What changed in this filing

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Item 1. Financial Statements

2020-08-05 compared with 2020-02-05 · 185 added, 355 removed, 331 unchanged (62% of the section changed)

2 unchanged sentences

CONSOLIDATED STATEMENTS OF OPERATIONS

For the three and nine months ended December 31, 2019 and 2018

For the three months ended June 30, 2020 and 2019

(In millions, except per share amounts)

Three months ended

Nine months ended

Three months ended June 30,

Cost of sales

1 unchanged sentence

Restructuring expenses

Impairment charge

(Gain) loss on sale of assets

Operating income

Operating (loss) income

Interest expense

Other income (expense) – net

Earnings before income taxes

(Provision) benefit for income taxes

Net loss (earnings) attributable to noncontrolling interest

Net earnings attributable to Modine

Net earnings per share attributable to Modine shareholders:

Other expense – net

(Loss) earnings before income taxes

Benefit (provision) for income taxes

Net (loss) earnings

Net earnings attributable to noncontrolling interest

Ne t (loss) earnings attributable to Modine

Net (loss) earnings per share attributable to Modine shareholders:

Weighted-average shares outstanding:

2 unchanged sentences

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the three and nine months ended December 31, 2019 and 2018

For the three months ended June 30, 2020 and 2019

(In millions)

Three months ended

Nine months ended

Three months ended June 30,

Net (loss) earnings

Other comprehensive income (loss):

2 unchanged sentences

Cash flow hedges, net of income taxes of $ 0.3 and ($ 0.3 ) million

Total other comprehensive income (loss)

Comprehensive income

Comprehensive (income) loss attributable to noncontrolling interest

Comprehensive income attributable to Modine

Total other comprehensive income

Comprehensive income (loss)

Comprehensive income attributable to noncontrolling interest

Comprehensive income (loss) attributable to Modine

The notes to condensed consolidated financial statements are an integral part of these statements.

1 unchanged sentence

CONSOLIDATED BALANCE SHEETS

December 31, 2019 and March 31, 2019

June 30, 2020 and March 31, 2020

(In millions, except per share amounts)

December 31, 2019

June 30, 2020

March 31, 2020

32 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the nine months ended December 31, 2019 and 2018

For the three months ended June 30, 2020 and 2019

(In millions)

Nine months ended December 31,

Three months ended June 30,

Cash flows from operating activities:

Adjustments to reconcile net earnings to net cash provided by operating activities:

Net (loss) earnings

Adjustments to reconcile net (loss) earnings to net cash provided by operating activities:

Depreciation and amortization

(Gain) loss on sale of assets

Impairment charge

Stock-based compensation expense

8 unchanged sentences

Proceeds from disposition of assets

Proceeds from sale of investment in affiliate

Net cash used for investing activities

2 unchanged sentences

Repayments of debt

Dividend paid to noncontrolling interest

Purchases of treasury stock under share repurchase program

Borrowings on bank overdraft facilities – net

Financing fees paid

Net cash used for financing activities

Purchases of treasury stock under share repurchase program

Dividend paid to noncontrolling interest

Net cash provided by financing activities

Effect of exchange rate changes on cash

Net decrease in cash, cash equivalents and restricted cash

Net increase (decrease) in cash, cash equivalents and restricted cash

Cash, cash equivalents and restricted cash – beginning of period

3 unchanged sentences

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For the three and nine months ended December 31, 2019 and 2018

For the three months ended June 30, 2020 and 2019

(In millions)

_________________

Accumulated other

2 unchanged sentences

Balance, March 31, 2020

Net earnings attributable to Modine

Other comprehensive income (loss)

Net loss attributable to Modine

Other comprehensive income

Stock options and awards

1 unchanged sentence

Stock-based compensation expense

Dividend paid to noncontrolling interest

Net earnings attributable to noncontrolling interest

Balance, June 30, 2020

Net loss attributable to Modine

Other comprehensive loss

Stock-based compensation expense

Net loss attributable to noncontrolling interest

Balance, September 30, 2019

Net earnings attributable to Modine

Other comprehensive income

Stock-based compensation expense

Net loss attributable to noncontrolling interest

Balance, December 31, 2019

Accumulated other

2 unchanged sentences

Balance, March 31, 2019

Adoption of new accounting guidance (Note 1)

Net earnings attributable to Modine

Other comprehensive loss

Other comprehensive income (loss)

Stock options and awards

4 unchanged sentences

Balance, June 30, 2019

Net earnings attributable to Modine

Other comprehensive loss

Stock options and awards

Stock-based compensation expense

Net earnings attributable to noncontrolling interest

Balance, September 30, 2018

Net earnings attributable to Modine

Other comprehensive loss

Stock options and awards

Purchase of treasury stock

Stock-based compensation expense

Net earnings attributable to noncontrolling interest

Balance, December 31, 2018

_________________

The notes to condensed consolidated financial statements are an integral part of these statements.

2 unchanged sentences

(In millions, except per share amounts)

The accompanying condensed consolidated financial statements were prepared in conformity with generally accepted accounting principles (“GAAP”) in the United States applied on a basis consistent with those principles used in the preparation of the annual consolidated financial statements of Modine Manufacturing Company (“Modine” or the “Company”) for the fiscal year ended March 31, 2019, except in regard to the new accounting guidance adopted, as described below.

The accompanying condensed consolidated financial statements of Modine Manufacturing Company (“Modine” or the “Company”) were prepared in conformity with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.

Accordingly, they do not include all of the information and footnotes necessary for a comprehensive presentation of financial position, results of operations and cash flows required by GAAP for complete financial statements.

The financial statements include all normal recurring adjustments that are, in the opinion of management, necessary for a fair statement of results for the interim periods.

Results for the first nine months of fiscal 2020 are not necessarily indicative of the results to be expected for the full year.

Results for the first three months of fiscal 2021 are not necessarily indicative of the results to be expected for the full year.

These financial statements should be read in conjunction with the consolidated financial statements and related notes in Modine’s Annual Report on Form 10-K for the year ended March 31, 2020.

Sale of facility in Germany

During the third quarter of fiscal 2020, the Company completed the sale of a previously-closed manufacturing facility in Germany for a selling price of $ 6.0 million.

As a result of this transaction, the Company recorded a gain of $ 0.8 million within the Vehicular Thermal Solutions segment.

The Company reported this gain within the gain on sale of assets line on the consolidated statements of operations.

Sale of Nikkei Heat Exchanger Company, Ltd.

During the second quarter of fiscal 2020, the Company completed the sale of its 50 percent ownership interest in NEX for a selling price of $ 3.8 million .

Prior to the sale, the Company accounted for its investment in this non-consolidated affiliate using the equity method.

As a result of this sale, the Company recorded a gain of $ 0.1 million , which included the write-off of accumulated foreign currency translation gains of $ 0.6 million , within other income and expense on the consolidated statements of operations.

Sale of AIAC Air Conditioning South Africa (Pty) Ltd.

During the second quarter of fiscal 2019, the Company completed the sale of its AIAC Air Conditioning South Africa (Pty) Ltd.

business, which was reported within the Building HVAC Systems segment, for a selling price of $ 0.5 million .

As a result of this transaction, the Company recorded a loss of $ 1.7 million , which included the write-off of accumulated foreign currency translation losses of $ 0.8 million .

The Company reported this loss within the loss on sale of assets line on the consolidated statements of operations.

Annual net sales attributable to this disposed business were less than $ 2.0 million .

New Accounting Guidance Adopted in Fiscal 2020

In February 2016, the FASB issued new comprehensive lease accounting guidance that supersedes existing lease accounting guidance and requires balance sheet recognition for most leases.

The Company adopted this guidance effective April 1, 2019 using a modified-retrospective transition method, under which it elected not to adjust comparative periods.

The Company elected the package of practical expedients permitted under the new guidance, and, as a result, the Company did not reassess the classification of existing leases or initial direct costs thereof, or whether existing contracts contain leases.

In addition, the Company elected accounting policies to not record short-term leases on the balance sheet and to not separate lease and non-lease components.

The Company did not elect the hindsight practical expedient.

MODINE MANUFACTURING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In millions, except per share amounts)

The Company assessed its global lease portfolio and implemented a new lease accounting software solution and new processes and controls to account for leases in accordance with the new guidance.

The Company’s most significant leases represent leases of real estate, such as manufacturing facilities, warehouses, and office buildings.

The Company also leases certain manufacturing and IT equipment and vehicles.

Upon adoption of this new guidance on April 1, 2019, the Company recognized right-of-use assets for operating leases totaling $ 61.3 million and corresponding current and noncurrent operating lease liabilities of $ 12.4 million and $ 48.9 million, respectively.

In addition, the Company assessed two existing build-to-suit arrangements, for which it had recorded property, plant and equipment and long-term debt on its consolidated balance sheet as of March 31, 2019.

The Company determined these arrangements represent operating leases under the new accounting guidance.

As a result, the Company derecognized the previously-recorded balances and recorded $ 5.2 million of operating lease right-of-use assets and corresponding lease liabilities.

As a result of adopting the new guidance, there was not a significant impact on the Company’s accounting for its previously-recorded capital leases, which are now classified as finance leases under the new guidance.

In addition, there was no impact to retained earnings.

Also, the adoption did not have a material impact on the Company’s consolidated statement of operations or consolidated statement of cash flows.

See Note 15 for additional information regarding the Company’s leases.

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

In February 2018, the FASB issued new guidance related to the accounting for certain stranded income tax effects in accumulated other comprehensive income (loss) resulting from tax reform legislation that was enacted in the U.S.

in December 2017.

This guidance provided companies the option to reclassify stranded income tax effects to retained earnings.

The Company adopted this guidance as of April 1, 2019 and chose not to reclassify stranded income tax effects;

therefore, the adoption of this guidance did not impact the Company’s consolidated financial statements.

New Accounting Guidance Adopted in Fiscal 2019

In March 2020, the World Health Organization declared the outbreak of the novel coronavirus, COVID-19, a pandemic.

See Note 17 for additional information regarding the risks and uncertainties to our business resulting from this global pandemic.

New Accounting Guidance

In June 2016, the Financial Accounting Standards Board issued new guidance related to the accounting for credit losses for certain financial assets, including trade accounts receivable and contract assets.

The new guidance modifies the credit loss model to measure and recognize credit losses based upon expected losses rather than incurred losses.

The Company adopted this guidance as of April 1, 2020.

The adoption did not have a material impact on the Company’s consolidated balance sheets, statements of operations or statements of cash flows.

Revenue Recognition

In May 2014, the FASB issued new guidance that outlines a comprehensive model for entities to use in accounting for revenue arising from contracts with customers.

The core principle of the new guidance is that companies are to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

The Company adopted this new guidance as of April 1, 2018, and, as a result, recorded an increase of $ 0.7 million to retained earnings.

Income Taxes:

Intra-Entity Transfers of Assets Other than Inventory

In October 2016, the FASB issued new guidance related to income tax accounting for intercompany asset transfers.

This new guidance requires companies to recognize the income tax effects of intercompany asset transfers other than inventory at the transaction date.

The income tax effects of these transfers were previously deferred.

The Company adopted this new guidance as of April 1, 2018, and, as a result, recorded a decrease to retained earnings of $ 8.3 million.

Disaggregation of Revenue

The table below presents revenue for each of the Company’s business segments, Commercial and Industrial Solutions (“CIS”), Building HVAC Systems (“BHVAC”), Heavy Duty Equipment (“HDE”) and Automotive.

Each segment’s revenue is disaggregated by primary end market, by geographic location and based upon the timing of revenue recognition, and includes inter-segment sales.

Effective April 1, 2020, the Company realigned its segment structure.

The segment revenue information presented in the table below for fiscal 2020 has been recast to conform to the fiscal 2021 presentation.

See Note 19 for additional information regarding the Company’s operating segments.

MODINE MANUFACTURING COMPANY

1 unchanged sentence

(In millions, except per share amounts)

Revenue Recognition

Disaggregation of Revenue

The table below presents revenue for each of the Company’s business segments, Vehicular Thermal Solutions (“VTS”), Commercial and Industrial Solutions (“CIS”) and Building HVAC Systems (“BHVAC”).

Each segment’s revenue is disaggregated by primary end market, by geographic location and based upon the timing of revenue recognition.

Three months ended December 31, 2019

Three months ended December 31, 2018

Three months ended June 30 , 2020

Three months ended June 30 , 2019

Primary end market:

Commercial vehicle

Commercial HVAC&R

1 unchanged sentence

Industrial cooling

Geographic location:

Timing of revenue recognition:

Products transferred at a point in time

Products transferred over time

Nine months ended December 31, 2019

Nine months ended December 31, 2018

Primary end market:

Commercial vehicle

Commercial HVAC&R

Data center cooling

Industrial cooling

Geographic location:

2 unchanged sentences

Products transferred over time

MODINE MANUFACTURING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In millions, except per share amounts)

Contract Balances

Contract assets and contract liabilities from contracts with customers were as follows:

December 31, 2019

June 30, 2020

March 31, 2020

2 unchanged sentences

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 $ 0.3 million decrease in contract assets during the first nine months of fiscal 2020 primarily resulted from a decrease in capitalized costs related to customer-owned tooling contracts, partially offset by an increase in contract assets for revenue recognized over time.

The $ 3.4 million decrease in contract assets during the first three months of fiscal 2021 primarily resulted from a decrease in contract assets for revenue recognized over time.

Contract liabilities, included within other current liabilities in the consolidated balance sheets, consist of payments received in advance of satisfying performance obligations under customer contracts, including contracts for customer-owned tooling.

The $ 1.7 million increase in contract liabilities during the first nine months of fiscal 2020 was primarily related to customer contracts for which payment had been received in advance of the Company’s satisfaction of performance obligations.

The $ 1.4 million increase in contract liabilities during the first three months of fiscal 2021 was primarily related to customer contracts for which payment was received in advance of the Company’s satisfaction of performance obligations.

Fair Value Measurements

6 unchanged sentences

Level 3 – Model-derived valuations in which one or more significant inputs are not observable.

MODINE MANUFACTURING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In millions, except per share amounts)

When available, the Company uses quoted market prices to determine fair value and classifies such measurements as Level 1.

8 unchanged sentences

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.

The fair values of the investments and obligations for the Company’s deferred compensation plans each totaled $ 4.4 million and $ 6.0 million as of December 31, 2019 and March 31, 2019, respectively.

The $ 1.6 million decrease in the fair value of the investments and deferred compensation obligations from March 31, 2019 was primarily due to participant withdrawals during the first nine months of fiscal 2020.

The fair values of the investments and obligations for the Company’s deferred compensation plans each totaled $ 3.7 million and $ 3.8 million as of June 30 , 2020 and March 31, 2020, respectively.

The fair value of the Company’s long-term debt is disclosed in Note 16.

MODINE MANUFACTURING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In millions, except per share amounts)

Pension cost included the following components:

Three months ended

Nine months ended

Interest cost

2 unchanged sentences

Net periodic benefit cost

During the nine months ended December 31, 2019 and 2018, the Company contributed $ 2.6 million and $ 4.6 million, respectively, to its U.S.

During the three months ended June 30, 2019, the Company contributed $ 0.9 million to its U.S.

pension plans.

The Company has no t yet made contributions to its U.S.

pension plans during fiscal 2021, as permitted by the Coronavirus Aid, Relief and Economic Security Act.

The Company expects to contribute approximately $ 20.0 million to its U.S.

pension plans during fiscal 2021.

Stock-Based Compensation

2 unchanged sentences

The Company calculates compensation expense based upon the fair value of the instruments at the time of grant and subsequently recognizes expense ratably over the respective vesting periods of the stock-based awards.

The Company recognized stock-based compensation expense of $ 0.8 million and $ 1.6 million for the three months ended December 31, 2019 and 2018, respectively.

The Company recognized stock-based compensation expense of $ 5.2 million and $ 6.8 million for the nine months ended December 31, 2019 and 2018, respectively.

The performance component of awards granted under the Company’s long-term incentive plan during the first quarter of fiscal 2020 is based upon both a target three-year average cash flow return on invested capital and a target three-year average revenue growth at the end of the three-year performance period.

The Company recognized stock-based compensation expense of $ 0.7 million and $ 1.7 million for the three months ended June 30,2020 and 2019, respectively.

The Company typically grants stock-based awards to officers and other executives during the first quarter;

however, for fiscal 2021, it has deferred these grants until later in the fiscal year.

MODINE MANUFACTURING COMPANY

1 unchanged sentence

(In millions, except per share amounts)

The fair value of stock-based compensation awards granted during the nine months ended December 31, 2019 and 2018 were as follows:

Nine months ended December 31,

Stock options

Restricted stock awards

Performance stock awards

Unrestricted stock awards

The Company used the following assumptions in determining fair value for stock options:

Nine months ended December 31,

Expected life of awards in years

Risk-free interest rate

Expected volatility of the Company's stock

Expected dividend yield on the Company's stock

As of December 31, 2019, unrecognized compensation expense related to non-vested stock-based compensation awards, which will be amortized over the remaining service periods, was as follows:

As of June 30, 2020, unrecognized compensation expense related to non-vested stock-based compensation awards, which will be amortized over the remaining service periods, was as follows:

Weighted-Average

4 unchanged sentences

Performance stock awards

MODINE MANUFACTURING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In millions, except per share amounts)

Restructuring Activities

The Company’s restructuring actions during the first nine months of fiscal 2020 consisted primarily of targeted headcount reductions and plant consolidation activities.

The headcount reductions support the Company’s objective to reduce operational and selling, general and administrative (“SG&A”) cost structures.

Also, in connection with the merger of its North American coils business into the CIS segment, the Company is in the process of transferring product lines in Mexico from a VTS manufacturing facility to a CIS manufacturing facility.

In January 2020, the Company approved additional headcount reductions in Europe and North America within the VTS segment and, as a result, expects to record approximately $ 4.0 million of severance expenses during the fourth quarter of fiscal 2020.

During the first quarter of fiscal 2021, the Company recorded $ 1.7 million of severance expenses related to plant consolidation activities in China within the CIS segment.

The Company is currently transferring production from the manufacturing facility in Zhongshan, China to another CIS segment manufacturing facility in China, which it expects to complete in the second or third quarter of fiscal 2021.

The Company also implemented targeted headcount reductions during the first quarter of fiscal 2021, the most significant of which were in North America in the HDE and CIS segments.

The headcount reductions were in response to lower market demand and support the Company’s objective of reducing operational and selling, general and administrative (“SG&A”) cost structures.

In addition, the Company is in the process of transferring product lines to its CIS manufacturing facility in Mexico.

The Company’s restructuring actions during the first quarter of fiscal 2020 consisted primarily of targeted headcount reductions and plant consolidation activities.

The fiscal 2020 headcount reductions were primarily in Europe within the Automotive segment and in the Americas within the HDE segment.

Restructuring and repositioning expenses were as follows:

Three months ended

Nine months ended

Three months ended June 30,

Employee severance and related benefits

1 unchanged sentence

Other restructuring and repositioning expenses primarily consist of equipment transfers and plant consolidation costs.

MODINE MANUFACTURING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In millions, except per share amounts)

The Company accrues severance in accordance with its written plans, procedures, and relevant statutory requirements.

Changes in accrued severance were as follows:

Three months ended December 31,

Beginning balance

Effect of exchange rate changes

Ending balance

Nine months ended December 31,

Three months ended June 30,

Beginning balance

1 unchanged sentence

Ending balance

During the third quarter of fiscal 2019, the Company recorded a $ 0.4 million asset impairment charge within the CIS segment related to a previously-closed manufacturing facility in Austria.

MODINE MANUFACTURING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In millions, except per share amounts)

Other Income and Expense

1 unchanged sentence

Three months ended

Nine months ended

Equity in earnings of non-consolidated affiliate (a)

Interest income

Foreign currency transactions (b)

Net periodic benefit cost (c)

Foreign currency transactions (a)

Net periodic benefit cost (b)

Equity in earnings of non-consolidated affiliate (c)

Total other income (expense) - net

During the second quarter of fiscal 2020, the Company sold its ownership interest in NEX and, as a result, recorded a gain of $ 0.1 million.

This gain is included within the year-to-date amount reported in fiscal 2020.

See Note 1 for additional information.

Foreign currency transactions primarily consist of foreign currency transaction gains and losses on the re-measurement or settlement of foreign currency-denominated assets and liabilities, including intercompany loans and transactions denominated in a foreign currency, along with gains and losses on certain foreign currency exchange contracts.

Net periodic benefit cost for the Company’s pension and postretirement plans is exclusive of service cost.

The Company’s effective tax rate for the three months ended December 31, 2019 and 2018 was 63.0 percent and 32.0 percent , respectively.

The Company’s effective tax rate for the nine months ended December 31, 2019 and 2018 was 65.4 percent and ( 13.2 ) percent , respectively.

The effective tax rates for the fiscal 2020 periods were negatively impacted by a net income tax charge totaling $ 2.7 million recorded during the third quarter of fiscal 2020 as a result of legal entity restructuring completed in preparation of a potential sale of the automotive business.

The effective tax rates for the fiscal 2019 periods were impacted by adjustments related to the Company’s accounting for the Tax Cuts and Jobs Act (the “Tax Act”), which resulted in income tax charges totaling $ 3.1 million during the third quarter of fiscal 2019 and income tax benefits totaling $ 7.7 million during the first nine months of fiscal 2019.

In addition, the effective tax rates for the fiscal 2019 periods were favorably impacted by income tax benefits related to the recognition of tax assets for foreign tax credits and a manufacturing deduction in the U.S.

The recognition of these tax assets resulted in tax benefits of $ 2.5 million and $ 17.0 million in the three and nine months ended December 31, 2018, respectively.

Compared with the prior year, the Company’s effective tax rate for fiscal 2020 was positively impacted by both the global intangible low taxed income (“GILTI”) provision of the Tax Act and an income tax benefit from the recognition of a tax incentive in Italy and was negatively impacted by changes in the valuation allowances in certain jurisdictions.

The Company sold its ownership interest in Nikkei Heat Exchanger Company, Ltd.

during the second quarter of fiscal 2020.

The Company’s effective tax rate for the three months ended June 30, 2020 and 2019 was 2.3 percent and 26.1 percent , respectively.

The effective tax rate for the first quarter of fiscal 2021 is lower than the first quarter of the prior year, primarily due to changes in the mix and amount of foreign and U.S.

The Company has recorded valuation allowances against its net deferred tax assets to the extent it has determined it is more likely than not that such assets will not be realized in the future.

As of June 30, 2020, valuation allowances against deferred tax assets in certain foreign jurisdictions and the U.S.

totaled $ 34.1 million and $ 15.3 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.

As further discussed in Note 17, the COVID- 19 pandemic has resulted in risks and uncertainties to our business.

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, which could have a material adverse effect on the Company’s results of operations and financial condition.

MODINE MANUFACTURING COMPANY

1 unchanged sentence

(In millions, except per share amounts)

During the third quarter of fiscal 2020, the Company recorded a valuation allowance of $ 3.0 million on certain U.S.

deferred tax assets after determining it was more likely than not the deferred tax assets would not be realized.

As of December 31, 2019, valuation allowances against deferred tax assets in certain foreign jurisdictions totaled $ 27.8 million and valuation allowances against certain U.S.

deferred tax assets totaled $ 10.3 million , as it is more likely than not these assets will not be realized based upon historical financial results and certain other factors.

The Company will continue to provide a valuation allowance against its net deferred tax assets in each of the applicable jurisdictions until the need for a valuation allowance is eliminated.

The need for a valuation allowance is eliminated when the Company determines it is more likely than not the deferred tax assets will be realized.

Accounting policies for interim reporting require the Company to adjust its effective tax rate each quarter to be consistent with its estimated annual effective tax rate.

3 unchanged sentences

The Company does not anticipate a significant change in unrecognized tax benefits during the remainder of fiscal 2021.

E arnings Per Share

Earnings Per Share

The components of basic and diluted earnings per share were as follows:

Three months ended

Nine months ended

Net earnings attributable to Modine

Undistributed earnings attributable to unvested shares

Net earnings available to Modine shareholders

Net (loss) earnings attributable to Modine

Weighted-average shares outstanding - basic

1 unchanged sentence

Weighted-average shares outstanding - diluted

Earnings per share:

Net earnings per share - basic

Net earnings per share - diluted

For the three and nine months ended December 31, 2019, the calculation of diluted earnings per share excluded 1.2 million and 0.8 million stock options, respectively, because they were anti-dilutive.

For the three and nine months ended December 31, 2018, the calculation of diluted earnings per share excluded 0.5 million and 0.4 million stock options, respectively, because they were anti-dilutive.

(Loss) earnings per share:

Net (loss) earnings per share - basic

Net (loss) earnings per share - diluted

For the three months ended June 30, 2020 and 2019, the calculation of diluted earnings per share excluded 1.4 million and 0.8 million stock options, respectively, because they were anti-dilutive.

For the three months ended June 30, 2020 and 2019, the calculation of diluted earnings per share excluded 0.4 million and 0.2 million restricted stock awards, respectively, because they were anti-dilutive.

MODINE MANUFACTURING COMPANY

3 unchanged sentences

Cash, cash equivalents and restricted cash consisted of the following:

December 31, 2019

June 30, 2020

March 31, 2020

2 unchanged sentences

Total cash, cash equivalents and restricted cash

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.

Inventories consisted of the following:

December 31, 2019

June 30, 2020

March 31, 2020

5 unchanged sentences

Property, plant and equipment, including depreciable lives, consisted of the following:

December 31, 2019

June 30, 2020

March 31, 2020

12 unchanged sentences

Effect of exchange rate changes

Goodwill, December 31, 2019

Goodwill, June 30, 2020

Intangible assets consisted of the following:

December 31, 2019

June 30, 2020

March 31, 2020

2 unchanged sentences

Total intangible assets

The Company recorded amortization expense of $ 2.3 million and $ 2.2 million for the three months ended December 31, 2019 and 2018, respectively.

The Company recorded amortization expense of $ 6.7 million and $ 6.8 million for the nine months ended December 31, 2019 and 2018, respectively.

The Company recorded amortization expense of $ 2.1 million and $ 2.2 million for the three months ended June 30, 2020 and 2019, respectively.

The Company estimates that it will record $ 6.3 million of amortization expense during the remainder of fiscal 2021 and approximately $ 8.0 million of annual amortization expense in fiscal 2022 through 2026.

1 unchanged sentence

Changes in accrued warranty costs were as follows:

Three months ended December 31,

Beginning balance

Warranties recorded at time of sale

Adjustments to pre-existing warranties

Effect of exchange rate changes

Ending balance

Nine months ended December 31,

Three months ended June 30,

Beginning balance

6 unchanged sentences

(In millions, except per share amounts)

Effective April 1, 2019, the Company adopted new lease accounting guidance and, as a result, recorded $ 61.3 million of right-of-use (“ROU”) assets and corresponding lease liabilities for operating leases on its consolidated balance sheet.

The condensed consolidated financial statements for the three and nine months ended December 31, 2019 reflect the adoption of this new guidance;

however, the comparable prior-year periods have not been adjusted.

See Note 1 for additional information regarding the Company’s adoption of the new guidance.

Significant Accounting Policy

The Company determines if an arrangement is a lease at contract inception.

The lease term begins upon lease commencement, which is when the Company takes possession of the asset, and may include options to extend or terminate the lease when it is reasonably certain that such options will be exercised.

The Company uses the lease term within its determination of the appropriate lease classification, either as an operating lease or as a finance lease, and to calculate straight-line lease expense for its operating leases.

ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease.

The Company recognizes ROU assets and lease liabilities at the commencement date, based upon the present value of lease payments over the lease term.

As its lease agreements typically do not provide an implicit rate, the Company primarily uses an incremental borrowing rate based upon the information available at lease commencement.

In determining the incremental borrowing rate, the Company considers its current borrowing rate, the term of the lease, and the economic environments 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 and recognizes payments for these leases as lease expense.

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 office buildings.

In addition, the Company leases certain manufacturing and IT equipment and vehicles.

The Company’s most significant leases have remaining lease terms of 1 to 15 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 any material residual value guarantees or material restrictive covenants.

MODINE MANUFACTURING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In millions, except per share amounts)

Lease Assets and Liabilities

1 unchanged sentence

Balance Sheet Location

December 31, 2019

June 30, 2020

March 31, 2020

Operating lease ROU assets

11 unchanged sentences

Long-term debt

Finance lease ROU assets were recorded net of accumulated amortization of $ 1.7 million as of December 31, 2019.

Finance lease ROU assets were recorded net of accumulated amortization of $ 1.9 million and $ 1.8 million as of June 30, 2020 and March 31, 2020, respectively.

Components of Lease Expense

The Company records operating lease expense as either cost of sales or SG&A expenses within its consolidated statements of operations, depending upon the nature and use of the ROU assets.

The Company records finance lease expense as depreciation expense within cost of sales or SG&A expenses, depending upon the nature and use of the ROU assets, and as interest expense in its consolidated statements of operations.

The components of lease expense were as follows:

Three months ended

December 31, 2019

Nine months ended

December 31, 2019

Three months ended June 30,

Operating lease expense (a)

3 unchanged sentences

Total lease expense

For the three and nine months ended December 31, 2019, operating lease expense included short-term lease expense of $ 1.0 million and $ 2.9 million, respectively.

For both the three months ended June 30, 2020 and 2019, operating lease expense included short-term lease expense of $ 0.9 million.

Variable lease expense was not significant.

2 unchanged sentences

(In millions, except per share amounts)

Supplemental Cash Flow Information

Three months ended

December 31, 2019

Nine months ended

December 31, 2019

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows for operating leases

Financing cash flows for finance leases

ROU assets obtained in exchange for lease liabilities

Operating leases

Finance leases

Lease Term and Discount Rates

December 31, 2019

Weighted-average remaining lease term:

Operating leases

Finance leases

Weighted-average discount rate:

Operating leases

Finance leases

Maturity of Lease Liabilities under New Lease Accounting Guidance

Future minimum rental payments for leases with initial non-cancellable lease terms in excess of one year were as follows at December 31, 2019:

Operating Leases

Finance Leases

Remainder of fiscal 2020

2025 and beyond

Total lease payments

Present value of lease liabilities

MODINE MANUFACTURING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In millions, except per share amounts)

Maturity of Lease Liabilities under Previous Lease Accounting Guidance

Future minimum rental payments for operating leases with initial non-cancellable lease terms in excess of one year were as follows at March 31, 2019:

2025 and beyond

The Company recorded $ 19.3 million and $ 18.5 million of rental expense related to operating leases in fiscal 2019 and 2018, respectively.

In June 2019, the Company executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $ 250.0 million revolving credit facility expiring in June 2024 , which modified the Company’s then-existing revolver that would have expired in November 2021.

As a result of the credit agreement modification, the Company deferred debt issuance costs of $ 1.1 million, which will be amortized over the term of the debt.

In addition, this credit agreement provides for both U.S.

dollar- and euro-denominated term loan facilities.

At December 31, 2019, the Company’s term loan borrowings totaled $ 193.4 million, with repayments continuing into fiscal 2025.

These term loans replaced the previously-existing term loans with repayments scheduled through fiscal 2022.

Borrowings under both the revolving credit 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 December 31, 2019, the weighted-average interest rates for revolving credit facility borrowings and the term loans were 3.5 percent and 3.3 percent, respectively.

MODINE MANUFACTURING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In millions, except per share amounts)

Long-term debt consisted of the following:

December 31, 2019

Fiscal year of maturity

June 30, 2020

March 31, 2020

6.8 % Senior Notes (a)

Revolving credit facility

5.9 % Senior Notes

Revolving credit facility (a)

current portion (a)

5.8 % Senior Notes

current portion

unamortized debt issuance costs

Total long-term debt

On January 31, 2020, the Company issued $ 100.0 million of 5.9 percent Senior Notes with repayments ending in fiscal 2029.

The Company used the proceeds to prepay the $ 73.0 million principal balance of the 6.8 percent Senior Notes, which were scheduled to mature in August 2020 , and to repay $ 27.0 million of borrowings on its revolving credit facility.

Since it had both the intent and ability to refinance these obligations on a long-term basis, the Company classified the $ 73.0 million of 6.8 percent Senior Notes and $ 27.0 million of its revolving credit facility borrowings within long-term debt on its consolidated balance sheet as of December 31, 2019.

Other long-term debt primarily includes borrowings by foreign subsidiaries and finance lease obligations.

Long-term debt matures as follows:

Other long-term debt primarily includes finance lease obligations and borrowings by foreign subsidiaries.

Long-term debt, including the current portion of long-term debt, matures as follows:

Remainder of 2021

2026 & beyond

The long-term debt maturity schedule reflects the impacts from the January 2020 issuance of the 5.9 percent Senior Notes and the prepayment of the 6.8 percent Senior Notes.

As of December 31, 2019 and March 31, 2019, the Company ’ s revolving credit facility borrowings totaled $ 109.3 million and $ 47.1 million, respectively.

With the exception of the $27.0 million of borrowings reported as long-term debt as of December 31, 2019, as discussed above, the Company reported these borrowings as short-term debt on the consolidated balance sheets.

At December 31, 2019, domestic letters of credit totaled $ 5.3 million, resulting in available borrowings under the Company’s revolving credit facility of $ 135.4 million.

The Company also maintains credit agreements for its foreign subsidiaries, with outstanding short-term borrowings of $ 18.9 million at both December 31, 2019 and March 31, 2019.

At June 30, 2020, the weighted-average interest rates for revolving credit facility borrowings and the term loans were both 2.8 percent.

At June 30, 2020, the Company’s revolving credit facility borrowings totaled $ 125.9 million and domestic letters of credit totaled $ 5.7 million, resulting in available borrowings under the revolving credit facility of $ 118.4 million.

The Company also maintains credit agreements for its foreign subsidiaries, with outstanding short-term borrowings of $ 25.2 million and $ 14.8 million at June 30, 2020 and March 31, 2020, respectively.

Provisions in the Company’s credit agreement, Senior Note agreements, and various foreign credit agreements require the Company to maintain compliance with various covenants and include certain cross-default clauses.

Under its primary debt agreements in the U.S., the Company has provided liens on substantially all domestic assets.

Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.

In addition, at the time of each incremental borrowing under the revolving credit facility, the Company is required to represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on its business, property, or results of operations.

MODINE MANUFACTURING COMPANY

1 unchanged sentence

(In millions, except per share amounts)

Under its primary debt agreements in the U.S., the Company has provided liens on substantially all domestic assets.

In addition, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.

The Company is also subject to a leverage ratio covenant, which requires the Company to limit its consolidated indebtedness, less a portion of its cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).

In May 2020, the Company executed amendments to its primary credit agreements in the U.S.

Under the amended agreements, the leverage ratio covenant limit has been temporarily raised.

The leverage ratio covenant requires the Company to limit the ratio of its consolidated indebtedness, less a portion of its cash balance, both as defined by the credit agreements, to its consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).

The leverage ratio covenant limit in fiscal 2021 is 4.00 to 1, 4.75 to 1, 5.25 to 1, and 5.75 to 1 for the first, second, third, and fourth quarters, respectively.

In fiscal 2022, the leverage ratio covenant limit is 4.75 to 1, 3.75 to 1, and 3.50 to 1 for the first, second and third quarters, respectively, and subsequently returns to 3.25 to 1 for the fourth quarter of fiscal 2022.

The Company is also subject to an interest expense coverage ratio covenant, which requires the Company to maintain Adjusted EBITDA of at least three times consolidated interest expense.

The Company was in compliance with its debt covenants as of December 31, 2019.

The Company was in compliance with its debt covenants as of June 30, 2020.

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 December 31, 2019 and March 31, 2019, 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 $ 124.9 million and $ 137.2 million, respectively.

As of June 30, 2020 and March 31, 2020, 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 $ 134.7 million and $ 131.3 million, respectively.

The fair value of the Company’s long-term debt is categorized as Level 2 within the fair value hierarchy.

Refer to Note 3 for the definition of a Level 2 fair value measurement.

Contingencies and Litigation

Risks, Uncertainties, Contingencies and Litigation

In March 2020, the World Health Organization declared the outbreak of the novel coronavirus, COVID-19, a pandemic.

The spread of COVID-19 and the resulting work and travel restrictions, including international border closings, have disrupted, and may continue to disrupt, global supply chains and have negatively impacted the global economy.

As a result of this pandemic, the Company has experienced significant impacts on its operations.

Local government requirements or customer shutdowns caused the Company to suspend production at many of its manufacturing facilities in March and April 2020.

Although all of the temporarily-closed facilities reopened, many are currently operating at reduced production levels based upon customer demand.

The Company is continuing to focus on protecting the health and wellbeing of its employees and the communities in which it operates, while also ensuring the continuity of its business operations and timely delivery of quality products and services to its customers.

T o mitigate the negative impacts of COVID-19, the Company has taken actions, including, but not limited to, production staffing adjustments, furloughs, shortened work weeks, and temporary salary reductions at all levels of the organization.

In addition, the Company is focused on reducing operating and administrative expenses.

Based on its current expectations, the Company believes that its sources of liquidity will generate sufficient cash flow to meet its obligations during the next twelve months from the date these financial statements are issued.

The Company’s consolidated financial statements reflect estimates and assumptions made by management, including assumptions regarding the future impacts of the COVID- 19 pandemic, that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting periods presented.

For example, assets particularly sensitive to assumptions that could be adversely impacted by the COVID- 19 pandemic include goodwill and deferred tax assets.

While the Company believes it used appropriate estimates and assumptions to prepare the consolidated financial statements, actual amounts could differ materially and future events or circumstances could have a potential negative effect on the assumptions used.

If the Company, its suppliers, or its customers experience further shutdowns or other significant business disruptions associated with the COVID- 19 pandemic, its ability to conduct business in the manner and on the timelines presently planned could be materially and negatively impacted, which could have a material adverse effect on the Company’s business, financial position, results of operations and cash flows.

MODINE MANUFACTURING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In millions, except per share amounts)

Environmental

The Company has recorded environmental investigation and remediation accruals related to soil and groundwater contamination at manufacturing facilities in the United States, one of which the Company currently owns and operates, and at its former manufacturing facility in the Netherlands, along with accruals for lesser environmental matters at certain other facilities in the United States and Brazil.

The Company has recorded environmental investigation and remediation accruals related to soil and groundwater contamination at manufacturing facilities in the U.S., one of which the Company currently owns and operates, and at its former manufacturing facility in the Netherlands, along with accruals for lesser environmental matters at certain other facilities in the U.S.

These accruals generally relate to 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.

The accruals for these environmental matters totaled $ 18.7 million and $ 18.9 million as of December 31, 2019 and March 31, 2019, respectively.

The accruals for these environmental matters totaled $ 18.1 million and $ 18.2 million as of June 30, 2020 and March 31, 2020, respectively.

As additional information becomes available, the Company will re-assess the liabilities related to these matters and revise the estimated accruals, if necessary.

10 unchanged sentences

Changes in accumulated other comprehensive loss were as follows:

Three months ended December 31, 2019

Nine months ended December 31, 2019

Three months ended June 30, 2020

Benefit Plans

4 unchanged sentences

Realized losses - net (b)

Foreign currency translation gains (c)

Total other comprehensive income (loss)

Ending balance

Three months ended December 31, 2018

Nine months ended December 31, 2018

Benefit Plans

Three months ended June 30, 2019

Benefit Plans

Beginning balance

Other comprehensive loss before reclassifications

Other comprehensive income (loss) before reclassifications

Reclassifications:

Amortization of unrecognized net loss (a)

Foreign currency translation losses (d)

Realized gains - net (b)

Total other comprehensive income (loss)

1 unchanged sentence

Amounts are included in the calculation of net periodic benefit cost for the Company’s defined benefit plans, which include pension and other postretirement plans.

See Note 4 for additional information about the Company’s pension plans.

Refer to Note 4 for additional information about the Company’s pension plans.

Amounts represent net gains and losses associated with cash flow hedges that were reclassified to net earnings.

As a result of the sale of its investment in NEX during the second quarter of fiscal 2020, the Company wrote off $ 0.6 million of accumulated foreign currency translation gains.

As a result of the sale of a business in South Africa during the second quarter of fiscal 2019, the Company wrote off $ 0.8 million of accumulated foreign currency translation losses.

MODINE MANUFACTURING COMPANY

2 unchanged sentences

Segment Information

Effective April 1, 2020, the Company began managing its global automotive business separate from the other businesses within the previously-reported Vehicular Thermal Solutions (“VTS”) segment.

The Company is managing the automotive business as the Automotive segment as it targets the sale or eventual exit of its underlying automotive business operations.

The other businesses of the VTS segment, including the commercial vehicle and off-highway businesses, are being managed as the Heavy Duty Equipment segment.

The segment realignment had no impact on the CIS and BHVAC segments or on the Company’s consolidated financial position, results of operations, and cash flows.

Segment financial information for fiscal 2020 has been recast to conform to the fiscal 2021 presentation.

Each operating segment is managed by a vice president and has separate financial results reviewed by the Company’s chief operating decision maker.

These results are used by management in evaluating the performance of each segment and in making decisions on the allocation of resources among the Company’s various businesses.

The following is a summary of net sales, gross profit, operating income, and total assets by segment:

Three months ended December 31,

Inter-segment

Segment total

Corporate and eliminations

Nine months ended December 31,

Three months ended June 30,

External Sales

Inter-segment

External Sales

Inter-segment

1 unchanged sentence

Corporate and eliminations

Three months ended December 31,

Nine months ended December 31,

Three months ended June 30,

Gross profit:

1 unchanged sentence

Corporate and eliminations

Three months ended December 31,

Nine months ended December 31,

Operating income:

Segment total

Corporate and eliminations

Operating income

MODINE MANUFACTURING COMPANY

1 unchanged sentence

(In millions, except per share amounts)

December 31, 2019

Three months ended June 30,

Operating income:

Segment total

Corporate and eliminations

Operating (loss) income

June 30, 2020

March 31, 2020

1 unchanged sentence

Corporate and eliminations

The Company adopted new lease accounting guidance and, as a result, recorded $ 61.3 million of operating lease assets on its consolidated balance sheet on April 1, 2019.

See Note 1 for additional information.

Subsequent Event

On August 4, 2020, the Company announced that Thomas A.

Burke stepped down from his position as President and Chief Executive Officer ( “CEO” ) and as a member of Modine ’s Board of Directors, effective immediately.

The Board of Directors has launched a search for Mr.

Burke ’s successor and has named Michael B.

Lucareli, the Company’s Vice President, Finance and Chief Financial Officer, as Interim President and CEO.

As a result of Mr.

Burke ’s departure and based upon the terms of his employment agreement, the Company expects to record severance expense during the second quarter of fiscal 2021 of approximately $ 5.0 million, to be paid on a bi-weekly basis over the next three years .

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements