1.5 million, and $ 1.5 million to its non-U.S. pension plans during fiscal 2024, 2023, and 2022, respectively. These contributions are
reported within the change in other liabilities in the consolidated statements of cash flows.
Postretirement plans
The Company provides selected healthcare and life insurance benefits for eligible retired domestic employees. The Company periodically amends these
unfunded plans to change the contribution rate of retirees and the amounts and forms of coverage. An annual limit on the Company’s cost is defined for the majority of these plans. The Company’s net periodic income for its postretirement plans in
fiscal 2024 was $ 0.4 million. The net periodic income for its postretirement plans in each fiscal 2023 and 2022 was $ 0.3 million.
Measurement date
The Company uses March 31 as the measurement date for its pension and postretirement plans.
Changes in benefit obligations and plan assets, as well as the funded status of the Company’s global pension plans, were as follows:
Years ended March 31,
2024
2023
Change in benefit obligation:
Benefit obligation at beginning of year
$
194.9
$
228.6
Service cost
0.2
0.2
Interest cost
9.3
8.1
Actuarial gain
( 2.7
)
( 25.8
)
Benefits paid
( 14.9
)
( 16.1
)
Disposition of Germany automotive businesses
( 7.4
)
-
Effect of exchange rate changes
( 0.1
)
( 0.1
)
Benefit obligation at end of year
$
179.3
$
194.9
Change in plan assets:
Fair value of plan assets at beginning of year
$
153.3
$
179.9
Actual return on plan assets
9.4
( 12.0
)
Benefits paid
( 14.9
)
( 16.1
)
Employer contributions
2.7
1.5
Fair value of plan assets at end of year
$
150.5
$
153.3
Funded status at end of year
$
( 28.8
)
$
( 41.6
)
Amounts recognized in the consolidated balance sheets:
Current liability
$
( 1.1
)
$
( 1.4
)
Noncurrent liability
( 27.7
)
( 40.2
)
$
( 28.8
)
$
( 41.6
)
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
As of March 31, 2024, 2023, and 2022, the benefit obligation associated with the Company’s non-U.S. pension plans totaled $ 13.0 million, $ 21.2 million, and $ 26.5 million, respectively. The $ 8.2
million decrease in the benefit obligation associated with non-U.S. pension plans as of March 31, 2024, compared with the prior year, was primarily due to the sale of the Germany automotive businesses and employer contributions for benefits paid to
plan participants which decreased the obligation by $ 7.4 million and $ 1.8 million, respectively, and to a lesser extent, the impact of foreign currency exchange rates. The decreases were partially offset by service and interest cost and net actuarial losses
during the year totaling $ 0.8 million and $ 0.5
million, respectively. In fiscal 2023, the $ 5.3 million decrease was primarily due to net actuarial gains during the year from an
increase in discount rates and employer contributions for benefits paid to plan participants which decreased the obligation by $ 4.4
million and $ 1.5 million, respectively, and to a lesser extent, the impact of foreign currency exchange rates. The decreases were
partially offset by service and interest cost totaling $ 0.7 million.
The accumulated benefit obligation for pension plans was $ 178.6 million and $ 194.4 million as of March 31, 2024 and 2023, respectively. The net actuarial loss
related to the pension plans recognized in accumulated other comprehensive loss was $ 117.9
million and $ 123.5 million as of March 31, 2024 and 2023, respectively.
Costs for the Company’s global pension plans included the following components:
Years ended March 31,
2024
2023
2022
Components of net periodic benefit cost:
Service cost
$
0.2
$
0.2
$
0.3
Interest cost
9.3
8.1
7.3
Expected return on plan assets
( 10.3
)
( 11.6
)
( 12.9
)
Amortization of net actuarial loss
4.7
5.7
6.9
Settlements (a)
( 0.1
)
-
-
Net periodic benefit cost
$
3.8
$
2.4
$
1.6
Other changes in benefit obligation recognized in other comprehensive income:
Net actuarial gain
$
1.7
$
2.1
$
11.4
Amortization of net actuarial loss (b)
3.9
5.7
8.6
Total recognized in other comprehensive income
$
5.6
$
7.8
$
20.0
(a)
The settlement charges
resulted from activity associated with the Company’s non-U.S. pension plans.
(b)
The fiscal 2024 amount includes $ 0.6 million of net actuarial
g ains written-off as a result of the sale of the Germany automotive businesses.
The fiscal 2022 amount includes
$ 1.7 million of net actuarial losses written-off as a result of the sale of the Austrian ai r-cooled automotive business. See Note 2 for additional information on the sale of these businesses.
The Company amortized $ 3.9 million, $ 5.7 million, and $ 8.6 million of net actuarial loss in
fiscal 2024, 2023, and 2022, respectively. Exclusive of the $ 0.6 million and $ 1.7 million written-off in fiscal 2024 and 2022 upon the sale of the Germany automotive businesses and Austrian air-cooled automotive business, respectively,
referenced above, less than $ 1.0 million
of the amortization was attributable to the Company’s non-U.S. pension plans in each of these years.
The Company used a discount rate of 5.4 %
and 5.2 % as of March 31, 2024 and 2023, respectively, for determining its benefit obligations under its U.S. pension plans. The Company
used a weighted-average discount rate of 3.7 % and 3.8 % as of March 31, 2024 and 2023, respectively, for determining its benefit obligations under its non-U.S. pension plans. The Company used a discount rate of 5.2 %, 3.9 %, and 3.2 % to determine its costs under its U.S. pension plans for fiscal 2024, 2023, and 2022, respectively. The Company used a weighted-average discount rate
of 4.0 %, 2.9 %, and 1.6 % to determine its costs under its non-U.S. pension plans for fiscal 2024, 2023, and 2022, respectively. The Company determined the discount rates
used for its U.S. pension plans by modeling a portfolio of high-quality corporate bonds, with appropriate consideration given to expected defined benefit payment terms and duration of the respective pension obligations. The Company used a similar
process to determine the discount rate for its non-U.S. pension obligations.
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Plan assets in the Company’s
U.S. pension plans comprise 100 percent of the Company’s world-wide pension plan assets. The Company establishes its pension plan
investment guidelines considering market conditions, its tolerance for risk, and cash requirements for benefit payments. The Company measures and monitors investment risk on an ongoing basis through quarterly investment portfolio reviews, annual
liability measurements and periodic asset/liability studies. For fiscal 2024, in light of the highly funded status of the U.S. pension plans, the Company revised its target allocation to increase weighting towards debt securities with durations
matched to plan liabilities. The
Company’s U.S. pension plan weighted-average asset allocations at the measurement dates of March 31, 2024 and 2023 were as follows:
March 31, 2024
March 31, 2023
Target allocation
Plan assets
Target allocation
Plan assets
Debt securities
80
%
72
%
18
%
15
%
Equity securities
19
%
18
%
76
%
76
%
Cash and cash equivalents
1
%
5
%
1
%
1
%
Real estate investments
-
5
%
5
%
8
%
100
%
100
%
100
%
100
%
Due to market conditions and other factors, including timing of benefit payments and other transactions, actual asset allocation may vary from the
target allocation outlined above. The Company periodically rebalances the assets to the target allocations. During fiscal 2024, 2023 and 2022, the Company’s pension plans did not directly own shares of Modine common stock.
The expected rate of return on U.S. plan
assets is based upon historical return experience and forward-looking return expectations for major asset class categories. For fiscal 2024, 2023, and 2022 U.S. pension plan expense, the expected rate of return on plan assets was 6.5 percent, 7.0 percent, and 7.5 percent, respectively. For fiscal 2025 U.S. pension plan expense, the Company has assumed a rate of return on plan assets of 5.5 percent.
The Company’s funding policy for its U.S. pension plans is to contribute annually, at a minimum, the amount necessary on an actuarial basis to provide
for benefits in accordance with applicable laws and regulations. The Company expects to contribute approximately $ 8.0 million to its U.S.
plans during fiscal 2025.
Estimated pension benefit payments for the Company’s global pension plans during the next ten fiscal years are as follows:
Fiscal Year
Estimated Pension
Benefit Payments
2025
$
15.1
2026
15.2
2027
15.1
2028
15.0
2029
14.8
2030 - 2034
68.9
Note 19: Derivative Instruments
The Company uses derivative financial instruments from time to time as a tool to manage certain financial risks. The Company’s policy prohibits the use of leveraged
derivatives. Accounting for derivatives and hedging activities requires derivative financial instruments to be measured at fair value and recognized as assets or liabilities in the consolidated balance sheets. All of the Company’s derivative financial instruments are categorized within Level 2 of the fair value hierarchy. Refer to Note 4 for the definition of a Level 2 fair value measurement. Accounting for
the gain or loss resulting from the change in fair value of the derivative financial instruments depends on whether it has been designated as a hedge, and, if so, on the nature of the hedging activity.
Commodity derivatives
The Company periodically enters into over-the-counter forward contracts related to forecasted purchases of aluminum and copper. The Company’s strategy
in entering into these contracts is to reduce its exposure to changing market prices of these commodities. The Company designates certain commodity forward contracts as cash flow hedges for accounting purposes. Accordingly, for these designated
hedges, the Company records unrealized gains and losses related to the change in the fair value of the contracts in accumulated other comprehensive income (loss) (“AOCI”) within shareholders’ equity and subsequently recognizes the gains and losses
within cost of sales as the underlying inventory is sold.
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Foreign exchange contracts
The Company’s foreign exchange risk management strategy uses derivative financial instruments to mitigate foreign currency exchange risk. The Company
periodically enters into foreign currency forward contracts to hedge specific foreign currency-denominated assets and liabilities as well as forecasted transactions. The Company designates certain hedges of forecasted transactions as cash flow
hedges for accounting purposes. Accordingly, for these designated hedges, the Company records unrealized gains and losses related to the change in the fair value of the contracts in AOCI within shareholders’ equity and subsequently recognizes the
gains and losses as a component of earnings at the same time and in the same financial statement line that the underlying transactions impact earnings. The Company has not designated forward contracts related to foreign currency-denominated assets
and liabilities as hedges. Accordingly, for these non-designated contracts, the Company records unrealized gains and losses related to changes in fair value in other income and expense. Gains and losses on these foreign currency contracts are
offset by foreign currency gains and losses associated with the related assets and liabilities.
The fair value of the Company’s derivative financial instruments recorded in the consolidated balance sheets were as follows:
_
Balance Sheet Location
March 31, 2024
March 31, 2023
Derivatives designated as hedges:
Foreign exchange contracts
Other current assets
$
0.1
$
1.3
Commodity derivatives
Other current assets
-
-
Derivatives not designated as hedges:
Foreign exchange contracts
Other current liabilities
$
0.3
$
0.2
The amounts associated with derivative financial instruments that the Company designated for hedge accounting during the years ended March 31 were as
follows:
Gain (loss) recognized in
other comprehensive income
Statement
of Operations
Gain (loss) reclassified
from AOCI
2024
2023
2022
Location
2024
2023
2022
Commodity derivatives
$
( 0.3
)
$
( 1.6
)
$
1.1
Cost of sales
$
( 0.3
)
$
( 1.0
)
$
1.2
Foreign exchange contracts
0.3
1.6
-
Net sales
1.3
0.6
-
Foreign exchange contracts
0.1
0.4
0.6
Cost of sales
-
0.7
0.4
Total gains
$
0.1
$
0.4
$
1.7
$
1.0
$
0.3
$
1.6
The amounts associated with derivative financial instruments that the Company did not designate for hedge accounting were as follows:
_
Years ended March 31,
_
Statement of Operations Location
2024
2023
2022
Foreign exchange contracts
Net sales
$
( 0.9
)
$
( 0.5
)
$
( 0.6
)
Foreign exchange contracts
Other income (expense) - net
( 1.0
)
( 2.6
)
( 0.8
)
Total losses
$
( 1.9
)
$
( 3.1
)
$
( 1.4
)
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 20: Risks, Uncertainties, Contingencies and Litigation
Credit risk
The Company invests excess
cash primarily in investment quality, short-term liquid debt instruments. Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of accounts receivable. The Company sells a broad
range of products that provide thermal solutions to customers operating throughout the world. In fiscal 2024, 2023, and 2022, no
customers accounted for more than ten percent of the Company’s total sales. Sales to the Company’s top ten customers were 40 percent, 39 percent, and 39 percent of total sales
in fiscal 2024, 2023, and 2022, respectively. At March 31, 2024 and 2023, 35 percent and 37 percent, respectively, of the Company’s trade accounts receivable were due from the Company’s top ten customers. These customers operate primarily in the commercial vehicle, off-highway, automotive and light vehicle, data center cooling, and commercial air conditioning and refrigeration
markets. The Company generally does not require collateral or advanced payments from its customers. The Company has not experienced significant credit losses to customers in the markets served.
The Company manages credit risk through its focus on the following:
•
Cash and investments – reviewing cash deposits and short-term investments to ensure banks have credit ratings acceptable to the Company and
that short-term investments are maintained in secured or guaranteed instruments;
•
Accounts receivable – performing periodic customer credit evaluations and actively monitoring their financial condition and applicable business
news;
•
Pension assets – ensuring that investments within pension plans provide appropriate diversification, monitoring of investment teams, ensuring
that portfolio managers adhere to the Company’s investment policies and directives, and ensuring that exposure to high risk investments is limited; and
•
Insurance – ensuring that insurance providers maintain financial ratings that are acceptable to the Company.
Counterparty risk
The Company manages counterparty risk through its focus on the following:
•
Customers – performing thorough reviews of customer credit reports and accounts receivable aging reports by internal credit committees;
•
Suppliers – maintaining a supplier risk management program and utilizing industry sources to identify and mitigate high risk situations; and
•
Derivatives – ensuring that counterparties to derivative instruments maintain credit ratings that are acceptable to the Company.
Environmental
The Company has recorded
environmental monitoring and remediation accruals related to manufacturing facilities in the U.S., one of which the Company currently owns and operates, and at its former manufacturing facility in the Netherlands. These accruals primarily relate to
soil and groundwater contamination at facilities where past operations followed practices and procedures that were considered acceptable under then-existing regulations, or where the Company is a successor to the obligations of prior owners, and
current laws and regulations require investigative and/or remedial work to ensure sufficient environmental compliance. In instances where a range of loss can be reasonably estimated for a probable environmental liability, but no amount within the
range is a better estimate than any other amount, the Company accrues the minimum of the range. The Company’s accruals for environmental
matters totaled $ 17.6 million at both March 31, 2024 and 2023. During each fiscal 2024 and 2023, the Company increased its remediation
accrual related to a former manufacturing facility in the U.S. by $ 1.0 million. As additional information becomes available regarding
environmental matters, the Company will re-assess the liabilities and revise the estimated accruals, if necessary. While it is possible that the ultimate environmental remediation costs may be in excess of amounts accrued, the Company believes, based upon currently available
information, that the ultimate outcome of these matters, individually and in the aggregate, will not have a material adverse effect on its financial position. However, these matters are subject to inherent uncertainties, and unfavorable outcomes
could occur, including significant monetary damages.
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Other litigation
In the normal course of business, the Company and its subsidiaries are named as defendants in various lawsuits and enforcement proceedings by private
parties, governmental agencies and/or others in which claims are asserted against Modine. The Company believes that any additional loss in excess of amounts already accrued would not have a material effect on the Company’s consolidated balance
sheet, results of operations, and cash flows. In addition, management expects that the liabilities which may ultimately result from such lawsuits or proceedings, if any, would not have a material adverse effect on the Company’s financial position.
Note 21: Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss were as follows:
Foreign
Currency
Translation
Defined
Benefit Plans
Cash Flow
Hedges
Total
Balance, March 31, 2023
$
( 57.5
)
$
( 104.4
)
$
0.8
$
( 161.1
)
Other comprehensive income (loss) before reclassifications
( 5.3
)
1.8
0.1
( 3.4
)
Reclassifications:
Amortization of unrecognized net loss (a)
-
4.1
-
4.1
Unrecognized net pension gain in disposed businesses (b)
-
( 0.6
)
-
( 0.6
)
Realized gains - net (c)
-
-
( 1.0
)
( 1.0
)
Income taxes
-
( 1.6
)
0.2
( 1.4
)
Total other comprehensive income (loss)
( 5.3
)
3.7
( 0.7
)
( 2.3
)
Balance, March 31, 2024
$
( 62.8
)
$
( 100.7
)
$
0.1
$
( 163.4
)
Foreign
Currency
Translation
Defined
Benefit Plans
Cash Flow
Hedges
Total
Balance, March 31, 2022
$
( 39.1
)
$
( 111.1
)
$
0.7
$
( 149.5
)
Other comprehensive income (loss) before reclassifications
( 18.4
)
2.5
0.4
( 15.5
)
Reclassifications:
Amortization of unrecognized net loss (a)
-
5.3
-
5.3
Realized gains - net (c)
-
-
( 0.3
)
( 0.3
)
Income taxes
-
( 1.1
)
-
( 1.1
)
Total other comprehensive income (loss)
( 18.4
)
6.7
0.1
( 11.6
)
Balance, March 31, 2023
$
( 57.5
)
$
( 104.4
)
$
0.8
$
( 161.1
)
(a)
Amounts
are included in the calculation of net periodic benefit cost for the Company’s defined benefit plans, which include pension and other postretirement plans. See Note 18 for additional information about the Company’s pension plans.
(b)
As a result of the sale of three automotive businesses based in Germany, the Company wrote -off $ 0.6 million of
net actuarial gains related to the disposal group’s pension plan. See Note 2 for additional information regarding the sale.
(c)
Amounts represent net gains and losses associated with cash flow hedges that were
reclassified to net earnings. See Note 19 for additional information regarding derivative instruments.
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Note 22: Segment and Geographic Information
The Company’s Climate
Solutions segment provides heat transfer products, heating, ventilating, air conditioning and refrigeration products and data center cooling solutions to global customers. The Company’s Performance Technologies segment designs and manufactures
air-and liquid-cooled technology for vehicular, stationary power, and industrial applications. In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive
customers and coatings products and application services.
Each operating segment is managed by a president and has separate financial results reviewed by the Company’s chief operating decision maker. Financial results, including net sales, gross profit, gross
margin and operating income, together with other considerations, are used by the chief operating decision maker in evaluating the performance of each segment and in making decisions on the allocation of resources between the Company’s operating
segments.
Effective April 1, 2022, the Company began
managing its operations under two operating segments, Climate Solutions and Performance Technologies. The Climate Solutions segment
includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings. The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and
Automotive segments and the CIS Coatings business. The segment realignment had no impact on the Company’s consolidated financial position, results of operations, and cash flows. Segment financial information for fiscal 2022 has been recast to
conform to the current presentation.
Effective April 1, 2024, the Company moved its 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. The Company expects that unifying these compl e mentary businesses will allow for it 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, the Company will report the financial results of the Coatings business within the Climate Solutions segment.
The following is a summary
of net sales, gross profit, and operating income by segment. See Note 3 for additional information regarding net sales by product groups within each segment.
Year ended March 31, 2024
External Sales
Inter-segment
Sales
Total
Net sales:
Climate Solutions
$
1,054.6
$
-
$
1,054.6
Performance Technologies
1,353.2
24.8
1,378.0
Segment total
2,407.8
24.8
2,432.6
Corporate and eliminations
-
( 24.8
)
( 24.8
)
Net sales
$
2,407.8
$
-
$
2,407.8
Year ended March 31, 2023
External Sales
Inter-segment
Sales
Total
Net sales:
Climate Solutions
$
1,011.5
$
0.4
$
1,011.9
Performance Technologies
1,286.4
29.8
1,316.2
Segment total
2,297.9
30.2
2,328.1
Corporate and eliminations
-
( 30.2
)
( 30.2
)
Net sales
$
2,297.9
$
-
$
2,297.9
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
Year ended March 31, 2022
External Sales
Inter-segment
Sales
Total
Net sales:
Climate Solutions
$
910.1
$
0.4
$
910.5
Performance Technologies
1,140.0
32.4
1,172.4
Segment total
2,050.1
32.8
2,082.9
Corporate and eliminations
-
( 32.8
)
( 32.8
)
Net sales
$
2,050.1
$
-
$
2,050.1
Inter-segment sales are accounted for based upon an established markup over production costs. Net sales for Corporate and eliminations primarily
represent the elimination of inter-segment sales.
Years ended March 31,
2024
2023
2022
Gross profit:
_ $’s
% of sales
_ $’s
% of sales
$’s
% of sales
Climate Solutions
$
275.4
26.1
%
$
223.6
22.1
%
$
166.3
18.3
%
Performance Technologies
251.1
18.2
%
166.1
12.6
%
142.2
12.1
%
Segment total
526.5
21.6
%
389.7
16.7
%
308.5
14.8
%
Corporate and eliminations
( 0.9
)
-
( 0.3
)
-
0.8
-
Gross profit
$
525.6
21.8
%
$
389.4
16.9
%
$
309.3
15.1
%
Years ended March 31,
Operating income:
2024
2023
2022
Climate Solutions
$
166.9
$
124.1
$
73.4
Performance Technologies
123.4
65.6
77.4
Segment total
290.3
189.7
150.8
Corporate and eliminations (a)
( 49.6
)
( 39.3
)
( 31.6
)
Operating income
$
240.7
$
150.4
$
119.2
(a)
The operating loss for Corporate includes certain research and development costs,
legal, finance and other general corporate and central services expenses, and other costs that are either not directly attributable to an operating segment or not considered when management evaluates segment performance.
The following is a summary of segment assets, comprised entirely of trade accounts receivable and inventories, and other assets:
March 31,
Assets:
2024
2023
Climate Solutions
$
400.6
$
334.8
Performance Technologies
380.2
388.1
Other (a)
1,070.7
843.0
Total assets
$
1,851.5
$
1,565.9
(a)
Represents cash and cash equivalents, other current assets, property plant and
equipment, intangible assets, goodwill, deferred income taxes, and other noncurrent assets for the Climate Solutions and Performance Technologies segments and Corporate.
86
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The following is a summary of capital expenditures and depreciation and amortization expense by segment:
Years ended March 31,
Capital expenditures:
2024
2023
2022
Climate Solutions (a)
$
50.6
$
24.2
$
9.9
Performance Technologies
36.4
25.2
29.2
Corporate
0.7
1.3
1.2
Total capital expenditures
$
87.7
$
50.7
$
40.3
(a)
In March 2024, the Company purchased a manufacturing
site in the U.K. for $ 13.4 million in order to expand its production capacity for data center cooling products.
Years ended March 31,
Depreciation and amortization expense:
2024
2023
2022
Climate Solutions
$
23.5
$
21.7
$
23.6
Performance Technologies
31.7
31.8
29.9
Corporate
0.9
1.0
1.3
Total depreciation and amortization expense
$
56.1
$
54.5
$
54.8
The following is a summary of net sales by geographic area, based upon the location of the selling unit:
Years ended March 31,
2024
2023
2022
United States
$
1,233.7
$
1,139.3
$
949.6
Italy
242.4
249.5
232.0
Hungary
224.7
210.7
185.2
China
144.2
151.6
166.0
United Kingdom
135.8
93.6
118.6
Other
427.0
453.2
398.7
Net sales
$
2,407.8
$
2,297.9
$
2,050.1
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MODINE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
The following is a summary of property, plant and equipment by geographic area:
March 31,
2024
2023
United States
$
117.5
$
96.4
Hungary
40.7
40.8
China
39.4
40.2
Mexico
35.2
34.0
Italy
33.8
32.8
Other
99.1
70.3
Total property, plant and equipment
$
365.7
$
314.5
88
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Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Modine Manufacturing Company:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Modine Manufacturing Company and subsidiaries (the Company) as of March 31, 2024 and March 31,
2023, the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for the years then ended, and the related notes and financial statement schedule II - Valuation and Qualifying Accounts (collectively,
the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2024 and March 31, 2023, and the results of its operations
and its cash flows for each of the years then ended, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal
control over financial reporting as of March 31, 2024, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated May 22, 2024
expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our
audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable
basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were
communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex
judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on
the critical audit matters or on the accounts or disclosures to which they relate.
Realizability of certain domestic deferred tax assets
As discussed in Notes 1 and 8 to the consolidated financial statements, the Company establishes a valuation allowance if it is more
likely than not that a deferred tax asset, or portion thereof, will not be realized. In making this assessment, the Company considers expectations of future taxable income and tax planning strategies. In addition, the Company considers the duration
of statutory carryforward periods and historical financial results. Valuation allowances as of March 31, 2024 were $63.0 million, a portion of which are related to certain domestic deferred tax assets.
We identified the evaluation of the realizability of certain domestic deferred tax assets, specifically certain federal carryforward
assets, as a critical audit matter. Subjective and challenging auditor judgment was required to: (i) evaluate the realizability of certain federal carryforward assets based on the projected future taxable income over the periods in which those
federal carryforward assets will be utilized and (ii) assess the application of tax laws to utilize the federal carryforward assets.
89
Table of Contents
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the
operating effectiveness of certain internal controls related to the Company’s evaluation of the realizability of the federal carryforward assets, including controls related to the projections of future taxable income and the application of tax laws
to utilize the federal carryforward assets. We evaluated the reasonableness of management’s projections of future taxable income, including positive and negative evidence used, by comparing the projections to:
•
recent financial profitability trends of the Company
•
industry data and economic trends, and
•
evidence obtained in other areas of the audit.
We assessed the Company’s ability to project future earnings based on comparisons of the Company’s previous annual projections to actual
results. We performed a sensitivity analysis over the amount and timing of future taxable income to assess the impact on utilization of the federal carryforward assets. We involved tax professionals with specialized skills and knowledge, who assisted
in assessing the Company’s application of tax laws to utilize the federal carryforward assets and evaluating the recognition and realizability of the federal carryforward assets.
Acquisition date fair value of certain customer relationship intangible assets
As discussed in Notes 1, 2 and 13 to the consolidated financial statements, on March 1, 2024, the Company acquired all of the issued and
outstanding shares in the capital of Scott Springfield Mfg. Inc. for consideration totaling $184.1 million. The Company accounts for the acquired business using the acquisition method of accounting by recording assets acquired and liabilities assumed
at their respective fair values. As part of the transaction, the Company acquired customer relationship intangible assets with an acquisition date fair value of $66.9 million, which was determined using the multi-period excess earnings method.
We identified the assessment of the acquisition date fair value of certain customer relationship intangible assets as a critical audit
matter. Subjective auditor judgment was required to evaluate certain assumptions used to determine the acquisition date fair value, specifically, future revenue growth rates, customer attrition rate, and discount rate. Changes in these assumptions
could have an impact on the forecasted future cash flows used in the multi-period excess earnings method and the resulting fair value of the customer relationship intangible assets.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the
operating effectiveness of certain internal controls related to the Company’s acquisition date valuation process over certain customer relationship intangible assets. This included certain controls over the development of the assumptions listed
above. We evaluated future revenue growth rates by comparing them to industry reports. We evaluated the customer attrition rate by comparing to historical attrition rates of similar existing customers. We involved valuation professionals with
specialized skills and knowledge who assisted in evaluating:
•
the customer attrition rate by comparing the economic life of the customer relationship to prior acquisitions
•
the discount rate by comparing it against a discount rate range that was independently developed using publicly available data for comparable entities
/s/ KPMG LLP
We have served as the Company’s auditor since 2022.
Milwaukee, Wisconsin
May 22, 2024
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Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Modine Manufacturing Company:
Opinion on Internal Control Over Financial Reporting
We have audited Modine Manufacturing Company and subsidiaries’ (the Company) internal control over financial reporting as of March 31, 2024, based on criteria
established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, because of the effect of the material weakness, described below, on the achievement of the
objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of March 31, 2024, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance
sheets of the Company as of March 31, 2024 and 2023, the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for the years then ended, and the related notes and financial statement schedule II -
Valuation and Qualifying Accounts (collectively, the consolidated financial statements), and our report dated May 22, 2024 expressed an unqualified opinion on those consolidated financial statements.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness was identified and included in management’s assessment. The
Company had ineffective information technology (“IT”) general controls (“ITGC’s”) in Europe related to systems supporting the Company’s accounting and financial reporting processes. Specifically, the Company did not appropriately restrict access to
certain systems. The material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the March 31, 2024 consolidated financial statements, and this report does not affect our report on those
consolidated financial statements.
The Company acquired Scott Springfield Mfg. Inc. during 2024, and management excluded from its assessment of the effectiveness of the Company’s internal
control over financial reporting as of March 31, 2024, Scott Springfield Mfg.’s internal control over financial reporting associated with total assets of $228 million and total net sales of $8 million included in the consolidated financial statements
of the Company as of and for the year ended March 31, 2024. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of Scott Springfield Mfg.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying Management’s report on internal control over financial reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on
our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
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Table of Contents
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Milwaukee, Wisconsin
May 22, 2024
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Modine Manufacturing
Company
Opinion on the Financial Statements
We have audited the consolidated statement of operations, comprehensive income, cash flows and shareholders’ equity of Modine Manufacturing Company and its
subsidiaries (the “Company”) for the year ended March 31, 2022, including the related notes and schedule of valuation and qualifying accounts for the year ended March 31, 2022 listed in the index appearing under Item 15(a)(2) (collectively referred
to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the results of operations and cash flows of the Company for the year ended March 31, 2022 in conformity
with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance
with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud,
and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
May 26, 2022, except for the change in composition of reportable segments
discussed in Note 22 to the consolidated financial statements, as to which the date is May 25, 2023
We served as the Company’s auditor from 1935 to 2022.
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ITEM 9 .
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE .
Not Applicable