MODINE MANUFACTURING CO - Quarter Report: 2020 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

☑	QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2020

☐	TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Commission file number 1-1373

MODINE MANUFACTURING COMPANY

(Exact name of registrant as specified in its charter)

Wisconsin		39-0482000
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1500 DeKoven Avenue, Racine, Wisconsin		53403
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code (262) 636-1200

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.625 par value	MOD	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer ☑	Accelerated Filer ☐

Non-accelerated Filer ☐	Smaller reporting company ☐

	Emerging growth company ☐

If an emerging growth company, indicate by checkmark if the registrant has not elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☑

The number of shares outstanding of the registrant’s common stock, $0.625 par value, was 51,147,640 at July 31, 2020.

MODINE MANUFACTURING COMPANY

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.		1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		21
Item 3. Quantitative and Qualitative Disclosures About Market Risk.		29
Item 4. Controls and Procedures.		30
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.		30
Item 6. Exhibits.		31
SIGNATURE		32

Table of Contents

PART I. FINANCIAL INFORMATION

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	)
Net (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 not 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

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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.

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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. To 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.

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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.

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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.

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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.

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Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations.

When we use the terms “Modine,” “we,” “us,” the “Company,” or “our” in this report, we are referring to Modine Manufacturing Company. Our fiscal year ends on March 31 and, accordingly, all references to quarters refer to our fiscal quarters. The quarter ended June 30, 2020 was the first quarter of fiscal 2021.

COVID-19

As the COVID-19 pandemic continues, the health and overall well-being of our employees continues to be our top priority. We have implemented strict measures to mitigate risk in our manufacturing operations and administrative offices, including face masks, social distancing, and enhanced sanitation protocols. We are also committed to meeting our customers’ needs and will work to overcome any obstacles that may arise to deliver quality products and services to our customers in a timely manner.

The COVID-19 pandemic and the resulting broad economic impacts on our key end markets negatively impacted our business operations and financial results during the first quarter of fiscal 2021. In March and April 2020, we suspended production at many manufacturing facilities around the world due to local government requirements or customer shutdowns. Although we have since reopened all of the temporarily-closed facilities, we are currently operating approximately half of our facilities at reduced production levels based upon customer demand. In an effort to mitigate the negative impacts of COVID-19 on our financial results, we have taken actions that are yielding significant cost savings, including, but not limited to, production staffing adjustments, furloughs, shortened work weeks, and temporary salary reductions at all levels of our organization. We have also taken advantage of government assistance programs, primarily offered in European countries, to offset idle labor costs and to avoid employee layoffs to the extent possible. In addition, we have reduced operating and administrative expenses, including travel and entertainment expenditures, and lowered the annual compensation paid to the Board of Directors. We are also focused on reducing capital expenditures and, where possible, have delayed certain projects and the purchase of some program-related equipment and tooling.

First Quarter Highlights

Net sales in the first quarter of fiscal 2021 decreased $181.2 million, or 34 percent, from the first quarter of fiscal 2020, primarily due to lower sales in our Heavy Duty Equipment (“HDE”), Automotive, and Commercial and Industrial Solutions (“CIS”) segments. Sales in each of these segments were significantly impacted by market-driven volume declines and the temporary plant closures described above related to the COVID-19 pandemic. Cost of sales decreased $143.9 million, or 32 percent, from the first quarter of fiscal 2020, primarily due to lower sales volume. Gross profit decreased $37.3 million and gross margin declined 250 basis points to 13.3 percent. Selling, general and administrative (“SG&A”) expenses decreased $18.8 million, primarily due to cost-reduction initiatives in response to the negative impacts of COVID-19 and lower project costs associated with our review of strategic alternatives for the automotive business, which decreased approximately $8.0 million compared with the first quarter of fiscal 2020. The operating loss during the first quarter of fiscal 2021 of $3.2 million represents a $21.3 million decline from the prior-year operating income of $18.1 million and was primarily due to lower earnings in our HDE, Automotive, and CIS segments, partially offset by increased earnings in our Building HVAC Systems (“BHVAC”) segment.

We previously reported that we had paused our evaluation of strategic alternatives for the automotive business in light of the impacts of the COVID-19 pandemic and vehicular market weakness. We resumed this process during the first quarter of fiscal 2021 and are committed to exiting the automotive business in a manner that is in the best interest of our shareholders.

Recent Announcement

On August 4, 2020, we 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, our 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, we expect 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.

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CONSOLIDATED RESULTS OF OPERATIONS

The following table presents our consolidated financial results on a comparative basis for the three months ended June 30, 2020 and 2019:

	Three months ended June 30,
	2020						2019
(in millions)	$'s			% of sales			$'s			% of sales
Net sales	$	347.8			100.0	%	$	529.0			100.0	%
Cost of sales		301.7			86.7	%		445.6			84.2	%
Gross profit		46.1			13.3	%		83.4			15.8	%
Selling, general and administrative expenses		44.7			12.9	%		63.5			12.0	%
Restructuring expenses		4.6			1.3	%		1.8			0.3	%
Operating (loss) income		(3.2	)		-0.9	%		18.1			3.4	%
Interest expense		(5.4	)		-1.6	%		(5.9	)		-1.1	%
Other expense – net		-			-			(1.1	)		-0.2	%
(Loss) earnings before income taxes		(8.6	)		-2.5	%		11.1			2.1	%
Benefit (provision) for income taxes		0.2			0.1	%		(2.9	)		-0.6	%
Net (loss) earnings	$	(8.4	)		-2.4	%	$	8.2			1.5	%

First quarter net sales of $347.8 million were $181.2 million, or 34 percent, lower than the first quarter of the prior year, primarily due to lower sales volume in our HDE, Automotive, and CIS segments. Sales in these segments decreased $92.9 million, $51.5 million, and $46.3 million, respectively, and were significantly impacted by market-driven volume declines and temporary plant closures due to the COVID-19 pandemic.

First quarter cost of sales decreased $143.9 million, or 32 percent, primarily due to lower sales volume. Cost of sales was favorably impacted by the benefits of cost-reduction initiatives in response to lower end market demand and procurement initiatives. As a percentage of sales, cost of sales increased 250 basis points to 86.7 percent, primarily due to the unfavorable impact of the lower sales volume.

As a result of lower sales and higher cost of sales as a percentage of sales, first quarter gross profit decreased $37.3 million and gross margin declined 250 basis points to 13.3 percent.

First quarter SG&A expenses decreased $18.8 million. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $10.0 million, and lower costs recorded at Corporate associated with our review of strategic alternatives for the Automotive segment’s business operations, which decreased approximately $8.0 million. The lower compensation-related expenses resulted primarily from our cost-reduction initiatives aimed to mitigate the negative impacts of COVID-19.

Restructuring expenses totaled $4.6 million in the first quarter of fiscal 2021 and primarily consisted of severance expenses in the CIS and HDE segments. The severance expenses related to targeted headcount reductions in support of our objective to reduce operational and SG&A cost structures and plant consolidation activities.

The operating loss of $3.2 million represents a $21.3 million decline from the prior-year operating income of $18.1 million and was primarily due to lower earnings in our HDE, CIS, and Automotive segments, partially offset by increased earnings in our BHVAC segment.

The benefit for income taxes was $0.2 million during the first quarter of fiscal 2021, compared with a provision for income taxes of $2.9 million during the first quarter of the prior year. The $3.1 million change was primarily due to lower earnings and changes in the mix of foreign and U.S. earnings.

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SEGMENT RESULTS OF OPERATIONS

Effective April 1, 2020, we began managing our global automotive business separate from the other businesses within the previously-reported Vehicular Thermal Solutions (“VTS”) segment. We are managing the automotive business as the Automotive segment as we target the sale or eventual exit of its underlying automotive business operations. We are managing the other businesses of the VTS segment, including the commercial vehicle and off-highway businesses, as the Heavy Duty Equipment segment. We began reporting financial results for our new segment structure beginning for fiscal 2021. Segment financial information for fiscal 2020 has been recast to conform to the fiscal 2021 presentation. The segment realignment had no impact on the CIS and BHVAC segments.

The following is a discussion of our segment results of operations for the three months ended June 30, 2020 and 2019:

Commercial and Industrial Solutions
	Three months ended June 30,
	2020					2019
(in millions)	$'s		% of sales			$'s		% of sales
Net sales	$	122.5		100.0	%	$	168.8		100.0	%
Cost of sales		107.0		87.4	%		144.5		85.6	%
Gross profit		15.5		12.6	%		24.3		14.4	%
Selling, general and administrative expenses		13.1		10.6	%		15.1		9.0	%
Restructuring expenses		2.4		2.0	%		0.2		0.1	%
Operating income	$	-		-		$	9.0		5.3	%

CIS net sales decreased $46.3 million, or 27 percent, from the first quarter of fiscal 2020 to the first quarter of fiscal 2021, primarily due to lower sales volume resulting from the impacts of the COVID-19 pandemic. Sales to commercial HVAC&R and data center cooling customers decreased $37.0 million and $10.4 million, respectively.

CIS cost of sales decreased $37.5 million, or 26 percent, from the first quarter of fiscal 2020 to the first quarter of fiscal 2021, primarily due to lower sales volume. As a percentage of sales, cost of sales increased 180 basis points to 87.4 percent, primarily due to the unfavorable impact of lower sales volume, partially offset by cost-reduction initiatives and favorable sales mix.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $8.8 million and gross margin declined 180 basis points to 12.6 percent.

SG&A expenses decreased $2.0 million compared with the first quarter of the prior year. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $2.0 million.

Restructuring expenses during the first quarter of fiscal 2021 totaled $2.4 million and primarily consisted of severance expenses related to plant consolidation activities in China and targeted headcount reductions in North America.

Operating income decreased $9.0 million, from the first quarter of fiscal 2020 to the first quarter of fiscal 2021, primarily due to lower gross profit and higher restructuring expenses, partially offset by lower SG&A expenses.

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Building HVAC Systems

	Three months ended June 30,
	2020					2019
(in millions)	$'s		% of sales			$'s		% of sales
Net sales	$	47.6		100.0	%	$	49.0		100.0	%
Cost of sales		33.1		69.5	%		35.3		72.1	%
Gross profit		14.5		30.5	%		13.7		27.9	%
Selling, general and administrative expenses		7.4		15.5	%		8.4		17.2	%
Operating income	$	7.1		15.0	%	$	5.3		10.7	%

BHVAC net sales decreased $1.4 million, or 3 percent, from the first quarter of fiscal 2020 to the first quarter of fiscal 2021 and were negatively impacted by the COVID-19 pandemic. Compared with the first quarter of the prior year, BHVAC sales decreased $3.1 million in the U.S. and increased $1.7 million in the U.K. The lower sales in the U.S. were primarily driven by decreased sales of heating and ventilation products. The higher sales in the U.K. were primarily due to higher sales of data center products, partially offset by lower sales of air conditioning products.

BHVAC cost of sales decreased $2.2 million, or 6 percent, from the first quarter of fiscal 2020 to the first quarter of fiscal 2021. As a percentage of sales, cost of sales decreased 260 basis points to 69.5 percent and was positively impacted by favorable customer pricing, cost-reduction initiatives and lower material costs.

As a result of the lower sales and lower cost of sales as a percentage of sales, gross profit increased $0.8 million and gross margin improved 260 basis points to 30.5 percent.

SG&A expenses decreased $1.0 million, or 170 basis points as a percentage of sales, from the prior year. The decrease in SG&A expenses was primarily due to lower compensation-related expenses and lower travel expenses.

Operating income of $7.1 million increased $1.8 million during the quarter, primarily due to higher gross profit and lower SG&A expenses.

Heavy Duty Equipment
	Three months ended June 30,
	2020						2019
(in millions)	$'s			% of sales			$'s		% of sales
Net sales	$	123.5			100.0	%	$	216.4		100.0	%
Cost of sales		112.2			90.8	%		183.9		85.0	%
Gross profit		11.3			9.2	%		32.5		15.0	%
Selling, general and administrative expenses		11.9			9.7	%		14.8		6.8	%
Restructuring expenses		1.9			1.5	%		0.4		0.2	%
Operating (loss) income	$	(2.5	)		-2.0	%	$	17.3		8.0	%

HDE net sales decreased $92.9 million, or 43 percent, from the first quarter of fiscal 2020 to the first quarter of fiscal 2021, primarily due to lower sales volume resulting from the impacts of the COVID-19 pandemic. Sales to commercial vehicle, off-highway, and automotive customers decreased $46.4 million, $16.8 million, and $13.8 million, respectively. These sales declines, which were most significant in the Americas and Europe, largely resulted from weakness in the global vehicular markets. In addition, the planned wind-down of certain programs contributed, to a lesser extent, to the lower sales to commercial vehicle customers.

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HDE cost of sales decreased $71.7 million, or 39 percent, from the first quarter of fiscal 2020 to the first quarter of fiscal 2021, primarily due to lower sales volume. As a percentage of sales, cost of sales increased 580 basis points to 90.8 percent. The significant unfavorable impact of the lower sales volume was partially offset by improved operating efficiencies and cost savings from procurement and other cost-reduction initiatives.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $21.2 million and gross margin declined 580 basis points to 9.2 percent.

SG&A expenses decreased $2.9 million compared with the first quarter of the prior year. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $2.0 million, and lower travel expenses.

Restructuring expenses during the first quarter of fiscal 2021 totaled $1.9 million and primarily consisted of severance expenses resulting from targeted headcount reductions in North America.

The operating loss of $2.5 million represents a $19.8 million decline from the prior-year operating income of $17.3 million and was primarily due to lower gross profit, partially offset by lower SG&A expenses.

Automotive
	Three months ended June 30,
	2020						2019
(in millions)	$'s			% of sales			$'s		% of sales
Net sales	$	62.1			100.0	%	$	113.6		100.0	%
Cost of sales		57.3			92.3	%		101.1		89.0	%
Gross profit		4.8			7.7	%		12.5		11.0	%
Selling, general and administrative expenses		8.4			13.6	%		11.3		10.0	%
Restructuring expenses		0.2			0.2	%		1.2		1.0	%
Operating (loss) income	$	(3.8	)		-6.1	%	$	-		-

Automotive net sales decreased $51.5 million, or 45 percent, from the first quarter of fiscal 2020 to the first quarter of fiscal 2021, primarily due to lower sales volume resulting from the impacts of the COVID-19 pandemic. Sales in Europe and North America decreased $43.4 million and $9.9 million, respectively.

Automotive cost of sales decreased $43.8 million, or 43 percent, from the first quarter of fiscal 2020 to the first quarter of fiscal 2021, primarily due to lower sales volume. As a percentage of sales, cost of sales increased 330 basis points to 92.3 percent. The significant unfavorable impact of the lower sales volume was partially offset by improved operating efficiencies and favorable raw material costs.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $7.7 million and gross margin declined 330 basis points to 7.7 percent.

Restructuring expenses during the first quarter of fiscal 2021 totaled $0.2 million and primarily consisted of severance expenses resulting from targeted headcount reductions in Europe.

The operating loss of $3.8 million represents a $3.8 million decline from the prior-year operating income of less than $0.1 million and was primarily due to lower gross profit, partially offset by lower SG&A and restructuring expenses.

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Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents as of June 30, 2020 of $77.2 million, and an available borrowing capacity of $118.4 million under our revolving credit facility. Given our extensive international operations, approximately $57.0 million of our cash and cash equivalents are held by our non-U.S. subsidiaries. Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.

In response to lower customer demand resulting from the COVID-19 pandemic, we have taken actions to reduce operating expenses, conserve cash and maximize liquidity. These actions have included, but are not limited to, production staffing adjustments, furloughs, shortened work weeks, and temporary salary reductions at all levels of our organization. In addition, we have reduced operating and administrative expenses. Further, as described below, we are focused on reducing our capital expenditures and executed amendments to our primary credit agreements to help ensure liquidity through financial covenant flexibility during fiscal 2021 and 2022. We believe our sources of liquidity, including cash flow from operations, our cash and cash equivalents, and access to both committed and uncommittted credit facilities, will provide sufficient cash flow to meet our obligations during the next twelve months and beyond. However, we are continuing to monitor the impacts of COVID-19 on our business and the credit and financial markets.

The full extent of the impacts of COVID-19, which will largely depend on the length and severity of the pandemic, could have a material adverse effect on our business, results of operations, and cash flows and could adversely affect our access to capital and/or financing.

Net Cash Provided by Operating Activities

Net cash provided by operating activities for the three months ended June 30, 2020 was $12.3 million, which represents an $11.8 million increase compared with the same period in the prior year. This increase in operating cash flow was primarily due to favorable net changes in working capital and lower payments for separation and project costs associated with our review of strategic alternatives for the automotive business, partially offset by lower operating earnings in the current year. The favorable changes in working capital during the first three months of fiscal 2021, compared with the same period in the prior year, included lower payments for incentive compensation, employee benefits, income taxes and payroll taxes. We have deferred, and expect to continue to defer, payments of payroll taxes, as permitted by the Coronavirus Aid, Relief and Economic Security Act.

Capital Expenditures

In response to the economic impacts of the COVID-19 pandemic, we are taking steps to preserve our financial liquidity. As part of this initiative, we are focused on reducing our capital expenditures and, where possible, have delayed certain projects and the purchase of certain program-related equipment and tooling in our vehicular businesses. Capital expenditures of $9.1 million during the first three months of fiscal 2021 decreased $11.2 million compared with the same period in the prior year.

Debt

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant further discussed below. 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, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

In May 2020, we executed amendments to our primary credit agreements in the U.S. to provide additional covenant flexibility in light of the risks and uncertainties associated with the COVID-19 pandemic. Under the amended agreements, the leverage ratio covenant limit has been temporarily raised. We believe this additional flexibility will enable us to be compliant with our debt covenants, even if the adverse effects of the COVID-19 pandemic on our business are more severe than we currently anticipate. However, failure to comply with the debt covenants could result in an event of default, which, if not cured or waived, could result in us being required to repay borrowings before their due date.

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The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, in relation to our consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”). For fiscal 2021, the leverage ratio covenant limit 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. We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.

As of June 30, 2020, we were in compliance with our debt covenants; our leverage ratio and interest coverage ratio were 2.9 and 7.0, respectively. We expect to remain in compliance with our debt covenants during fiscal 2021 and beyond.

Forward-Looking Statements

This report, including, but not limited to, the discussion under Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains statements, including information about future financial performance, accompanied by phrases such as “believes,” “estimates,” “expects,” “plans,” “anticipates,” “intends,” and other similar “forward-looking” statements, as defined in the Private Securities Litigation Reform Act of 1995. Modine’s actual results, performance or achievements may differ materially from those expressed or implied in these statements, because of certain risks and uncertainties, including, but not limited to, those described under “Risk Factors” in Item 1A. in Part I. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2020. Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

•

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers, customers, and employees;

•

Economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including, in particular, foreign currency exchange rate fluctuations; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); inflation; changes in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade, public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade, the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the short- and long-term implications of “Brexit”

•

The impact of potential price increases associated with raw materials, including aluminum, copper, steel and stainless steel (nickel), and other purchased component inventory including, but not limited to, increases in the underlying material cost based upon the London Metal Exchange and related premiums or fabrication costs. These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand. This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whether through our quotation process or through contract provisions for prospective price adjustments, as well as the inherent lag in timing of such contract provisions; and

•

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

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Operational Risks:

•

The overall health and continually increasing price-down focus of our vehicular customers in light of economic and market-specific factors, and the potential impact on us from any deterioration in the stability or performance of any of our major customers;

•

Unanticipated problems with suppliers meeting our time, quantity, quality and price demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

•

Our ability to maintain current customer programs and compete effectively for new business, including our ability to offset or otherwise address increasing pricing pressures from competitors and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;

•

Unanticipated product or manufacturing difficulties or operating inefficiencies, including unanticipated program launch and product transfer challenges and warranty claims and delays or inefficiencies resulting from restrictions imposed in response to the COVID-19 pandemic;

•

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

•

Our ability to consistently structure our operations in order to develop and maintain a competitive cost base with appropriately skilled and stable labor, while also positioning ourselves geographically, so that we can continue to support our customers with the technical expertise and market-leading products they demand and expect from Modine;

•

Our ability to effectively and efficiently reduce our cost structure in response to sales volume declines and to complete restructuring activities and realize the anticipated benefits of those activities;

•

Costs and other effects of the investigation and remediation of environmental contamination; particularly when related to the actions or inactions of others and/or facilities over which we have no control;

•

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

•

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

•

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

•

Increasingly complex and restrictive laws and regulations, including those associated with being a U.S. public company and others present in various jurisdictions in which we operate, and the costs associated with compliance therewith;

•

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

•

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

•

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

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Strategic Risks:

•

Our ability to successfully exit the automotive business in a manner that is in the best interest of our shareholders in order to optimize the segment’s future financial performance;

•

Our ability to successfully realize anticipated benefits from our increased “industrial” market presence, with our CIS and BHVAC businesses, while maintaining appropriate focus on the market opportunities presented by our HDE and Automotive businesses;

•

Our ability to identify and execute growth and diversification opportunities in order to position us for long-term success; and

•

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

Financial Risks:

•

Our ability to fund our global liquidity requirements efficiently for Modine’s current operations and meet our long-term commitments, particularly in light of the volatility and negative pressure in the financial markets as a result of the COVID-19 pandemic and in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

•

The impact of potential increases in interest rates, particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations, and of the continued uncertainty around the utilization of LIBOR or alternative reference rates;

•

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

•

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

•

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2020. The Company’s market risks have not materially changed since the fiscal 2020 Form 10-K was filed.

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Item 4.

Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Vice President, Finance and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon that evaluation, the President and Chief Executive Officer and Vice President, Finance and Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of June 30, 2020.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the first quarter of fiscal 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the first quarter of fiscal 2021:

Period	Total Number of Shares Purchased	Average Price Paid Per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (a)
April 1 – April 30, 2020	_______	_______	_______	$46,985,524

May 1 – May 31, 2020	57,559 (b)	$5.35	_______	$46,985,524

June 1 – June 30, 2020	75,743 (b)	$6.28	_______	$46,985,524

Total	133,302 (b)	$5.88	_______

(a)

Effective October 30, 2018, the Board of Directors approved a two-year, $50.0 million share repurchase program, which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate. The Company did not repurchase any of its common stock under the repurchase program during the first quarter of fiscal 2021.

(b)

Consists of shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards. The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions. These shares are held as treasury shares.

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Item 6.

Exhibits.

(a) Exhibits:

Exhibit No.	Description	Incorporated Herein By Reference To	Filed Herewith
3.1	Bylaws of Modine Manufacturing Company, as amended, effective June 17, 2020.	Exhibit 3.1 to Registrant’s Current Report on Form 8-K dated June 17, 2020

10.1	2020 Incentive Compensation Plan.	Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated July 23, 2020

10.2	Form of Fiscal 2021 Modine Non-Employee Director Restricted Stock Unit Award Agreement.	Exhibit 10.2 to Registrant’s Current Report on Form 8-K dated July 23, 2020

31.1	Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Interim President and Chief Executive Officer and Vice President, Finance and Chief Financial Officer.		X

32.1	Section 1350 Certification of Michael B. Lucareli, Interim President and Chief Executive Officer and Vice President, Finance and Chief Financial Officer.		X

101.INS	Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)		X

101.SCH	Inline XBRL Taxonomy Extension Schema		X

101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document		X

101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document		X

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

MODINE MANUFACTURING COMPANY

(Registrant)

By: /s/ Michael B. Lucareli

Michael B. Lucareli, Interim President and Chief Executive Officer and Vice President, Finance and

Chief Financial Officer*

Date: August 5, 2020

* Executing as both the principal financial officer and a duly authorized officer of the Company