| 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 September 30, 2023 was the second quarter of fiscal 2024.
Acquisition of Napps Technology Corporation
On July 1, 2023, we acquired substantially all of the net operating assets of Napps Technology Corporation (“Napps”) for consideration totaling $5.8 million. Napps is a Texas-based manufacturer of air- and water-cooled chillers, condensing units and heat pumps. This acquisition expands our indoor air quality product portfolio and supports our growth strategy and mission of improving indoor air quality. Napps has historical annual sales of approximately $5.0 million. Since the date of the acquisition, we have reported the financial results of the Napps business within the Climate Solutions segment.
Disposition of two coatings facilities
On September 19, 2023, we sold two coatings facilities, located in California and Florida, to Protecall, LLC. These facilities provide aftermarket application services, in which HVAC units are sprayed with an anti-corrosion protective coating. Our other coatings businesses will continue to own and license spray-applied coatings used in aftermarket applications and are strategically pursuing growth through product licensing arrangements. Prior to the disposition, we reported the financial results of these businesses within the Performance Technologies segment. In fiscal 2023, the net sales of these two businesses totaled $6.4 million. As a result of this transaction, we recorded a gain on sale of less than $0.1 million during the second quarter of fiscal 2024.
Disposition of Germany Automotive Businesses
On September 6, 2023, we signed a definitive agreement to sell three automotive businesses based in Germany to affiliates of Regent, L.P. We expect that the sale of these businesses, which produce air- and liquid-cooled products for internal combustion diesel and gasoline engines for the European automotive market, will support our strategic prioritization of resources towards higher-margin technologies. This sale transaction closed on October 31, 2023. The determination of the final purchase price is pending and will be adjusted for net working capital and certain other items, as defined by the sale agreement. We currently expect that the total net proceeds and the resulting gain or loss on sale, to be recorded during the third quarter of fiscal 2024, will be immaterial to the consolidated financial statements. See Note 2 of the Notes to Condensed Consolidated Financial Statements for more information regarding this sale.
Second Quarter Highlights
Net sales in the second quarter of fiscal 2024 increased $41.7 million, or 7 percent, from the second quarter of fiscal 2023, primarily due to higher sales in our Performance Technologies and Climate Solutions segments. Cost of sales increased $2.8 million, or 1 percent. Gross profit increased $38.9 million and gross margin improved 520 basis points to 21.8 percent. Selling, general and administrative (“SG&A”) expenses increased $10.1 million and included higher compensation-related expenses. Operating income of $65.7 million during the second quarter of fiscal 2024 increased $28.9 million from the prior year, primarily due to higher earnings in our operating segments.
Year-to-date Highlights
Net sales in the first six months of fiscal 2024 increased $123.1 million, or 11 percent, from the same period last year, primarily due to higher sales in our Performance Technologies and Climate Solutions segments. Cost of sales increased $39.7 million, or 4 percent, from the same period last year, primarily due to higher sales volume. Gross profit increased $83.4 million and gross margin improved 520 basis points to 21.2 percent. SG&A expenses increased $15.2 million, primarily due to higher compensation-related expenses. Operating income of $132.2 million during the first six months of fiscal 2024 increased $69.8 million from the prior year, primarily due to higher earnings in our operating segments.
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, 2023 and 2022:
| | | Three months ended September 30, | | | Six months ended September 30, | |
| | | 2023 | | | 2022 | | | 2023 | | | 2022 | |
| (in millions) | | $’s | | | % of sales | | | $’s | | | % of sales | | | $’s | | | % of sales | | | $’s | | | % of sales | |
| Net sales | | $ | 620.5 | | | | 100.0 | % | | $ | 578.8 | | | | 100.0 | % | | $ | 1,242.9 | | | | 100.0 | % | | $ | 1,119.8 | | | | 100.0 | % |
| Cost of sales | | | 485.4 | | | | 78.2 | % | | | 482.6 | | | | 83.4 | % | | | 979.9 | | | | 78.8 | % | | | 940.2 | | | | 84.0 | % |
| Gross profit | | | 135.1 | | | | 21.8 | % | | | 96.2 | | | | 16.6 | % | | | 263.0 | | | | 21.2 | % | | | 179.6 | | | | 16.0 | % |
| Selling, general and administrative expenses | | | 68.9 | | | | 11.1 | % | | | 58.8 | | | | 10.1 | % | | | 130.3 | | | | 10.5 | % | | | 115.1 | | | | 10.3 | % |
| Restructuring expenses | | | 0.5 | | | | 0.1 | % | | | 0.6 | | | | 0.1 | % | | | 0.5 | | | | - | | | | 2.1 | | | | 0.2 | % |
| Operating income | | | 65.7 | | | | 10.6 | % | | | 36.8 | | | | 6.4 | % | | | 132.2 | | | | 10.6 | % | | | 62.4 | | | | 5.6 | % |
| Interest expense | | | (6.1 | ) | | | -1.0 | % | | | (4.7 | ) | | | -0.8 | % | | | (12.0 | ) | | | -1.0 | % | | | (8.8 | ) | | | -0.8 | % |
| Other income (expense) – net | | | 0.1 | | | | - | | | | (1.4 | ) | | | -0.3 | % | | | (0.5 | ) | | | - | | | | (3.7 | ) | | | -0.3 | % |
| Earnings before income taxes | | | 59.7 | | | | 9.6 | % | | | 30.7 | | | | 5.3 | % | | | 119.7 | | | | 9.6 | % | | | 49.9 | | | | 4.5 | % |
| Provision for income taxes | | | (12.8 | ) | | | -2.1 | % | | | (6.4 | ) | | | -1.1 | % | | | (27.5 | ) | | | -2.2 | % | | | (11.3 | ) | | | -1.0 | % |
| Net earnings | | $ | 46.9 | | | | 7.6 | % | | $ | 24.3 | | | | 4.2 | % | | $ | 92.2 | | | | 7.4 | % | | $ | 38.6 | | | | 3.4 | % |
Comparison of Three Months ended September 30, 2023 and 2022
Second quarter net sales of $620.5 million were $41.7 million, or 7 percent, higher than the second quarter of the prior year, primarily due to favorable commercial pricing and a $14.7 million favorable impact of foreign currency exchange rates. Sales in the Performance Technologies and Climate Solutions segments increased $21.7 million and $19.9 million, respectively.
Second quarter cost of sales increased $2.8 million, or 1 percent, primarily due to an $11.7 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, higher labor and inflationary costs and warranty expenses. These increases were partially offset by lower raw material prices, which decreased approximately $11.0 million, and improved operating efficiencies. As a percentage of sales, cost of sales decreased 520 basis points to 78.2 percent, primarily due to the favorable impact of higher sales.
As a result of higher sales and lower cost of sales as a percentage of sales, second quarter gross profit increased $38.9 million and gross margin improved 520 basis points to 21.8 percent.
Second quarter SG&A expenses increased $10.1 million, or 17 percent. As a percentage of sales, SG&A expenses increased by 100 basis points. The increase in SG&A expenses included higher compensation-related expenses, which increased approximately $3.0 million, and increases across other general and administrative expenses, such as higher product development costs, professional service fees, and employee travel expenses. The compensation-related expenses included higher incentive compensation expenses driven by improved financial results, as compared with the prior year. In addition, environmental charges related to a previously-closed manufacturing facility in the U.S. increased $0.7 million.
Restructuring expenses decreased $0.1 million compared with the second quarter of fiscal 2023, primarily due to lower equipment transfer costs in the Performance Technologies segment.
Operating income of $65.7 million in the second quarter of fiscal 2024 increased $28.9 million compared with the second quarter of fiscal 2023, primarily due to higher gross profit in our operating segments, partially offset by higher SG&A expenses.
Interest expense during the second quarter of fiscal 2024 increased $1.4 million compared with the second quarter of fiscal 2023, primarily due to unfavorable changes in interest rates.
The provision for income taxes was $12.8 million and $6.4 million in the second quarter of fiscal 2024 and 2023, respectively. The $6.4 million increase was primarily due to higher earnings in the current year as compared with the same period in the prior year.
Comparison of Six Months ended September 30, 2023 and 2022
Fiscal 2024 year-to-date net sales of $1,242.9 million were $123.1 million, or 11 percent, higher than the same period last year, primarily due to higher sales volume, favorable commercial pricing and a $15.1 million favorable impact of foreign currency exchange rates. Sales in the Performance Technologies and Climate Solutions segments increased $76.3 million and $47.3 million, respectively.
Fiscal 2024 year-to-date cost of sales of $979.9 million increased $39.7 million, or 4 percent, primarily due to higher sales volume, a $12.1 unfavorable impact of foreign currency exchange rates and, to a lesser extent, higher labor and inflationary costs and warranty expenses. These increases were partially offset by lower raw material prices, which decreased approximately $28.0 million and, to a lesser extent, improved operating efficiencies. As a percentage of sales, cost of sales decreased 520 basis points to 78.8 percent, primarily due to the favorable impact of higher sales.
As a result of higher sales and lower cost of sales as a percentage of sales, gross profit increased $83.4 million and gross margin improved 520 basis points to 21.2 percent.
Fiscal 2024 year-to-date SG&A expenses increased $15.2 million, or 13 percent. As a percentage of sales, SG&A expenses increased by 20 basis points. The increase in SG&A expenses was primarily driven by higher compensation-related expenses, which increased approximately $7.0 million, and increases across other general and administrative expenses. The compensation-related expenses included higher incentive compensation expenses driven by improved financial results, as compared with the prior year.
Restructuring expenses during the first six months of fiscal 2024 decreased $1.6 million compared with the same period last year, primarily due to lower severance expenses in the Performance Technologies segment.
Operating income of $132.2 million during the first six months of fiscal 2024 increased $69.8 million compared with the same period last year, primarily due to higher gross profit in our operating segments, partially offset by higher SG&A expenses.
Interest expense during the first six months of fiscal 2024 increased $3.2 million compared with the same period last year, primarily due to unfavorable changes in interest rates.
The provision for income taxes was $27.5 million and $11.3 million during the first six months of fiscal 2024 and 2023, respectively. The $16.2 million increase was primarily due to higher earnings in the current year as compared with the same period in the prior year.
SEGMENT RESULTS OF OPERATIONS
The following is a discussion of our segment results of operations for the three and six months ended September 30, 2023 and 2022:
| | | Three months ended September 30, | | | Six months ended September 30, | |
| | | 2023 | | | 2022 | | | 2023 | | | 2022 | |
| (in millions) | | $’s | | | % of sales | | | $’s | | | % of sales | | | $’s | | | % of sales | | | $’s | | | % of sales | |
| Net sales | | $ | 275.8 | | | | 100.0 | % | | $ | 255.9 | | | | 100.0 | % | | $ | 547.6 | | | | 100.0 | % | | $ | 500.3 | | | | 100.0 | % |
| Cost of sales | | | 204.0 | | | | 74.0 | % | | | 198.6 | | | | 77.6 | % | | | 406.8 | | | | 74.3 | % | | | 392.6 | | | | 78.5 | % |
| Gross profit | | | 71.8 | | | | 26.0 | % | | | 57.3 | | | | 22.4 | % | | | 140.8 | | | | 25.7 | % | | | 107.7 | | | | 21.5 | % |
| Selling, general and administrative expenses | | | 26.9 | | | | 9.7 | % | | | 24.3 | | | | 9.5 | % | | | 51.6 | | | | 9.4 | % | | | 47.7 | | | | 9.5 | % |
| Restructuring expenses | | | 0.3 | | | | 0.1 | % | | | 0.3 | | | | 0.1 | % | | | 0.3 | | | | 0.1 | % | | | 0.3 | | | | 0.1 | % |
| Operating income | | $ | 44.6 | | | | 16.2 | % | | $ | 32.7 | | | | 12.8 | % | | $ | 88.9 | | | | 16.2 | % | | $ | 59.7 | | | | 11.9 | % |
Comparison of Three Months ended September 30, 2023 and 2022
Climate Solutions net sales increased $19.9 million, or 8 percent, from the second quarter of fiscal 2023 to the second quarter of fiscal 2024, primarily due to higher sales volume and a $6.6 million favorable impact of foreign currency exchange rates. Compared with the second quarter of the prior year, sales of data center cooling products increased $42.5 million. Sales of heat transfer and HVAC & refrigeration products decreased $20.5 million and $2.0 million, respectively.
Climate Solutions cost of sales increased $5.4 million, or 3 percent, from the second quarter of fiscal 2023 to the second quarter of fiscal 2024, primarily due to higher sales volume, a $5.0 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, higher warranty expenses, which increased approximately $3.0 million, and higher labor and inflationary costs. These increases were partially offset by improved operating efficiencies and lower raw material prices, which decreased approximately $4.0 million. As a percentage of sales, cost of sales decreased 360 basis points to 74.0 percent, primarily due to the favorable impact of higher sales and improved operating efficiencies.
As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $14.5 million and gross margin improved 360 basis points to 26.0 percent.
SG&A expenses increased $2.6 million compared with the second quarter of the prior year. As a percentage of sales, SG&A expenses increased by 20 basis points. The increase in SG&A expenses includes higher compensation-related expenses and increases across other general and administrative expenses.
Restructuring expenses totaled $0.3 million during both the second quarter of fiscal 2024 and 2023. The fiscal 2024 expenses consist of equipment transfer and severance expenses. The fiscal 2023 expenses primarily relate to closure costs associated with a previously-leased facility.
Operating income of $44.6 million increased $11.9 million from the second quarter of fiscal 2023 to the second quarter of fiscal 2024, primarily due to higher gross profit.
Comparison of Six Months ended September 30, 2023 and 2022
Climate Solutions year-to-date net sales increased $47.3 million, or 9 percent, from the same period last year, primarily due to higher sales volume and a $7.4 million favorable impact of foreign currency exchange rates. Compared with the same period in the prior year, sales of data center cooling products increased $80.2 million. Sales of heat transfer and HVAC & refrigeration products decreased $29.3 million and $3.3 million, respectively.
Climate Solutions year-to-date cost of sales increased $14.2 million, or 4 percent, from the same period last year, primarily due to higher sales volume, a $5.5 million unfavorable impact of foreign currency exchanges rates, and higher warranty expenses and labor and inflationary costs. These increases were partially offset by lower raw material prices, which decreased approximately $14.0 million and improved operating efficiencies. As a percentage of sales, cost of sales decreased 420 basis points to 74.3 percent, primarily due to the favorable impact of higher sales and improved operating efficiencies.
As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $33.1 million and gross margin improved 420 basis points to 25.7 percent.
Climate Solutions year-to-date SG&A expenses increased $3.9 million, yet decreased 10 basis points as a percentage of sales. The increase in SG&A expenses includes higher compensation-related expenses and increases across other general and administrative expenses.
Restructuring expenses totaled $0.3 million during both the first six months of fiscal 2024 and 2023. The fiscal 2024 expenses consist of equipment transfer and severance expenses. The fiscal 2023 expenses primarily relate to closure costs associated with a previously-leased facility.
Operating income of $88.9 million during the first six months of fiscal 2024 increased $29.2 million from the same period last year, primarily due to higher gross profit.
| | | Three months ended September 30, | | | Six months ended September 30, | |
| | | 2023 | | | 2022 | | | 2023 | | | 2022 | |
| (in millions) | | $’s | | | % of sales | | | $’s | | | % of sales | | | $’s | | | % of sales | | | $’s | | | % of sales | |
| Net sales | | $ | 351.7 | | | | 100.0 | % | | $ | 330.0 | | | | 100.0 | % | | $ | 710.6 | | | | 100.0 | % | | $ | 634.3 | | | | 100.0 | % |
| Cost of sales | | | 288.9 | | | | 82.2 | % | | | 290.8 | | | | 88.1 | % | | | 589.2 | | | | 82.9 | % | | | 562.1 | | | | 88.6 | % |
| Gross profit | | | 62.8 | | | | 17.8 | % | | | 39.2 | | | | 11.9 | % | | | 121.4 | | | | 17.1 | % | | | 72.2 | | | | 11.4 | % |
| Selling, general and administrative expenses | | | 29.0 | | | | 8.2 | % | | | 22.6 | | | | 6.9 | % | | | 55.6 | | | | 7.8 | % | | | 46.7 | | | | 7.4 | % |
| Restructuring expenses | | | 0.2 | | | | - | | | | 0.3 | | | | 0.1 | % | | | 0.2 | | | | - | | | | 1.8 | | | | 0.3 | % |
| Operating income | | $ | 33.6 | | | | 9.6 | % | | $ | 16.3 | | | | 4.9 | % | | $ | 65.6 | | | | 9.2 | % | | $ | 23.7 | | | | 3.7 | % |
Comparison of Three Months ended September 30, 2023 and 2022
Performance Technologies net sales increased $21.7 million, or 7 percent, from the second quarter of fiscal 2023 to the second quarter of fiscal 2024, primarily due to favorable commercial pricing and an $8.0 million favorable impact of foreign currency exchange rates. These increases were partially offset by lower sales volume. Compared with the second quarter of the prior year, sales of advanced solutions, liquid-cooled and air-cooled products increased $10.3 million, $7.4 million, and $4.0 million, respectively.
Performance Technologies cost of sales decreased $1.9 million, or 1 percent, from the second quarter of fiscal 2023 to the second quarter of fiscal 2024, primarily due to lower raw material prices, which decreased approximately $8.0 million and lower sales volume. These decreases were partially offset by a $6.7 million unfavorable impact of foreign currency exchange rates and higher labor and inflationary costs. As a percentage of sales, cost of sales decreased 590 basis points to 82.2 percent, primarily due to the favorable impact of higher sales, partially offset by higher labor and inflationary costs.
As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $23.6 million and gross margin improved 590 basis points to 17.8 percent.
SG&A expenses increased $6.4 million, or 28 percent, compared with the second quarter of the prior year. As a percentage of sales, 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 $3.0 million, higher product development costs and increases across other general and administrative expenses.
Restructuring expenses decreased $0.1 million compared with the second quarter of fiscal 2023, primarily due to lower equipment transfer costs.
Operating income of $33.6 million increased $17.3 million from the second quarter of fiscal 2023 to the second quarter of fiscal 2024, primarily due to higher gross profit, partially offset by higher SG&A expenses.
Comparison of Six Months ended September 30, 2023 and 2022
Performance Technologies year-to-date net sales increased $76.3 million, or 12 percent, from the same period last year, primarily due to favorable commercial pricing, higher sales volume, and a $7.8 million favorable impact of foreign currency exchange rates. Compared with the same period in the prior year, sales of liquid-cooled, air-cooled, and advanced solutions products increased $31.2 million, $23.7 million, and $20.6 million, respectively.
Performance Technologies year-to-date cost of sales increased $27.1 million, or 5 percent, from the same period last year, primarily due to higher sales volume, higher labor and inflationary costs and a $6.7 million unfavorable impact of foreign currency exchange rates. These increases were partially offset by lower raw material prices, which decreased approximately $14.0 million. As a percentage of sales, cost of sales decreased 570 basis points to 82.9 percent, primarily due to the favorable impact of higher sales, partially offset by higher labor and inflationary costs.
As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $49.2 million and gross margin improved 570 basis points to 17.1 percent.
Performance Technologies year-to-date SG&A expenses increased $8.9 million, or 19 percent, compared with the same period last year. As a percentage of sales, year-to-date SG&A expenses increased by 40 basis points. The increase in SG&A expenses was primarily due to higher compensation-related expenses and increases across other general and administrative expenses.
Restructuring expenses during the first six months of fiscal 2024 decreased $1.6 million compared with the same period last year, primarily due to lower severance expenses.
Operating income of $65.6 million during the first six months of fiscal 2024 increased $41.9 million from the same period last year, primarily due to higher gross profit, partially offset by higher 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, 2023 of $120.2 million, and available borrowing capacity of $269.4 million under our revolving credit facility. Given our extensive international operations, approximately $71.0 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
Net cash provided by operating activities for the six months ended September 30, 2023 was $110.8 million, which represents a $54.7 million increase compared with the same period in the prior year. This increase in operating cash flow was primarily due to the favorable impact of higher earnings, partially offset by unfavorable net changes in working capital, as compared with the same period in the prior year. The unfavorable changes in working capital include higher payments for incentive compensation, as compared with the same period in the prior year.
Capital Expenditures
Capital expenditures of $26.2 million during the first six months of fiscal 2024 increased $3.2 million compared with the same period in the prior year. The fiscal 2024 capital expenditures include investments supporting our strategic growth initiatives across several of our business units.
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, 2023, we were in compliance with our debt covenants. We expect to remain in compliance with our debt covenants during the remainder of fiscal 2024 and beyond.
Share Repurchase Program
During the first six months of fiscal 2024, we repurchased $9.0 million of our common stock. As of September 30, 2023, we had $36.4 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, 2023. Other risks and uncertainties include, but are not limited to, the following:
Market Risks:
| • | The impact of potential adverse developments or disruptions in the global economy and financial markets, including impacts related to inflation, energy costs, supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and military conflicts, including the current conflicts in Ukraine and in the Middle East; |
| • | The impact of other 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 foreign currency exchange rate fluctuations; increases in interest rates; recession and recovery therefrom; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade that have been or may be implemented in the U.S. or abroad; |
| • | 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, including through our quotation process or through contract provisions for prospective price adjustments, as well as the inherent lag in timing of such contract provisions; |
| • | Our ability to mitigate increased labor costs and labor shortages; |
| • | The impact of public health threats, such as COVID-19, on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; and |
| • | The impact of legislation, regulations, and government incentive programs, including those addressing climate change, on demand for our products and the markets we serve, including our ability to take advantage of opportunities to supply alternative new technologies to meet environmental and/or energy standards and objectives. |
Operational Risks:
| • | The impact of problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained; |
| • | The overall health of and price-reduction pressure from our 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, including impacts associated with the recent United Auto Workers union strikes; |
| • | Our ability to maintain current customer relationships and compete effectively for new business, including our ability to achieve profit margins acceptable to us by offsetting or otherwise addressing any cost increases associated with supply chain challenges and inflationary market conditions; |
| • | The impact of product or manufacturing difficulties or operating inefficiencies, including any product or program launches, product transfer challenges and warranty claims; |
| • | The impact of delays or modifications initiated by major customers with respect to product or 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 manage our operations in response to sales volume changes, including maintaining adequate production capacity to meet demand in our growing businesses while also completing restructuring activities and realizing the anticipated benefits thereof; |
| • | Costs and other effects of the investigation and remediation of environmental contamination; including 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, operational and administrative functions; |
| • | Our ability to protect our proprietary information and intellectual property from theft or attack by internal or external sources; |
| • | The impact of a 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; |
| • | Increasing emphasis by customers, investors, and employees on environmental, social and corporate governance matters may impose additional costs on us, adversely affect our reputation or expose us to new risks; |
| • | 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 litigation, claims, or other obligations, including those that may be asserted against us in connection with divested businesses. |
Strategic Risks:
| • | Our ability to successfully realize anticipated benefits, including improved profit margins and cash flow, from strategic initiatives and our continued application of 80/20 principles across our businesses; |
| • | Our ability to accelerate growth by identifying and executing on organic growth opportunities and acquisitions, and to efficiently and successfully integrate acquired businesses; and |
| • | The potential impacts from actions by activist shareholders, including disruption of our business and related costs. |
Financial Risks:
| • | Our ability to fund our global liquidity requirements efficiently for our current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy; |
| • | The impact of increases in interest rates in relation to our variable-rate debt obligations; |
| • | The impact of changes in federal, state or local taxes that could have the effect of increasing our income tax expense; |
| • | Our ability to comply with the financial covenants 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, 2023. The Company’s market risks have not materially changed since the fiscal 2023 Form 10-K was filed.
| 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 Executive Vice President, 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 Executive Vice President, 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 September 30, 2023.
Changes in Internal Control Over Financial Reporting
There have been no changes in internal control over financial reporting during the second quarter of fiscal 2024 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 second quarter of fiscal 2024:
| 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) |
| July 1 – July 31, 2023 | _______
| _______
| _______
| |
| | | | |
August 1 – August 31, 2023 | | | _______
| $45,372,391 |
| | | | | |
| September 1 – September 30, 2023 | | | | |
| | | | | |
| Total | | | 200,000 | |
| (a) | Effective November 5, 2022, the Company’s Board of Directors authorized the Company to repurchase up to $50.0 million of Modine common stock at such times and prices that it deems to be appropriate. This authorization expires in November 2024. |
| (b) | Includes 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. |
| (c) | Includes shares acquired pursuant to the repurchase program described in (a) above. |
