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.


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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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