Item 1. Financial Statements
Item 1. Financial Statements.
MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended June 30, 2020 and 2019
(In millions, except per share amounts)
(Unaudited)
Three months ended June 30,
2020
2019
Net sales
$
347.8
$
529.0
Cost of sales
301.7
445.6
Gross profit
46.1
83.4
Selling, general and administrative expenses
44.7
63.5
Restructuring expenses
4.6
1.8
Operating (loss) income
( 3.2
)
18.1
Interest expense
( 5.4
)
( 5.9
)
Other expense – net
-
( 1.1
)
(Loss) earnings before income taxes
( 8.6
)
11.1
Benefit (provision) for income taxes
0.2
( 2.9
)
Net (loss) earnings
( 8.4
)
8.2
Net earnings attributable to noncontrolling interest
( 0.2
)
( 0.2
)
Ne t (loss) earnings attributable to Modine
$
( 8.6
)
$
8.0
Net (loss) earnings per share attributable to Modine shareholders:
Basic
$
( 0.17
)
$
0.16
Diluted
$
( 0.17
)
$
0.16
Weighted-average shares outstanding:
Basic
50.9
50.7
Diluted
50.9
51.1
The notes to condensed consolidated financial statements are an integral part of these statements.
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MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three months ended June 30, 2020 and 2019
(In millions)
(Unaudited)
Three months ended June 30,
2020
2019
Net (loss) earnings
$
( 8.4
)
$
8.2
Other comprehensive income (loss):
Foreign currency translation
5.4
1.8
Defined benefit plans, net of income taxes of $ 0.4 and $ 0.3 million
1.2
1.1
Cash flow hedges, net of income taxes of $ 0.3 and ($ 0.3 ) million
1.0
( 0.8
)
Total other comprehensive income
7.6
2.1
Comprehensive income (loss)
( 0.8
)
10.3
Comprehensive income attributable to noncontrolling interest
( 0.3
)
( 0.1
)
Comprehensive income (loss) attributable to Modine
$
( 1.1
)
$
10.2
The notes to condensed consolidated financial statements are an integral part of these statements.
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MODINE MANUFACTURING COMPANY
CONSOLIDATED BALANCE SHEETS
June 30, 2020 and March 31, 2020
(In millions, except per share amounts)
(Unaudited)
June 30, 2020
March 31, 2020
ASSETS
Cash and cash equivalents
$
77.2
$
70.9
Trade accounts receivable – net
272.6
292.5
Inventories
210.2
207.4
Other current assets
56.8
62.5
Total current assets
616.8
633.3
Property, plant and equipment – net
439.4
448.0
Intangible assets – net
105.1
106.3
Goodwill
167.0
166.1
Deferred income taxes
109.2
104.8
Other noncurrent assets
79.2
77.6
Total assets
$
1,516.7
$
1,536.1
LIABILITIES AND SHAREHOLDERS’ EQUITY
Short-term debt
$
25.2
$
14.8
Long-term debt – current portion
13.4
15.6
Accounts payable
190.1
227.4
Accrued compensation and employee benefits
74.2
65.0
Other current liabilities
54.1
49.2
Total current liabilities
357.0
372.0
Long-term debt
448.1
452.0
Deferred income taxes
7.0
8.1
Pensions
130.3
130.9
Other noncurrent liabilities
81.6
79.5
Total liabilities
1,024.0
1,042.5
Commitments and contingencies (see Note 17)
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 53.7 million and 53.4 million shares
33.5
33.3
Additional paid-in capital
245.6
245.1
Retained earnings
461.3
469.9
Accumulated other comprehensive loss
( 215.8
)
( 223.3
)
Treasury stock, at cost, 2.7 million and 2.5 million shares
( 37.9
)
( 37.1
)
Total Modine shareholders’ equity
486.7
487.9
Noncontrolling interest
6.0
5.7
Total equity
492.7
493.6
Total liabilities and equity
$
1,516.7
$
1,536.1
The notes to condensed consolidated financial statements are an integral part of these statements.
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MODINE MANUFACTURING COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended June 30, 2020 and 2019
(In millions)
(Unaudited)
Three months ended June 30,
2020
2019
Cash flows from operating activities:
Net (loss) earnings
$
( 8.4
)
$
8.2
Adjustments to reconcile net (loss) earnings to net cash provided by operating activities:
Depreciation and amortization
18.6
18.9
Stock-based compensation expense
0.7
1.7
Deferred income taxes
( 5.9
)
( 0.5
)
Other – net
1.3
0.9
Changes in operating assets and liabilities:
Trade accounts receivable
21.7
1.6
Inventories
( 1.5
)
( 15.0
)
Accounts payable
( 34.1
)
( 3.8
)
Other assets and liabilities
19.9
( 11.5
)
Net cash provided by operating activities
12.3
0.5
Cash flows from investing activities:
Expenditures for property, plant and equipment
( 9.1
)
( 20.3
)
Proceeds from disposition of assets
0.6
-
Other – net
-
1.8
Net cash used for investing activities
( 8.5
)
( 18.5
)
Cash flows from financing activities:
Borrowings of debt
8.2
342.1
Repayments of debt
( 17.1
)
( 329.1
)
Borrowings on bank overdraft facilities – net
12.3
-
Financing fees paid
( 0.8
)
( 1.1
)
Purchases of treasury stock under share repurchase program
-
( 2.4
)
Dividend paid to noncontrolling interest
-
( 1.3
)
Other – net
( 0.8
)
( 2.7
)
Net cash provided by financing activities
1.8
5.5
Effect of exchange rate changes on cash
0.6
( 0.1
)
Net increase (decrease) in cash, cash equivalents and restricted cash
6.2
( 12.6
)
Cash, cash equivalents and restricted cash – beginning of period
71.3
42.2
Cash, cash equivalents and restricted cash – end of period
$
77.5
$
29.6
The notes to condensed consolidated financial statements are an integral part of these statements.
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MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the three months ended June 30, 2020 and 2019
(In millions)
(Unaudited)
_________________
Common stock
Additional
paid-in
Retained
Accumulated other
Treasury
stock, at
Non- controlling
Shares
Amount
capital
earnings
comprehensive loss
cost
interest
Total
Balance, March 31, 2020
53.4
$
33.3
$
245.1
$
469.9
$
( 223.3
)
$
( 37.1
)
$
5.7
$
493.6
Net loss attributable to Modine
-
-
-
( 8.6
)
-
-
-
( 8.6
)
Other comprehensive income
-
-
-
-
7.5
-
0.1
7.6
Stock options and awards
0.3
0.2
( 0.2
)
-
-
-
-
-
Purchase of treasury stock
-
-
-
-
-
( 0.8
)
-
( 0.8
)
Stock-based compensation expense
-
-
0.7
-
-
-
-
0.7
Net earnings attributable to noncontrolling interest
-
-
-
-
-
-
0.2
0.2
Balance, June 30, 2020
53.7
$
33.5
$
245.6
$
461.3
$
( 215.8
)
$
( 37.9
)
$
6.0
$
492.7
Common stock
Additional
paid-in
Retained
Accumulated other
Treasury
stock, at
Non-controlling
Shares
Amount
capital
earnings
comprehensive loss
cost
interest
Total
Balance, March 31, 2019
52.8
$
33.0
$
238.6
$
472.1
$
( 178.4
)
$
( 31.4
)
$
7.2
$
541.1
Net earnings attributable to Modine
-
-
-
8.0
-
-
-
8.0
Other comprehensive income (loss)
-
-
-
-
2.2
-
( 0.1
)
2.1
Stock options and awards
0.5
0.2
( 0.1
)
-
-
-
-
0.1
Purchase of treasury stock
-
-
-
-
-
( 5.6
)
-
( 5.6
)
Stock-based compensation expense
-
-
1.7
-
-
-
-
1.7
Dividend paid to noncontrolling interest
-
-
-
-
-
-
( 1.3
)
( 1.3
)
Net earnings attributable to noncontrolling interest
-
-
-
-
-
-
0.2
0.2
Balance, June 30, 2019
53.3
$
33.2
$
240.2
$
480.1
$
( 176.2
)
$
( 37.0
)
$
6.0
$
546.3
_________________
The notes to condensed consolidated financial statements are an integral part of these statements.
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MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
Note 1: General
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 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.
COVID-19
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.
Note 2: Revenue Recognition
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.
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MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
Three months ended June 30 , 2020
Three months ended June 30 , 2019
CIS
BHVAC
HDE
Automotive
Segment
Total
CIS
BHVAC
HDE
Automotive
Segment
Total
Primary end market:
Commercial HVAC&R
$
93.9
$
32.5
$
-
$
-
$
126.4
$
130.9
$
38.0
$
-
$
-
$
168.9
Data center cooling
13.8
15.0
-
-
28.8
24.2
10.6
-
-
34.8
Industrial cooling
11.9
-
-
-
11.9
11.4
-
-
-
11.4
Commercial vehicle
-
-
46.3
2.1
48.4
-
-
92.7
6.0
98.7
Off-highway
-
-
53.4
0.7
54.1
-
-
70.2
3.7
73.9
Automotive
-
-
13.0
54.4
67.4
-
-
26.8
102.4
129.2
Other
2.9
0.1
10.8
4.9
18.7
2.3
0.4
26.7
1.5
30.9
Net sales
$
122.5
$
47.6
$
123.5
$
62.1
$
355.7
$
168.8
$
49.0
$
216.4
$
113.6
$
547.8
Geographic location:
Americas
$
59.9
$
26.0
$
67.9
$
7.5
$
161.3
$
97.1
$
29.1
$
136.0
$
17.4
$
279.6
Europe
50.9
21.6
24.1
39.6
136.2
58.6
19.9
46.4
83.0
207.9
Asia
11.7
-
31.5
15.0
58.2
13.1
-
34.0
13.2
60.3
Net sales
$
122.5
$
47.6
$
123.5
$
62.1
$
355.7
$
168.8
$
49.0
$
216.4
$
113.6
$
547.8
Timing of revenue recognition:
Products transferred at a point in time
$
109.3
$
47.6
$
121.3
$
62.1
$
340.3
$
143.9
$
49.0
$
209.0
$
113.6
$
515.5
Products transferred over time
13.2
-
2.2
-
15.4
24.9
-
7.4
-
32.3
Net sales
$
122.5
$
47.6
$
123.5
$
62.1
$
355.7
$
168.8
$
49.0
$
216.4
$
113.6
$
547.8
Contract Balances
Contract assets and contract liabilities from contracts with customers were as follows:
June 30, 2020
March 31, 2020
Contract assets
$
18.3
$
21.7
Contract liabilities
7.0
5.6
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 $ 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 $ 1.4 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.
Note 3: 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.
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MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
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. 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. 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.
Note 4: Pensions
Pension cost included the following components:
Three months ended
June 30,
2020
2019
Service cost
$
0.1
$
0.1
Interest cost
2.0
2.3
Expected return on plan assets
( 2.9
)
( 3.0
)
Amortization of unrecognized net loss
1.7
1.5
Net periodic benefit cost
$
0.9
$
0.9
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.
Note 5: Stock-Based Compensation
The Company’s stock-based incentive programs consist of the following: (1) a long-term incentive compensation program for officers and other executives that consists of stock awards, stock options, and performance-based stock awards granted for retention and performance, (2) a discretionary equity program for other management and key employees, and (3) stock awards for non-employee directors.
The Company 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 $ 0.7 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.
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MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
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:
Unrecognized
Compensation
Expense
Weighted-Average
Remaining Service
Period in Years
Stock options
$
2.1
2.3
Restricted stock awards
4.5
2.4
Performance stock awards
0.7
1.7
Total
$
7.3
2.3
Note 6: Restructuring Activities
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 June 30,
2020
2019
Employee severance and related benefits
$
4.4
$
1.5
Other restructuring and repositioning expenses
0.2
0.3
Total
$
4.6
$
1.8
Other restructuring and repositioning expenses primarily consist of equipment transfers and plant consolidation costs.
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MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
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 June 30,
2020
2019
Beginning balance
$
5.0
$
10.0
Additions
4.4
1.5
Payments
( 2.6
)
( 3.7
)
Effect of exchange rate changes
0.1
-
Ending balance
$
6.9
$
7.8
Note 7: Other Income and Expense
Other income and expense consisted of the following:
Three months ended
June 30,
2020
2019
Interest income
$
0.3
$
0.1
Foreign currency transactions (a)
0.5
( 0.6
)
Net periodic benefit cost (b)
( 0.8
)
( 0.7
)
Equity in earnings of non-consolidated affiliate (c)
-
0.1
Total other income (expense) - net
$
-
$
( 1.1
)
(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 intercompany loans and transactions denominated in a foreign currency, along with gains and losses on certain foreign currency exchange contracts.
(b)
Net periodic benefit cost for the Company’s pension and postretirement plans is exclusive of service cost.
(c)
The Company sold its ownership interest in Nikkei Heat Exchanger Company, Ltd. during the second quarter of fiscal 2020.
Note 8 : Income Taxes
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. earnings.
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.
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MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
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. Under this methodology, the Company applies its estimated annual income tax rate to its year-to-date ordinary earnings to derive its income tax provision each quarter. The Company records the tax impacts of certain significant, unusual or infrequently occurring items in the period in which they occur. The Company excluded the impact of its operations in certain foreign locations from the overall effective tax rate methodology and recorded them discretely based upon year-to-date results because the Company anticipates net operating losses for the full fiscal year in these jurisdictions. The Company does not anticipate a significant change in unrecognized tax benefits during the remainder of fiscal 2021.
Note 9: Earnings Per Share
The components of basic and diluted earnings per share were as follows:
Three months ended
June 30,
2020
2019
Net (loss) earnings attributable to Modine
$
( 8.6
)
$
8.0
Weighted-average shares outstanding - basic
50.9
50.7
Effect of dilutive securities
-
0.4
Weighted-average shares outstanding - diluted
50.9
51.1
(Loss) earnings per share:
Net (loss) earnings per share - basic
$
( 0.17
)
$
0.16
Net (loss) earnings per share - diluted
$
( 0.17
)
$
0.16
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.
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MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
Note 10: Cash, Cash Equivalents and Restricted Cash
Cash, cash equivalents and restricted cash consisted of the following:
June 30, 2020
March 31, 2020
Cash and cash equivalents
$
77.2
$
70.9
Restricted cash
0.3
0.4
Total cash, cash equivalents and restricted cash
$
77.5
$
71.3
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 agreement.
Note 11: Inventories
Inventories consisted of the following:
June 30, 2020
March 31, 2020
Raw materials
$
128.4
$
123.6
Work in process
34.4
34.6
Finished goods
47.4
49.2
Total inventories
$
210.2
$
207.4
Note 12: Property, Plant and Equipment
Property, plant and equipment, including depreciable lives, consisted of the following:
June 30, 2020
March 31, 2020
Land
$
20.1
$
19.7
Buildings and improvements ( 10 - 40 years)
279.7
276.7
Machinery and equipment ( 3 - 15 years)
893.0
870.3
Office equipment ( 3 - 10 years)
96.9
95.2
Construction in progress
33.1
40.5
1,322.8
1,302.4
Less: accumulated depreciation
( 883.4
)
( 854.4
)
Net property, plant and equipment
$
439.4
$
448.0
12
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MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
Note 13: Goodwill and Intangible Assets
Changes in the carrying amount of goodwill were as follows:
CIS
BHVAC
Total
Goodwill, March 31, 2020
$
152.6
$
13.5
$
166.1
Effect of exchange rate changes
0.9
-
0.9
Goodwill, June 30, 2020
$
153.5
$
13.5
$
167.0
Intangible assets consisted of the following:
June 30, 2020
March 31, 2020
Gross
Carrying
Value
Accumulated
Amortization
Net
Intangible
Assets
Gross
Carrying
Value
Accumulated
Amortization
Net
Intangible
Assets
Customer relationships
$
61.4
$
( 13.7
)
$
47.7
$
60.8
$
( 12.6
)
$
48.2
Trade names
58.5
( 16.9
)
41.6
58.3
( 16.2
)
42.1
Acquired technology
23.9
( 8.1
)
15.8
23.6
( 7.6
)
16.0
Total intangible assets
$
143.8
$
( 38.7
)
$
105.1
$
142.7
$
( 36.4
)
$
106.3
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.
Note 14: Product Warranties
Changes in accrued warranty costs were as follows:
Three months ended June 30,
2020
2019
Beginning balance
$
7.9
$
9.2
Warranties recorded at time of sale
1.1
1.4
Adjustments to pre-existing warranties
-
( 0.6
)
Settlements
( 0.8
)
( 0.9
)
Effect of exchange rate changes
0.1
-
Ending balance
$
8.3
$
9.1
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MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
Note 15: Leases
Lease Assets and Liabilities
The following table provides a summary of leases recorded on the consolidated balance sheet.
Balance Sheet Location
June 30, 2020
March 31, 2020
Lease Assets
Operating lease ROU assets
Other noncurrent assets
$
63.6
$
61.4
Finance lease ROU assets (a)
Property, plant and equipment - net
8.4
8.5
Lease Liabilities
Operating lease liabilities
Other current liabilities
$
11.8
$
10.9
Operating lease liabilities
Other noncurrent liabilities
52.3
50.3
Finance lease liabilities
Long-term debt - current portion
0.4
0.4
Finance lease liabilities
Long-term debt
3.3
3.3
(a)
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 components of lease expense were as follows:
Three months ended June 30,
2020
2019
Operating lease expense (a)
$
4.9
$
5.2
Finance lease expense:
Depreciation of ROU assets
0.1
0.1
Interest on lease liabilities
-
-
Total lease expense
$
5.0
$
5.3
(a)
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.
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MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
Note 16: Indebtedness
Long-term debt consisted of the following:
Fiscal year of maturity
June 30, 2020
March 31, 2020
Term loans
2025
$
186.9
$
189.4
Revolving credit facility
2025
125.9
127.2
5.9 % Senior Notes
2029
100.0
100.0
5.8 % Senior Notes
2027
50.0
50.0
Other (a)
3.7
6.0
466.5
472.6
Less: current portion
( 13.4 )
( 15.6 )
Less: unamortized debt issuance costs
( 5.0 )
( 5.0 )
Total long-term debt
$
448.1
$
452.0
(a)
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:
Fiscal Year
Remainder of 2021
$
10.0
2022
21.7
2023
21.7
2024
21.7
2025
272.9
2026 & beyond
118.5
Total
$
466.5
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 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.
15
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MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
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 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 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.
Note 17: Risks, Uncertainties, Contingencies and Litigation
COVID-19
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.
16
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MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
Environmental
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 $ 18.1 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. Based upon currently available information, the Company believes 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.
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.
17
Table of Contents
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
Note 18: Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss were as follows:
Three months ended June 30, 2020
Foreign
Currency
Translation
Defined
Benefit Plans
Cash Flow
Hedges
Total
Beginning balance
$
( 61.4
)
$
( 160.9
)
$
( 1.0
)
$
( 223.3
)
Other comprehensive income (loss) before reclassifications
5.3
-
0.8
6.1
Reclassifications:
Amortization of unrecognized net loss (a)
-
1.6
-
1.6
Realized losses - net (b)
-
-
0.5
0.5
Income taxes
-
( 0.4
)
( 0.3
)
( 0.7
)
Total other comprehensive income (loss)
5.3
1.2
1.0
7.5
Ending balance
$
( 56.1
)
$
( 159.7
)
$
-
$
( 215.8
)
Three months ended June 30, 2019
Foreign
Currency
Translation
Defined
Benefit Plans
Cash Flow
Hedges
Total
Beginning balance
$
( 42.6
)
$
( 136.3
)
$
0.5
$
( 178.4
)
Other comprehensive income (loss) before reclassifications
1.9
-
( 1.0
)
0.9
Reclassifications:
Amortization of unrecognized net loss (a)
-
1.4
-
1.4
Realized gains - net (b)
-
-
( 0.1
)
( 0.1
)
Income taxes
-
( 0.3
)
0.3
-
Total other comprehensive income (loss)
1.9
1.1
( 0.8
)
2.2
Ending balance
$
( 40.7
)
$
( 135.2
)
$
( 0.3
)
$
( 176.2
)
(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. Refer to Note 4 for additional information about the Company’s pension plans.
(b)
Amounts represent net gains and losses associated with cash flow hedges that were reclassified to net earnings.
18
Table of Contents
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
Note 19: 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 June 30,
2020
2019
External Sales
Inter-segment
Sales
Total
External Sales
Inter-segment
Sales
Total
Net sales:
CIS
$
121.3
$
1.2
$
122.5
$
167.9
$
0.9
$
168.8
BHVAC
47.4
0.2
47.6
48.5
0.5
49.0
HDE
118.3
5.2
123.5
199.7
16.7
216.4
Automotive
60.8
1.3
62.1
112.9
0.7
113.6
Segment total
347.8
7.9
355.7
529.0
18.8
547.8
Corporate and eliminations
-
( 7.9
)
( 7.9
)
-
( 18.8
)
( 18.8
)
Net sales
$
347.8
$
-
$
347.8
$
529.0
$
-
$
529.0
Three months ended June 30,
2020
2019
$'s
% of sales
$'s
% of sales
Gross profit:
CIS
$
15.5
12.6
%
$
24.3
14.4
%
BHVAC
14.5
30.5
%
13.7
27.9
%
HDE
11.3
9.2
%
32.5
15.0
%
Automotive
4.8
7.7
%
12.5
11.0
%
Segment total
46.1
13.0
%
83.0
15.2
%
Corporate and eliminations
-
-
0.4
-
Gross profit
$
46.1
13.3
%
$
83.4
15.8
%
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MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
Three months ended June 30,
2020
2019
Operating income:
CIS
$
-
$
9.0
BHVAC
7.1
5.3
HDE
( 2.5
)
17.3
Automotive
( 3.8
)
-
Segment total
0.8
31.6
Corporate and eliminations
( 4.0
)
( 13.5
)
Operating (loss) income
$
( 3.2
)
$
18.1
June 30, 2020
March 31, 2020
Total assets:
CIS
$
600.4
$
617.7
BHVAC
109.2
102.3
HDE
427.5
417.4
Automotive
270.2
272.5
Corporate and eliminations
109.4
126.2
Total assets
$
1,516.7
$
1,536.1
Note 20: 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 .
20
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.