Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
þ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2024
or
☐ 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 for 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 þ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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).
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 þ
Accelerated Filer ☐
Non-accelerated Filer ☐
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not 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 þ
The number of shares outstanding of the registrant’s common stock, $0.625 par value, was 52,503,083 at October 25, 2024.
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.
25
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
34
Item 4. Controls and Procedures.
35
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
37
Item 5. Other Information.
Item 6. Exhibits.
38
SIGNATURE
39
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and six months ended September 30, 2024 and 2023
(In millions, except per share amounts)
(Unaudited)
Three months ended September 30,
Six months ended September 30,
2024
2023
Net sales
$
658.0
620.5
1,319.5
1,242.9
Cost of sales
492.4
485.4
991.3
979.9
Gross profit
165.6
135.1
328.2
263.0
Selling, general and administrative expenses
85.8
68.9
168.6
130.3
Restructuring expenses
4.5
0.5
9.9
Operating income
75.3
65.7
149.7
132.2
Interest expense
(7.4)
(6.1)
(14.9)
(12.0)
Other (expense) income – net
(1.5)
0.1
(1.8)
(0.5)
Earnings before income taxes
66.4
59.7
133.0
119.7
Provision for income taxes
(20.0)
(12.8)
(38.8)
(27.5)
Net earnings
46.4
46.9
94.2
92.2
Net earnings attributable to noncontrolling interest
(0.3)
(0.4)
(0.8)
(0.9)
Net earnings attributable to Modine
46.1
46.5
93.4
91.3
Net earnings per share attributable to Modine shareholders:
Basic
0.88
0.89
1.78
1.74
Diluted
0.86
0.87
1.73
1.72
Weighted-average shares outstanding:
52.6
52.4
52.5
53.9
53.4
53.2
The notes to condensed consolidated financial statements are an integral part of these statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
Other comprehensive income (loss), net of income taxes:
Foreign currency translation
21.1
(12.7)
14.1
(13.5)
Defined benefit plans, net of income taxes of $0.2, $0.3, $0.5 and $0.5 million
0.8
1.6
Cash flow hedges, net of income taxes of $0.1, ($0.1), $0.1 and ($0.3) million
0.2
(0.2)
Total other comprehensive income (loss)
22.1
(12.1)
15.9
Comprehensive income
68.5
34.8
110.1
79.4
Comprehensive income attributable to noncontrolling interest
(0.7)
(1.1)
Comprehensive income attributable to Modine
67.8
34.4
109.0
78.7
2
CONSOLIDATED BALANCE SHEETS
September 30, 2024 and March 31, 2024
September 30, 2024
March 31, 2024
ASSETS
Cash and cash equivalents
78.6
60.1
Trade accounts receivable – net
452.9
422.9
Inventories
366.5
357.9
Other current assets
54.6
53.1
Total current assets
952.6
894.0
Property, plant and equipment – net
373.9
365.7
Intangible assets – net
165.8
188.3
Goodwill
240.7
230.9
Deferred income taxes
63.3
75.1
Other noncurrent assets
119.3
97.5
Total assets
1,915.6
1,851.5
LIABILITIES AND SHAREHOLDERS’ EQUITY
Short-term debt
14.0
12.0
Long-term debt – current portion
32.3
19.7
Accounts payable
295.1
283.4
Accrued compensation and employee benefits
91.7
101.6
Other current liabilities
103.8
129.1
Total current liabilities
536.9
545.8
Long-term debt
359.1
399.9
26.3
30.0
Pensions
21.2
27.7
Other noncurrent liabilities
104.7
92.6
Total liabilities
1,048.2
1,096.0
Commitments and contingencies (see Note 18)
Shareholders’ equity:
Preferred stock, $0.025 par value, authorized 16.0 million shares, issued – none
—
Common stock, $0.625 par value, authorized 80.0 million shares, issued 56.3 million and 56.1 million shares
35.2
35.0
Additional paid-in capital
293.5
283.7
Retained earnings
752.4
659.0
Accumulated other comprehensive loss
(147.8)
(163.4)
Treasury stock, at cost, 3.8 million and 3.7 million shares
(74.5)
(66.7)
Total Modine shareholders’ equity
858.8
747.6
Noncontrolling interest
8.6
7.9
Total equity
867.4
755.5
Total liabilities and equity
3
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended September 30, 2024 and 2023
Cash flows from operating activities:
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization
39.1
Stock-based compensation expense
9.8
4.6
5.5
Other – net
3.4
3.8
Changes in operating assets and liabilities:
Trade accounts receivable
(25.5)
6.7
(5.2)
(4.3)
21.8
(43.3)
Other assets and liabilities
(49.6)
17.9
Net cash provided by operating activities
97.8
110.8
Cash flows from investing activities:
Expenditures for property, plant and equipment
(40.3)
(26.2)
Payments for business acquisitions
(3.4)
(4.8)
Proceeds from disposition of assets
1.1
(4.5)
Net cash used for investing activities
(43.2)
(34.4)
Cash flows from financing activities:
Borrowings of debt
282.0
176.6
Repayments of debt
(301.8)
(182.4)
Repayments on bank overdraft facilities – net
(9.0)
(3.7)
Purchases of treasury stock
(7.8)
(10.3)
Dividend paid to noncontrolling interest
0.3
1.7
Net cash used for financing activities
(36.7)
(18.6)
Effect of exchange rate changes on cash
0.7
(1.9)
Net increase in cash, cash equivalents and restricted cash
18.6
55.9
Cash, cash equivalents and restricted cash – beginning of period
60.3
67.2
Cash, cash equivalents and restricted cash – end of period
78.9
123.1
4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the three and six months ended September 30, 2024
Accumulated
Additional
other
Treasury
Non-
Common stock
paid-in
Retained
comprehensive
stock, at
controlling
Shares
Amount
capital
earnings
loss
cost
interest
Total
Balance, March 31, 2024
56.1
47.3
47.8
Other comprehensive loss
(0.1)
(6.2)
Stock options and awards
Purchase of treasury stock
(4.7)
4.2
Balance, June 30, 2024
56.2
35.1
287.9
706.3
(169.5)
(71.4)
796.3
Other comprehensive income
21.7
0.4
(3.1)
5.6
Balance, September 30, 2024
56.3
5
For the three and six months ended September 30, 2023
Balance, March 31, 2023
55.4
34.6
270.8
497.5
(161.1)
(49.0)
6.8
599.6
44.8
45.3
(1.2)
1.5
Balance, June 30, 2023
55.6
34.7
272.7
542.3
(161.6)
(50.2)
6.6
644.5
0.6
(9.1)
3.1
Balance, September 30, 2023
55.7
276.4
588.8
(173.7)
(59.3)
7.0
674.0
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1: General
The accompanying unaudited 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 six months of fiscal 2025 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, 2024.
Supplier finance programs
The Company facilitates a voluntary supplier finance program through a financial institution that allows certain suppliers in the U.S. and Europe to request early payment for invoices, at a discount, from the financial institution. The Company or the financial institution may terminate the supplier finance program upon 90 days’ notice. The Company’s obligations to its suppliers, including amounts due and payment terms, are consistent, irrespective of whether a supplier participates in the program. The Company is not party to the arrangements between the participating suppliers and the financial institution. Under this program, the Company confirms the validity of supplier invoices to the financial institution and remits payments to it based on the original payment terms, which typically range from 60 to 120 days. The outstanding obligations under this program, included within accounts payable in the consolidated balance sheets, totaled $17.8 million and $23.6 million at September 30, 2024 and March 31, 2024, respectively.
New accounting guidance
Segment reporting disclosures
In November 2023, the Financial Accounting Standards Board issued new disclosure guidance for reportable segments. The new guidance will require disclosure of significant segment expenses, which are expenses that are (i) significant to the segment, (ii) regularly provided to the chief operating decision maker (“CODM”) and (iii) included in the reported measure of segment profit or loss. In addition, the new guidance will require companies to disclose the title and position of their CODM and expand interim disclosures to include the majority of the annual segment disclosures. The definition of and method for determining reportable segments is unchanged. The new disclosure requirements will become effective for the Company’s fiscal 2025 annual financial statements. The Company is currently evaluating the new disclosures, but does not expect the guidance will have a material impact on its consolidated financial statements.
7
Note 2: Acquisitions and Dispositions
Acquisition of Scott Springfield Mfg. Inc.
On March 1, 2024, the Company acquired all of the issued and outstanding shares in the capital of Scott Springfield Mfg. Inc. (“Scott Springfield Manufacturing”) for consideration totaling $184.1 million. In July 2024 and upon finalization of the working capital adjustment, the Company paid $2.4 million to the seller.
Based in Calgary, Canada, Scott Springfield Manufacturing is a leading manufacturer of air handling units to customers in the data center, telecommunications, healthcare, and aerospace markets. This acquisition expanded the Company’s product offerings and customer base in the high-growth data center and indoor air quality markets in the U.S. and Canada. Since the date of the acquisition, the Company has reported the financial results of the Scott Springfield Manufacturing business within the Climate Solutions segment. For the three and six months ended September 30, 2024, the Company included $53.4 million and $93.1 million of net sales, respectively, within its consolidated statements of operations attributable to Scott Springfield Manufacturing.
The Company has completed the purchase price allocation for its acquisition of Scott Springfield Manufacturing. During the first quarter of fiscal 2025, the Company completed its market and trade name analyses and recorded a measurement period adjustment to reduce the fair value of the trade name intangible asset by $9.6 million. This adjustment resulted in a corresponding decrease in the deferred income tax liability of $2.2 million and an increase in goodwill of $7.4 million.
The Company’s purchase price allocation for its acquisition of Scott Springfield Manufacturing is as follows:
27.5
20.9
Property, plant and equipment
6.0
Intangible assets
92.7
72.6
Other assets
4.0
(8.6)
(1.3)
(22.2)
Other liabilities
Purchase price
184.1
The following unaudited supplemental pro forma information presents the Company’s consolidated results of operations as though the acquisition of Scott Springfield Manufacturing had occurred at the beginning of fiscal 2023. This pro forma financial information is presented for illustrative purposes only and is not considered to be indicative of the operating results that would have been achieved had the acquisition been completed as of the date indicated or the operating results that may be obtained in the future.
Three months ended
Six months ended
September 30, 2023
647.5
1,299.2
46.6
91.1
8
The supplemental pro forma financial information above is based upon the Company’s historical results and the historical results of Scott Springfield Manufacturing, which have been translated from Canadian dollars to U.S. dollars using the historical average foreign exchange rates. The pro forma information includes adjustments for: i) amortization and depreciation expense totaling approximately $2.0 million and $5.0 million for the three and six months ended September 30, 2023, respectively, for acquired tangible and intangible assets, (ii) estimated quarterly interest expense of $1.5 million resulting from acquisition-related borrowings, and (iii) the estimated income tax impacts related to the pro forma adjustments, considering the statutory tax rates within Canada. The pro forma financial information does not reflect any expected revenue or cost synergies.
Acquisition of Napps Technology Corporation
On July 1, 2023, the Company acquired substantially all of the net operating assets of Napps Technology Corporation (“Napps”), a Texas-based manufacturer of air- and water-cooled chillers, condensing units and heat pumps, for consideration totaling $5.8 million. The Company paid $4.8 million during the second quarter of fiscal 2024 and paid the remaining $1.0 million to the seller in July 2024. The Company has reported the financial results of the Napps business within the Climate Solutions segment since the date of the acquisition.
Disposition of Germany automotive businesses
In October 2023, the Company sold three automotive businesses based in Germany (the “disposal group”) to affiliates of Regent, L.P. Prior to the disposition, the Company reported the financial results of the disposal group within its Performance Technologies segment. Net sales of the disposal group included within the Company’s consolidated statement of operations for the three and six months ended September 30, 2023 totaled $21.9 million and $46.2 million, respectively.
9
Note 3: Revenue Recognition
Disaggregation of revenue
The tables below present revenue for each of the Company’s operating segments. Each segment’s revenue is disaggregated by product group, by geographic location and based upon the timing of revenue recognition.
Effective April 1, 2024, the Company moved its Coatings business, which was previously managed by and reported within the Performance Technologies segment, under the leadership of the Climate Solutions segment. See Note 20 for additional segment financial information. The disaggregated revenue information presented in the tables below for fiscal 2024 has been recast to be comparable with the fiscal 2025 presentation.
Three months ended September 30, 2024
Three months ended September 30, 2023
Climate
Performance
Segment
Solutions
Technologies
Product groups:
Data center cooling
158.9
78.8
Heat transfer
103.4
119.2
HVAC&R
104.1
91.2
Air-cooled
155.2
173.3
Liquid-cooled
99.1
126.4
Advanced solutions
37.3
31.6
Inter-segment sales
5.9
366.4
297.5
663.9
289.2
337.3
626.5
Geographic location:
Americas
252.6
182.7
435.3
174.1
178.4
352.5
Europe
105.9
72.5
109.1
110.0
219.1
Asia
42.3
50.2
48.9
54.9
Timing of revenue recognition:
Products transferred at a point in time
350.9
294.6
645.5
271.6
333.7
605.3
Products transferred over time
15.5
2.9
18.4
17.6
3.6
10
Six months ended September 30, 2024
Six months ended September 30, 2023
321.5
147.0
215.2
260.0
186.9
168.9
323.8
346.0
203.1
261.1
69.0
59.9
10.6
10.7
13.4
723.7
606.5
1,330.2
575.9
680.4
1,256.3
492.6
367.4
860.0
327.4
351.1
678.5
217.4
152.6
370.0
236.0
230.0
466.0
13.7
86.5
100.2
12.5
99.3
111.8
691.6
600.4
1,292.0
529.8
673.7
1,203.5
32.1
6.1
38.2
52.8
Contract balances
Contract assets and contract liabilities from contracts with customers were as follows:
Contract assets
14.5
12.9
Contract liabilities
51.9
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 $1.6 million increase in contract assets during the first six months of fiscal 2025 primarily resulted from increases in contract assets for revenue recognized over time and in capitalized costs related to the Company’s fulfillment of its performance obligations.
Contract liabilities, included within other current liabilities in the consolidated balance sheets, consist of payments received in advance of satisfying performance obligations under customer contracts, including contracts for data center cooling products and customer-owned tooling. The $27.5 million decrease in contract liabilities during the first six months of fiscal 2025 primarily resulted from the Company’s satisfaction of performance obligations under contracts that had required advanced payments, largely associated with long inventory lead times.
11
Note 4: Fair Value Measurements
Fair value is defined as the price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. Fair value measurements are classified under the following hierarchy:
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, trade accounts receivable, accounts payable, and short-term debt approximate fair value due to the short-term nature of these instruments. The fair value of the Company’s long-term debt is disclosed in Note 17.
Note 5: Pensions
Pension cost included the following components:
Service cost
Interest cost
2.2
2.4
4.8
Expected return on plan assets
(2.1)
(2.6)
Amortization of unrecognized net loss
1.2
2.3
Net periodic benefit cost
1.3
1.0
2.6
2.0
During the six months ended September 30, 2024, the Company contributed $6.5 million to its U.S. pension plan.
In June 2024, the Company approved the termination of its U.S. pension plan, subject to approvals from the Internal Revenue Service and the Pension Benefit Guaranty Corporation. The Company intends to offer certain participants the option to receive their pension benefits in the form of a lump-sum distribution prior to purchasing annuity contracts to transfer its remaining obligations under the plan. In connection with the plan termination, the Company expects to make additional cash contributions in the range of $10.0 million to $25.0 million to fully fund the plan, on a plan termination basis, and to record non-cash pension settlement charges totaling approximately $120.0 million to $130.0 million during fiscal 2026. The timing and amount of the final cash contribution and settlement charges could materially differ from the Company’s estimates due to the nature and timing of participant settlements, prevailing market and economic conditions, the duration of the termination process, or other factors.
12
Note 6: Stock-Based Compensation
The Company’s stock-based incentive programs consist of the following: (i) a long-term incentive plan (“LTIP”) for officers and other executives that authorizes grants of stock awards, stock options, and performance-based awards for retention and performance, (ii) a discretionary equity program for other management and key employees, and (iii) stock awards for non-employee directors.
The Company calculates compensation expense based upon the fair value of the awards 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 $5.6 million and $3.1 million for the three months ended September 30, 2024 and 2023, respectively. The Company recognized stock-based compensation expense of $9.8 million and $4.6 million for the six months ended September 30, 2024 and 2023, respectively.
During the first six months of fiscal 2025, the Company granted performance-based stock awards and restricted stock awards. The performance metrics for the performance-based stock awards are based upon a target three-year average cash flow return on invested capital and a target three-year average growth in consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”) at the end of the performance period ending March 31, 2027.
The weighted-average fair value of stock-based compensation awards granted during the six months ended September 30, 2024 and 2023 were as follows:
Fair Value
Per Award
Performance stock awards
103.77
27.29
Restricted stock awards
105.40
33.19
As of September 30, 2024, unrecognized compensation expense related to non-vested stock-based compensation awards, which will be recognized as expense over the remaining service periods, was as follows:
Unrecognized
Weighted-Average
Compensation
Remaining Service
Expense
Period in Years
30.6
8.2
Stock options
0.9
39.7
Note 7: Restructuring Activities
During the first six months of fiscal 2025, restructuring and repositioning expenses primarily consisted of severance expenses recorded in the Performance Technologies segment. These severance charges were primarily recorded in Europe and include severance related to the closure of a technical service center and other targeted headcount reductions. In addition, as part of its transformational initiatives supported by 80/20 principles, the Company is taking steps to optimize the efficiency of its supply chain and manufacturing processes in order to improve profit margins in the Climate Solutions and Performance Technologies segments. These restructuring activities have included transferring the production and warehousing for certain product lines among its facilities.
13
During the first six months of fiscal 2024, restructuring and repositioning expenses primarily consisted of equipment transfer costs in the Climate Solutions and Performance Technologies segments.
Restructuring and repositioning expenses were as follows:
Employee severance and related benefits
3.2
8.0
Other restructuring and repositioning expenses
1.9
Other restructuring and repositioning expenses primarily consist of costs related to product line transfers.
The Company accrues severance in accordance with its written plans, procedures, and relevant statutory requirements. Changes in accrued severance were as follows:
Beginning balance
8.9
Additions
Payments
(4.1)
Reclassified as held for sale (a)
(2.5)
Effect of exchange rate changes
Ending balance
13.0
(13.3)
(4.9)
____
14
Note 8: Other Income and Expense
Other income and expense consisted of the following:
Interest income
Foreign currency transactions (a)
(1.0)
Net periodic benefit cost (b)
(2.3)
(1.7)
Total other (expense) income - net
Note 9: Income Taxes
The Company’s effective tax rate for the three months ended September 30, 2024 and 2023 was 30.1 percent and 21.4 percent, respectively. The Company’s effective tax rate for the six months ended September 30, 2024 and 2023 was 29.2 percent and 23.0 percent, respectively. The effective tax rates for fiscal 2025 are higher than the prior year, primarily due to changes in the mix and amount of foreign and U.S. earnings. In addition, the effective tax rates for the prior-year periods were favorably impacted by the release of a $1.8 million unrecognized tax benefit during the second quarter of fiscal 2024, due to a lapse in statute of limitations.
The Company records valuation allowances against its net deferred tax assets to the extent it determines it is more likely than not that such assets will not be realized in the future. Each quarter, the Company evaluates the probability that its deferred tax assets will be realized and determines whether valuation allowances or adjustments thereto are needed. This determination involves judgement and the use of significant estimates and assumptions, including expectations of future taxable income and tax planning strategies. In addition, the Company considers the duration of statutory carryforward periods and historical financial results.
At September 30, 2024, valuation allowances against deferred tax assets in the U.S. and in certain foreign jurisdictions totaled $46.3 million and $23.8 million, respectively. The Company will maintain the valuation allowances in each applicable tax jurisdiction until it determines it is more likely than not the deferred tax assets will be realized, thereby eliminating the need for a valuation allowance. Future events or circumstances, such as lower taxable income or unfavorable changes in the financial outlook of the Company’s operations in the U.S. and certain foreign jurisdictions, could necessitate the establishment of further valuation allowances.
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. In addition, the Company excludes the impact of operations anticipated to generate net operating losses for the full fiscal year from the overall effective tax rate calculation and instead records them discretely based upon year-to-date results. The Company does not anticipate a significant change in unrecognized tax benefits during the remainder of fiscal 2025.
15
Note 10: Earnings Per Share
The components of basic and diluted earnings per share were as follows:
Weighted-average shares outstanding – basic
Effect of dilutive securities
1.4
Weighted-average shares outstanding – diluted
Earnings per share:
Net earnings per share – basic
Net earnings per share – diluted
There were no anti-dilutive securities outstanding for the three and six months ended September 30, 2024 and the three months ended September 30, 2023. For the six months ended September 30, 2023, the Company excluded 0.1 million of restricted stock awards for the calculation of diluted earnings per share because they were anti-dilutive.
Note 11: Cash, Cash Equivalents and Restricted Cash
Cash, cash equivalents and restricted cash consisted of the following:
Restricted cash
Total cash, cash equivalents and restricted cash
Restricted cash, which is reported within other current assets and other noncurrent assets in the consolidated balance sheets, consists primarily of deposits for contractual guarantees or commitments required for rents, import and export duties, and commercial agreements.
Note 12: Inventories
Inventories consisted of the following:
Raw materials
224.0
207.8
Work in process
69.6
64.5
Finished goods
72.9
85.6
Total inventories
16
Note 13: Property, Plant and Equipment
Property, plant and equipment, including depreciable lives, consisted of the following:
Land
16.8
16.3
Buildings and improvements (10-40 years)
289.3
280.7
Machinery and equipment (3-15 years)
858.4
824.4
Office equipment (3-10 years)
95.8
97.0
Construction in progress
57.6
67.6
1,317.9
1,286.0
Less: accumulated depreciation
(944.0)
(920.3)
Net property, plant and equipment
Note 14: Goodwill and Intangible Assets
During the first quarter of fiscal 2025, the Company recorded a measurement period adjustment to reduce the fair value of the acquired Scott Springfield Manufacturing trade name by $9.6 million. This purchase accounting adjustment resulted in a $7.4 million increase in goodwill. See Note 2 for additional information.
As a result of the segment realignment during the first quarter of fiscal 2025, the Company’s goodwill now resides entirely within the Climate Solutions segment. The following table presents a roll forward of the carrying value of goodwill from March 31, 2024 to September 30, 2024.
Climate Solutions
Goodwill, March 31, 2024
Acquisition adjustment
7.4
Goodwill, September 30, 2024
Intangible assets consisted of the following:
Gross
Net
Carrying
Intangible
Value
Amortization
Assets
Customer relationships
151.5
(37.8)
113.7
150.5
(26.3)
124.2
Trade names
53.6
(19.9)
33.7
62.8
(18.5)
44.3
Acquired technology
32.8
(14.4)
32.5
19.8
Total intangible assets
237.9
(72.1)
245.8
(57.5)
The Company recorded amortization expense of $6.9 million and $2.0 million for the three months ended September 30, 2024 and 2023, respectively. The Company recorded amortization expense of $13.8 million and $4.0 million for the six months ended September 30, 2024 and 2023, respectively. The Company estimates that it will record approximately $14.0 million of amortization expense during the remainder of fiscal 2025. The Company estimates that it will record approximately $18.0 million, $16.0 million, $16.0 million, and $15.0 million of annual amortization expense in fiscal 2026 through 2029, respectively.
17
Note 15: Product Warranties
Changes in accrued warranty costs were as follows:
10.8
Warranties recorded at time of sale
Adjustments to pre-existing warranties
2.5
Settlements
(1.6)
(1.4)
11.1
10.3
6.9
(3.3)
18
Note 16: Leases
Lease assets and liabilities
The following table provides a summary of leases recorded on the consolidated balance sheets.
Balance Sheet Location
Lease Assets
Operating lease ROU assets
91.4
76.0
Finance lease ROU assets (a)
Property, plant and equipment - net
7.3
6.5
Lease Liabilities
Operating lease liabilities
17.4
15.3
75.4
62.1
Finance lease liabilities
Long-term debt - current portion
The increases in operating lease ROU assets and liabilities from March 31, 2024 to September 30, 2024 primarily resulted from the commencement of a 10-year manufacturing facility lease within the Climate Solutions segment. The Company entered into this new lease to increase production capacity for data center products.
Components of lease expense
The components of lease expense were as follows:
Operating lease expense (a)
7.7
14.6
11.5
Finance lease expense:
Depreciation of ROU assets
Interest on lease liabilities
Total lease expense
15.0
11.9
During July 2024, the Company signed a 10-year operating lease of a manufacturing facility with future lease payments totaling approximately $12.0 million which is expected to commence in the third quarter of fiscal 2025.
19
Note 17: Indebtedness
Long-term debt consisted of the following:
Fiscal year
of maturity
Term loans
2028
200.3
204.5
5.9% Senior Notes
2029
100.0
Revolving credit facility
65.0
90.0
5.8% Senior Notes
2027
25.0
Finance lease obligations
3.0
393.3
421.8
Less: current portion
(32.3)
(19.7)
Less: unamortized debt issuance costs
(2.2)
Total long-term debt
Long-term debt, including the current portion of long-term debt, matures as follows:
Fiscal Year
Remainder of 2025
2026
263.4
25.5
2030 & beyond
The Company maintains a credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and U.S. dollar- and euro-denominated term loan facilities maturing in October 2027. In addition, the credit agreement provides for shorter-duration swingline loans. Borrowings under the revolving credit, swingline and term loan facilities bear interest at a variable rate, based upon the applicable reference rate and including a margin percentage dependent upon the Company’s leverage ratio, as described below. At September 30, 2024, the weighted-average interest rate for revolving credit facility borrowings and the term loans was 6.3 and 5.8 percent, respectively.
Based upon the terms of the credit agreement, the Company classifies borrowings under its revolving credit and swingline facilities as long-term and short-term debt, respectively, on its consolidated balance sheets. At September 30, 2024, the Company’s borrowings under its revolving credit and swingline facilities totaled $65.0 million and $13.0 million, respectively, and domestic letters of credit totaled $6.2 million. As a result, available borrowing capacity under the Company’s revolving credit facility was $190.8 million as of September 30, 2024. At March 31, 2024, the Company’s borrowings under its revolving credit and swingline facilities totaled $90.0 million and $2.0 million, respectively.
The Company also maintains credit agreements for its foreign subsidiaries. The outstanding short-term borrowings related to these foreign credit agreements totaled $1.0 million and $10.0 million at September 30, 2024 and March 31, 2024, respectively.
20
Indebtedness under the Company’s credit agreement and Senior Note agreements is secured by liens on substantially all domestic assets. These agreements further require compliance with various covenants that may limit the Company’s ability to incur additional indebtedness; grant liens; make investments, loans, or guarantees; engage in certain transactions with affiliates; and make restricted payments, including dividends. In addition, the agreements may require prepayment in the event of certain asset sales.
Financial covenants within its credit agreements include a leverage ratio covenant, which requires the Company to limit its consolidated indebtedness, less a portion of its cash balances, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”). The Company must also maintain a ratio of Adjusted EBITDA of at least three times consolidated interest expense. As of September 30, 2024, the Company was in compliance with its debt covenants.
The Company estimates the fair value of long-term debt using discounted future cash flows at rates offered to the Company for similar debt instruments of comparable maturities. As of September 30, 2024 and March 31, 2024, 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 $124.9 million and $120.9 million, respectively. The fair value of the Company’s long-term debt is categorized as Level 2 within the fair value hierarchy. Refer to Note 4 for the definition of a Level 2 fair value measurement.
Note 18: Risks, Uncertainties, Contingencies and Litigation
Environmental
The Company has recorded environmental monitoring and remediation accruals related to manufacturing facilities in the U.S., one of which the Company currently owns and operates, and at its former manufacturing facility in the Netherlands. These accruals primarily relate to soil and groundwater contamination at facilities where past operations followed practices and procedures that were considered acceptable under then-existing regulations, or where the Company is a successor to the obligations of prior owners, and current laws and regulations require investigative and/or remedial work to ensure sufficient environmental compliance. In instances where a range of loss can be reasonably estimated for a probable environmental liability, but no amount within the range is a better estimate than any other amount, the Company accrues the minimum of the range. The Company’s accruals for environmental matters totaled $17.4 million and $17.6 million as of September 30, 2024 and March 31, 2024, respectively. As additional information becomes available regarding environmental matters, the Company will re-assess the liabilities and revise the estimated accruals, if necessary. While it is possible that the ultimate environmental remediation costs may be in excess of amounts accrued, the Company believes, based upon currently available information, that the ultimate outcome of these matters, individually and in the aggregate, will not have a material adverse effect on its financial position. However, these matters are subject to inherent uncertainties, and unfavorable outcomes could occur, including significant monetary damages.
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.
21
Note 19: Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss were as follows:
Foreign
Currency
Defined
Cash Flow
Translation
Benefit Plans
Hedges
(69.7)
(99.9)
(62.8)
(100.7)
Other comprehensive income before reclassifications
20.7
13.8
14.2
Reclassifications:
Amortization of unrecognized net loss (a)
2.1
Realized gains - net (b)
Income taxes
(0.6)
Total other comprehensive income
15.6
(99.1)
(58.1)
(103.6)
(104.4)
Other comprehensive income (loss) before reclassifications
(13.7)
(12.6)
(70.8)
(102.8)
22
Note 20: Segment Information
Effective April 1, 2024, the Company moved its Coatings business, which was previously managed by and reported within the Performance Technologies segment, under the leadership of the Climate Solutions segment. Under this refined organizational structure, the Coatings business is better aligned with the Climate Solution’s Heat Transfer Products business, which serves similar heating, ventilating, air conditioning, and refrigeration markets and customers. The Company believes that unifying these complementary businesses is allowing it to better focus resources on targeted growth opportunities and more efficiently apply 80/20 principles to optimize profit margins and cash flow. Segment financial information for the prior periods has been recast to conform to the current presentation.
The following is a summary of net sales, gross profit and operating income by segment:
External
Inter-segment
Sales
Net sales:
Performance Technologies
291.6
331.3
Segment total
Corporate and eliminations
(5.9)
(6.0)
723.6
595.9
667.0
(10.7)
(13.4)
% of
$’s
sales
Gross profit:
106.3
29.0
%
76.9
26.6
207.1
28.6
152.7
26.5
20.2
17.1
123.6
20.4
109.5
16.1
166.4
25.1
134.5
21.5
330.7
24.9
262.2
25.2
23
Operating income:
64.7
47.1
124.5
95.7
30.8
31.2
62.3
58.8
95.5
78.3
186.8
154.5
(20.2)
(37.1)
(22.3)
The following is a summary of segment assets, comprised entirely of trade accounts receivable and inventories, and other assets:
Assets:
433.0
412.7
386.4
368.1
Other (a)
1,096.2
1,070.7
24
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 September 30, 2024 was the second quarter of fiscal 2025.
Fiscal 2024 acquisitions and dispositions
On March 1, 2024, we acquired Scott Springfield Mfg. Inc. (“Scott Springfield Manufacturing”), a Canadian-based manufacturer of air handling units, for consideration totaling $184.1 million. On July 1, 2023, we acquired Napps Technology Corporation (“Napps”), a Texas-based manufacturer of air- and water-cooled chillers, condensing units and heat pumps, for consideration totaling $5.8 million. These acquisitions expanded our data center and indoor air quality product portfolios and support our growth strategy and mission of improving indoor air quality. We have reported the financial results of these businesses within the Climate Solutions segment since the acquisition dates.
In October 2023, we sold three automotive businesses based in Germany. The sale of these businesses, which produce air- and liquid-cooled products for internal combustion, diesel and gasoline engines for the European automotive market, supports our strategic prioritization of resources towards higher-margin technologies.
See Note 2 of the Notes to Consolidated Financial Statements for further information.
Second quarter highlights
Net sales in the second quarter of fiscal 2025 increased $37.5 million, or 6 percent, from the second quarter of fiscal 2024, primarily due to higher sales in our Climate Solutions segment, partially offset by lower sales in our Performance Technologies segment. The higher Climate Solutions segment sales included $53.4 million of incremental sales from the acquired Scott Springfield Manufacturing business. The lower Performance Technologies segment sales included a $21.9 million impact of the disposition of three automotive businesses in Germany during the third quarter of fiscal 2024. Cost of sales increased $7.0 million, or 1 percent. Gross profit increased $30.5 million and gross margin improved 340 basis points to 25.2 percent. Selling, general and administrative (“SG&A”) expenses increased $16.9 million and included higher compensation-related expenses and incremental expenses from Scott Springfield Manufacturing, including amortization expense for acquired intangible assets. Operating income of $75.3 million during the second quarter of fiscal 2025 increased $9.6 million from the prior year, primarily due to higher earnings in our operating segments, partially offset by higher SG&A and restructuring expenses.
Year-to-date highlights
Net sales in the first six months of fiscal 2025 increased $76.6 million, or 6 percent, from the same period last year, primarily due to higher sales in our Climate Solutions segment, partially offset by lower sales in our Performance Technologies segment. The higher Climate Solutions segment sales included $94.5 million of incremental sales from the acquired Scott Springfield Manufacturing and Napps businesses. The lower Performance Technologies segment sales were largely driven by the $46.2 million impact of the disposition of three automotive businesses in Germany during the third quarter of fiscal 2024. Cost of sales increased $11.4 million, or 1 percent, from the same period last year. Gross profit increased $65.2 million and gross margin improved 370 basis points to 24.9 percent. SG&A expenses increased $38.3 million and included higher compensation-related expenses and incremental expenses from Scott Springfield Manufacturing, including amortization expense for acquired intangible assets. Operating income of $149.7 million during the first six months of fiscal 2025 increased $17.5 million from the prior year, primarily due to higher earnings in our operating segments, partially offset by higher SG&A and restructuring expenses.
CONSOLIDATED RESULTS OF OPERATIONS
The following table presents our consolidated financial results on a comparative basis for the three and six months ended September 30, 2024 and 2023:
(in millions)
% of sales
74.8
78.2
12.8
10.5
11.4
11.3
10.1
9.6
(3.0)
(2.9)
7.1
7.6
Comparison of the three months ended September 30, 2024 and 2023
Second quarter net sales of $658.0 million were $37.5 million, or 6 percent, higher than the second quarter of the prior year, primarily due to $77.2 million of higher sales in our Climate Solutions segment, driven by $53.4 million of incremental sales from the acquired Scott Springfield Manufacturing business and organic sales growth to hyperscale and colocation data center customers. The higher sales in Climate Solutions were partially offset by lower sales in our Performance Technologies segment, which decreased $39.8 million, including a $21.9 million impact from the disposition of three automotive businesses in Germany during the third quarter of fiscal 2024.
Second quarter cost of sales increased $7.0 million, or 1 percent, primarily due to higher labor and inflationary costs, higher sales volume, and higher raw material costs, which increased approximately $3.0 million, partially offset by improved operating efficiencies. As a percentage of sales, cost of sales decreased 340 basis points to 74.8 percent, primarily due to favorable sales mix, higher average selling prices, and the favorable impact of commercial pricing settlements and the recognition of sales tax credits in Brazil within the Climate Solutions and Performance Technologies segments, respectively.
As a result of higher sales and lower cost of sales as a percentage of sales, second quarter gross profit increased $30.5 million and gross margin improved 340 basis points to 25.2 percent.
Second quarter SG&A expenses increased $16.9 million, or 25 percent. As a percentage of sales, SG&A expenses increased by 190 basis points. The increase in SG&A expenses includes higher compensation-related expenses, which increased approximately $13.0 million and included incremental expenses from the acquired Scott Springfield Manufacturing business and increased incentive compensation resulting from improved financial results. In addition, SG&A expenses in the second quarter of fiscal 2025 included $4.7 million of incremental amortization expense for acquired intangible assets. These increases were partially offset by lower environmental charges related to previously-owned facilities in the U.S., which decreased $1.0 million.
Restructuring expenses increased $4.0 million compared with the second quarter of fiscal 2024, primarily due to higher severance expenses and product line transfer costs in the Performance Technologies and Climate Solutions segments, respectively.
Operating income of $75.3 million in the second quarter of fiscal 2025 increased $9.6 million compared with the second quarter of fiscal 2024, primarily due to higher gross profit, partially offset by higher SG&A and restructuring expenses.
26
Interest expense during the second quarter of fiscal 2025 increased $1.3 million compared with the second quarter of fiscal 2024, primarily due to higher borrowings on our revolving credit facility, which we used to fund a portion of the purchase price for the acquisition of Scott Springfield Manufacturing.
The provision for income taxes was $20.0 million and $12.8 million in the second quarter of fiscal 2025 and 2024, respectively. The $7.2 million increase was primarily due to higher earnings and changes in the mix and amount of foreign and U.S. earnings in the current year, as compared with the same period in the prior year. In addition, the provision for income taxes in the prior year was favorably impacted by the release of a $1.8 million unrecognized tax benefit during the second quarter of fiscal 2024.
Comparison of six months ended September 30, 2024 and 2023
Fiscal 2025 year-to-date net sales of $1,319.5 million were $76.6 million, or 6 percent, higher than the same period last year, primarily due to $147.8 million of higher sales in our Climate Solutions segment, including $94.5 million of incremental sales from the acquired Scott Springfield Manufacturing and Napps businesses, partially offset by $73.9 million of lower sales in our Performance Technologies segment, including a $46.2 million impact from the disposition of three automotive businesses in Germany during the third quarter of fiscal 2024. From a product group perspective, compared with the same period last year, sales of data center cooling products increased $174.5 million, while sales of liquid-cooled and heat transfer products decreased $58.0 million and $44.8 million, respectively.
Fiscal 2025 year-to-date cost of sales of $991.3 million increased $11.4 million, or 1 percent, primarily due to higher sales volume, higher labor and inflationary costs, partially offset by lower raw material costs, which decreased approximately $6.0 million, and improved operating efficiencies. In addition, we recorded $1.6 million of cost of sales at Corporate during the first quarter of fiscal 2025 related to an inventory purchase accounting adjustment for the acquisition of Scott Springfield Manufacturing. As a percentage of sales, cost of sales decreased 370 basis points to 75.1 percent, primarily due to favorable sales mix, higher average selling prices, improved operating efficiencies, and the favorable impact of commercial pricing settlements and the recognition of sales tax credits in Brazil within the Climate Solutions and Performance Technologies segments, respectively.
As a result of higher sales and lower cost of sales as a percentage of sales, gross profit increased $65.2 million and gross margin improved 370 basis points to 24.9 percent.
Fiscal 2025 year-to-date SG&A expenses increased $38.3 million, or 29 percent. As a percentage of sales, SG&A expenses increased by 230 basis points. The increase in SG&A expenses includes higher compensation-related expenses, which increased approximately $26.0 million and included incremental expenses from the acquired businesses and increased incentive compensation resulting from improved financial results. In addition, SG&A expenses in the first six months of fiscal 2025 included $9.3 million of incremental amortization expense for acquired intangible assets.
Restructuring expenses during the first six months of fiscal 2025 increased $9.4 million compared with the same period last year, primarily due to higher severance expenses and product line transfer costs in the Performance Technologies and Climate Solutions segments, respectively.
Operating income of $149.7 million in the first six months of fiscal 2025 increased $17.5 million compared with the same period last year, primarily due to higher gross profit, partially offset by higher SG&A and restructuring expenses.
Interest expense during the first six months of fiscal 2025 increased $2.9 million compared with the same period last year, primarily due to higher borrowings on our revolving credit facility, which we used to fund a portion of the purchase price for the acquisition of Scott Springfield Manufacturing.
The provision for income taxes was $38.8 million and $27.5 million during the first six months of fiscal 2025 and 2024, respectively. The $11.3 million increase was primarily due to higher earnings and changes in the mix and amount of foreign and U.S. earnings in the current year, as compared with the same period in the prior year. In addition, the provision for income taxes in the prior year was favorably impacted by the release of a $1.8 million unrecognized tax benefit during the second quarter of fiscal 2024.
27
SEGMENT RESULTS OF OPERATIONS
Effective April 1, 2024, we moved our Coatings business, which was previously managed by and reported within the Performance Technologies segment, under the leadership of the Climate Solutions segment. Under this refined organizational structure, the Coatings business is better aligned with the Climate Solution’s Heat Transfer Products business, which serves similar heating, ventilating, air conditioning, and refrigeration (“HVAC&R”) markets and customers. We believe that unifying these complementary businesses is allowing us to better focus resources on targeted growth opportunities and more efficiently apply 80/20 principles to optimize profit margins and cash flow. Segment financial information for fiscal 2024 has been recast to conform to the current presentation.
The following is a discussion of our segment results of operations for the three and six months ended September 30, 2024 and 2023:
260.1
71.0
212.3
73.4
516.6
71.4
423.2
73.5
40.1
11.0
29.5
10.2
80.9
11.2
56.7
17.2
16.6
Climate Solutions net sales increased $77.2 million, or 27 percent, from the second quarter of fiscal 2024 to the second quarter of fiscal 2025, primarily due to higher sales volume, and, to a lesser extent, higher average selling prices. The higher sales volume includes $53.4 million of incremental sales from the acquired Scott Springfield Manufacturing business. Compared with the second quarter of the prior year, sales of data center cooling and HVAC&R products increased $80.1 million and $12.9 million, respectively. The increase in sales of data center products includes sales from the acquired Scott Springfield Manufacturing business and organic sales growth to hyperscale and colocation customers. Sales of heat transfer products decreased $15.8 million. The decrease in heat transfer products largely resulted from lower sales of heat transfer coils for heat pumps and other commercial and residential applications, partially offset by commercial pricing settlements with heat pump customers in Europe.
Climate Solutions cost of sales increased $47.8 million, or 23 percent, from the second quarter of fiscal 2024 to the second quarter of fiscal 2025, primarily due to higher sales volume, higher raw material costs, which increased approximately $5.0 million, and, to a lesser extent, higher labor and inflationary costs. These increases were partially offset by lower warranty expense, which decreased approximately $3.0 million. As a percentage of sales, cost of sales decreased 240 basis points to 71.0 percent, primarily due to favorable sales mix and the favorable impact of the commercial pricing settlements during the quarter.
As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $29.4 million and gross margin improved 240 basis points to 29.0 percent.
Climate Solutions SG&A expenses increased $10.6 million compared with the second quarter of the prior year. As a percentage of sales, SG&A expenses increased by 80 basis points. The increase in SG&A expenses includes higher compensation-related expenses, which increased approximately $5.0 million and included expenses from the acquired Scott Springfield Manufacturing business, and $4.7 million of incremental amortization expense related to acquired intangible assets.
28
Restructuring expenses of $1.5 million during the second quarter of fiscal 2025 primarily consisted of costs related to transferring production and warehousing for certain product lines among the Climate Solutions segment’s facilities.
Operating income of $64.7 million increased $17.6 million from the second quarter of fiscal 2024 to the second quarter of fiscal 2025, primarily due to higher gross profit, partially offset by higher SG&A expenses.
Climate Solutions year-to-date net sales increased $147.8 million, or 26 percent, from the same period last year, primarily due to higher sales volume, including $94.5 million of incremental sales from the acquired Scott Springfield Manufacturing and Napps businesses. Compared with the same period in the prior year, sales of data center cooling and HVAC&R products increased $174.5 million and $18.0 million, respectively. The increase in sales of data center products includes sales from the acquired Scott Springfield Manufacturing business and organic sales growth to hyperscale and colocation customers. Sales of heat transfer products decreased $44.8 million, largely due to lower sales of heat transfer coils for heat pumps and other commercial and residential applications, partially offset by commercial pricing settlements with heat pump customers in Europe.
Climate Solutions year-to-date cost of sales increased $93.4 million, or 22 percent, from the same period last year, primarily due to higher sales volume, and, to a lesser extent, higher raw material costs, which increased approximately $3.0 million and higher labor and inflationary costs. These increases were partially offset by lower warranty expense, which decreased approximately $3.0 million, and improved operating efficiencies. As a percentage of sales, cost of sales decreased 210 basis points to 71.4 percent, primarily due to favorable sales mix and the favorable impact of the commercial pricing settlements during the second quarter.
As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $54.4 million and gross margin improved 210 basis points to 28.6 percent.
Climate Solutions year-to-date SG&A expenses increased $24.2 million and increased 140 basis points as a percentage of sales. The increase in SG&A expenses includes higher compensation-related expenses, which increased approximately $10.0 million, and $9.3 million of incremental amortization expense related to acquired intangibles assets.
Restructuring expenses during the first six months of fiscal 2025 increased $1.4 million compared with the same period last year, primarily due to higher costs related to transferring production and warehousing for certain product lines.
Operating income of $124.5 million during the first six months of fiscal 2025 increased $28.8 million from the same period last year, primarily due to higher gross profit, partially offset by higher SG&A expenses.
237.4
79.8
279.7
82.9
482.9
79.6
570.9
83.9
8.8
26.2
7.8
8.7
50.5
10.4
9.2
29
Performance Technologies net sales decreased $39.8 million, or 12 percent, from the second quarter of fiscal 2024 to the second quarter of fiscal 2025, primarily due to lower sales volume, including $21.9 million of lower sales from three automotive businesses in Germany that we sold during the third quarter of fiscal 2024. These decreases were partially offset by higher average selling prices and, to a lesser extent, the recognition of sales tax credits in Brazil. Compared with the second quarter of the prior year, sales of liquid-cooled and air-cooled products decreased $27.3 million and $18.1 million, respectively. Sales of advanced solutions products increased $5.7 million.
Performance Technologies cost of sales decreased $42.3 million, or 15 percent, from the second quarter of fiscal 2024 to the second quarter of fiscal 2025, primarily due to lower sales volume and, to a lesser extent, improved operating efficiencies and lower raw material costs, which decreased approximately $2.0 million. These favorable drivers were partially offset by higher labor and inflationary costs. As a percentage of sales, cost of sales decreased 310 basis points to 79.8 percent, primarily due to higher average selling prices, the favorable impact of the sales tax credits recognized in Brazil, and improved operating efficiencies.
As a result of the lower sales and lower cost of sales as a percentage of sales, gross profit increased $2.5 million and gross margin improved 310 basis points to 20.2 percent.
Performance Technologies SG&A expenses increased $0.1 million compared with the second quarter of the prior year. As a percentage of sales, SG&A expenses increased by 100 basis points. The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, partially offset by decreases across other general and administrative expenses.
Restructuring expenses increased $2.8 million compared with the second quarter of the prior year, primarily due to higher severance expenses in Europe.
Operating income of $30.8 million decreased $0.4 million from the second quarter of fiscal 2024 to the second quarter of fiscal 2025, primarily due to higher restructuring expenses, partially offset by higher gross profit.
Performance Technologies year-to-date net sales decreased $73.9 million, or 11 percent, from the same period last year, primarily due to lower sales volume, including $46.2 million of lower sales from three automotive businesses in Germany that we sold during the third quarter of fiscal 2024. These decreases were partially offset by higher average selling prices and, to a lesser extent, the recognition of sales tax credits in Brazil. Compared with the same period in the prior year, sales of liquid-cooled and air-cooled products decreased $58.0 million and $22.2 million, respectively. Sales of advanced solutions products increased $9.1 million.
Performance Technologies year-to-date cost of sales decreased $88.0 million, or 15 percent, from the same period last year, primarily due to lower sales volume and, to a lesser extent, improved operating efficiencies and lower raw material costs, which decreased approximately $9.0 million. These favorable drivers were partially offset by higher labor and inflationary costs. As a percentage of sales, cost of sales decreased 430 basis points to 79.6 percent, primarily due to higher average selling prices, improved operating efficiencies, lower material costs, and the favorable impact of the sales tax credits recognized in Brazil, partially offset by higher labor and inflationary costs.
As a result of the lower sales and lower cost of sales as a percentage of sales, gross profit increased $14.1 million and gross margin improved 430 basis points to 20.4 percent.
Performance Technologies year-to-date SG&A expenses increased $2.6 million, or 5 percent, compared with the same period last year. As a percentage of sales, year-to-date SG&A expenses increased by 130 basis points. The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $5.0 million. This increase was partially offset by decreases across other general and administrative expenses.
30
Restructuring expenses during the first six months of fiscal 2025 increased $8.0 million compared with the same period last year, primarily due to higher severance expenses in Europe and product line transfer costs.
Operating income of $62.3 million during the first six months of fiscal 2025 increased $3.5 million from the same period last year, primarily due to higher gross profit, partially offset by higher restructuring and SG&A expenses.
Liquidity and Capital Resources
Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents as of September 30, 2024 of $78.6 million, and available borrowing capacity of $190.8 million under our revolving credit facility. Given our extensive international operations, approximately $74.0 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. We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.
Net cash provided by operating activities for the six months ended September 30, 2024 was $97.8 million, which represents a $13.0 million decrease compared with the same period in the prior year. This decrease in operating cash flow was primarily due to unfavorable net changes in working capital, as compared with the same period in the prior year, partially offset by the favorable impact of higher earnings. The unfavorable changes in working capital include a decrease in customer deposits associated with sales contracts with long inventory lead times and higher payments for incentive compensation, as compared with the same period in the prior year.
Capital expenditures
Capital expenditures of $40.3 million during the first six months of fiscal 2025 increased $14.1 million compared with the same period in the prior year. The fiscal 2025 capital expenditures include investments supporting several of our strategic growth initiatives, including increasing production capacity for data center products.
Debt
Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant, which are discussed further below. Indebtedness under our credit agreements is secured by liens on substantially all domestic assets. These agreements further require compliance with various covenants that may limit our ability to incur additional indebtedness; grant liens; make investments, loans, or guarantees; engage in certain transactions with affiliates; or make restricted payments, including dividends. Also, the credit agreements may require prepayments in the event of certain asset sales.
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, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”). We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense. As of September 30, 2024, we were in compliance with our debt covenants. We expect to remain in compliance with our debt covenants during the remainder of fiscal 2025 and beyond.
U.S. pension plan termination
In June 2024, we approved the termination of our U.S. pension plan, subject to approvals from the Internal Revenue Service and the Pension Benefit Guaranty Corporation. We intend to offer certain participants the option to receive their pension benefits in the form of a lump-sum distribution prior to purchasing annuity contracts to transfer our remaining obligations under the plan. In connection with the plan termination, we expect to make additional cash contributions in the range of $10.0 million to $25.0 million to fully fund the plan, on a plan termination basis, and to record non-cash pension settlement charges totaling approximately $120.0 million to $130.0 million during fiscal 2026. The timing and amount of the final cash contribution and settlement charges could materially differ from our estimates due to the nature and timing of participant settlements, prevailing market and economic conditions, the duration of the termination process, or other factors.
31
Share repurchase program
During the first six months of fiscal 2025, we did not repurchase any of our common stock under our share repurchase program. During the first six months of fiscal 2024, we repurchased $9.0 million of our common stock under our share repurchase program. As of September 30, 2024, we had $32.1 million of share repurchase authorization remaining under the current repurchase program, which expires in November 2024. Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.
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, 2024. Other risks and uncertainties include, but are not limited to, the following:
Market risks:
32
Operational risks:
33
Strategic risks:
Financial risks:
Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.
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, 2024. The Company’s market risks have not materially changed since the fiscal 2024 Form 10-K was filed.
Evaluation of disclosure controls and procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, management of the Company, with the participation of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, and under the oversight of the Audit Committee of the Board of Directors, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended. As described below, management previously identified a material weakness in the Company’s internal control over financial reporting. This material weakness will not be considered remediated until the applicable new and enhanced controls operate for a sufficient period of time and management can conclude, through testing, that the controls are designed and operating effectively. As remediation of the material weakness is not yet complete, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures continue to be ineffective as of September 30, 2024.
Notwithstanding the material weakness, management performed additional analysis and other post-closing procedures to ensure that the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q are fairly presented in all material respects in accordance with accounting principles generally accepted in the United States of America.
Previously-identified material weakness
As reported in Part II, Item 9A. “Controls and Procedures” of the Company’s Annual Report on Form 10-K for the year ended March 31, 2024, management identified a material weakness in the Company’s internal control over financial reporting related to IT general controls in Europe for systems supporting the Company’s accounting and financial reporting processes. Specifically, the Company did not appropriately restrict access to certain systems. As a result, automated process-level controls and manual controls that are dependent upon the accuracy and completeness of information derived from those IT systems were also ineffective since they could have been adversely impacted. The material weakness resulted from an insufficient number of trained resources with the IT expertise necessary to appropriately assess and be accountable for IT-related risks or effectively design, implement, and operate controls to monitor and restrict access to systems that support the Company’s accounting and financial reporting processes.
Management’s remediation activities
Management is substantially complete or in the process with the following steps, which it believes will fully address the underlying causes of the material weakness:
Management believes that these actions and control improvements, when fully implemented and tested, will strengthen the Company’s internal control over financial reporting and remediate the material weakness identified.
Changes in internal control over financial reporting
The Company acquired Scott Springfield Manufacturing during the fourth quarter of fiscal 2024 and is currently integrating the operations, processes and internal controls of the acquired company. See Note 2 of the Notes to the Condensed Consolidated Financial Statements included in this report for additional information regarding the acquisition.
Except for the remediation steps described above and the integration activities for the Scott Springfield Manufacturing acquisition, there have been no changes in internal control over financial reporting during the second quarter of fiscal 2025 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
36
ISSUER PURCHASES OF EQUITY SECURITIES
The following describes the Company’s purchases of common stock during the second quarter of fiscal 2025:
Maximum
Number (or
Total Number of
Approximate Dollar
Shares Purchased
Value) of Shares
Average
as Part of Publicly
that May Yet Be
Price Paid
Announced Plans
Purchased Under the
Period
Per Share
or Programs
Plans or Programs (a)
July 1 – July 31, 2024
2,031 (b)
106.10
32,063,074
August 1 – August 31, 2024
28,643 (b)
100.80
September 1 – September 30, 2024
30,674
101.15
During the three months ended September 30, 2024, no director or “officer” of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.
Exhibit No.
Description
Incorporated Herein ByReference To
FiledHerewith
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
X
Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer.
Section 1350 Certification of Neil D. Brinker, President and Chief Executive Officer.
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer.
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).
101.SCH
Inline XBRL Taxonomy Extension Schema.
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document.
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
10.1.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).
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.
(Registrant)
By:
/s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*
Date: October 30, 2024
* Executing as both the principal financial officer and a duly authorized officer of the Company