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, 2020 was the second quarter of fiscal
2021.
COVID-19
As the COVID-19 pandemic continues, both the health and overall well-being of
our employees and delivering quality products and services to our customers
remain our top priorities.
The COVID-19 pandemic has broadly impacted the global economy and our key end
markets, which were most severely impacted during the first quarter of fiscal
2021. In response to lower market demand and in an effort to mitigate the
negative impacts of COVID-19 on our financial results, we implemented actions,
including, but not limited to, production staffing adjustments, furloughs,
shortened work weeks, and temporary salary reductions at all levels of our
organization. In addition, we have reduced operating and administrative
expenses, including travel and entertainment expenditures, and lowered the
annual compensation paid to the Board of Directors. We have also focused on
limiting capital expenditures and, where possible, have delayed certain projects
and the purchase of some program-related equipment and tooling. Our swift
cost-saving actions, coupled with a slow but steady recovery in most of our key
end markets, favorably impacted our financial results during the second quarter
of fiscal 2021. Looking ahead, while we are continuing to focus on cost-saving
measures, we plan to reduce the level of furloughs, shortened work weeks and
salary reductions. As a result, we expect the benefit of the cost-saving
actions, primarily on SG&A expenses, to be less significant in the second half
of fiscal 2021.
The full extent of the impacts of COVID-19, which will largely depend on the
length and severity of the pandemic, could have a material adverse effect on our
business, results of operations, and cash flows.
Second Quarter Highlights
Net sales in the second quarter of fiscal 2021 decreased $38.8 million, or
8 percent, from the second quarter of fiscal 2020, primarily due to lower sales
in our Commercial and Industrial Solutions ("CIS"), Heavy Duty Equipment ("HDE")
and Automotive segments. Sales in each of these segments were impacted by
market-driven volume declines. Cost of sales decreased $43.9 million, or 10
percent, from the second quarter of fiscal 2020, primarily due to lower sales
volume. Gross profit increased $5.1 million and gross margin improved 240 basis
points to 17.5 percent. Selling, general and administrative ("SG&A") expenses
decreased $16.6 million, primarily due to lower project costs associated with
our review of strategic alternatives for the automotive business and
cost-reduction initiatives in response to the negative impacts of COVID-19.
Operating income during the second quarter of fiscal 2021 increased $22.5
million to $28.5 million, primarily due to higher earnings in our Automotive,
HDE, and Building HVAC Systems ("BHVAC") segments and lower SG&A expenses at
Corporate.
Year-to-date Highlights
Net sales in the first six months of fiscal 2021 decreased $220.0 million, or 21
percent, from the same period last year, primarily due to lower sales in our
HDE, CIS and Automotive segments. Cost of sales decreased $187.8 million, or 22
percent, from the same period last year, primarily due to lower sales volume.
Gross profit decreased $32.2 million and gross margin improved 20 basis points
to 15.7 percent. SG&A expenses decreased $35.4 million, primarily due to lower
project costs associated with our review of strategic alternatives for the
automotive business and cost-reduction initiatives in response to the negative
impacts of COVID-19. Operating income during the first six months of fiscal
2021 increased $1.2 million to $25.3 million, primarily due to higher earnings
in our BHVAC and Automotive segments and lower SG&A expenses at Corporate,
partially offset by lower earnings in our HDE and CIS segments.
23
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Recent Event
On November 2, 2020, we announced that we entered into a definitive agreement to
sell our liquid-cooled automotive business to Dana Incorporated. We expect this
transaction to close during the first half of calendar 2021, subject to
regulatory approvals and other customary closing conditions. We do not expect
significant net cash proceeds from this transaction based upon the selling price
and adjustments for cash, debt, and working capital, as defined within the
definitive agreement. We report financial results of this business within the
Automotive segment. Net sales attributable to the liquid-cooled automotive
business were approximately $130.0 million during the first six months of fiscal
2021 and approximately $310.0 million in fiscal 2020. Net assets of this
business were approximately $140.0 million as of September 30, 2020.
In connection with this pending sale, we expect to record a non-cash impairment
charge of approximately $120.0 million to $130.0 million during the third
quarter of fiscal 2021 related to the long-lived assets of the liquid-cooled
automotive business. When the transaction is completed, we expect to record an
additional loss on sale related to other net assets and cumulative foreign
currency translation adjustments attributable to the business, net working
capital adjustments, and costs to sell. As we have not yet finalized our
analysis, the impairment charge recorded in the third quarter could differ
materially from our preliminary estimate and, at this time, we cannot estimate
the loss on sale to be recorded upon completion of this transaction.
We are continuing to evaluate strategic alternatives for our other automotive
businesses and are committed to exiting these businesses in a manner that is in
the best interest of our shareholders.
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