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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q

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

For the quarterly period ended September 30, 2019
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 CO MPANY
(Exact name of registrant as specified in its charter)

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

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

Registrant’s telephone number, including area code (262) 636-1200
Securities registered pursuant to Section 12(b) of the Act:

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer ☑ | Accelerated Filer ☐
Non-accelerated Filer ☐ | Smaller reporting company ☐
| Emerging growth company ☐

If an emerging growth company, indicate by checkmark if the registrant has not elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☑
The number of shares outstanding of the registrant’s common stock, $0.625 par value, was 50,796,770 at November 1, 2019.

MODINE MANUFACTURING COMPANY
TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION |
Item 1. Financial Statements. | 1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. | 26
Item 3. Quantitative and Qualitative Disclosures About Market Risk. | 36
Item 4. Controls and Procedures. | 36
PART II. OTHER INFORMATION |
Item 6. Exhibits. | 37
SIGNATURE | 38

Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and six months ended September 30, 2019 and 2018
(In millions, except per share amounts)
(Unaudited)

|  | Three months ended September 30, |  |  | Six months ended September 30, |
|  | 2019 |  |  | 2018 |  |  | 2019 |  |  | 2018 |
Net sales |  | $ | 500.2 |  |  | $ | 548.9 |  |  | $ | 1,029.2 |  |  | $ | 1,115.0 |
Cost of sales |  |  | 424.5 |  |  |  | 461.0 |  |  |  | 870.1 |  |  |  | 932.8 |
Gross profit |  |  | 75.7 |  |  |  | 87.9 |  |  |  | 159.1 |  |  |  | 182.2 |
Selling, general and administrative expenses |  |  | 67.4 |  |  |  | 63.4 |  |  |  | 130.9 |  |  |  | 122.7 |
Restructuring expenses |  |  | 2.3 |  |  |  | - |  |  |  | 4.1 |  |  |  | 0.2 |
Loss on sale of assets |  |  | - |  |  |  | 1.7 |  |  |  | - |  |  |  | 1.7 |
Operating income |  |  | 6.0 |  |  |  | 22.8 |  |  |  | 24.1 |  |  |  | 57.6 |
Interest expense |  |  | (5.8 | ) |  |  | (6.5 | ) |  |  | (11.7 | ) |  |  | (12.7 | )
Other expense – net |  |  | (1.3 | ) |  |  | (0.5 | ) |  |  | (2.4 | ) |  |  | (1.6 | )
(Loss) earnings before income taxes |  |  | (1.1 | ) |  |  | 15.8 |  |  |  | 10.0 |  |  |  | 43.3 |
(Provision) benefit for income taxes |  |  | (3.7 | ) |  |  | 22.9 |  |  |  | (6.6 | ) |  |  | 17.9 |
Net (loss) earnings |  |  | (4.8 | ) |  |  | 38.7 |  |  |  | 3.4 |  |  |  | 61.2 |
Net loss (earnings) attributable to noncontrolling interest |  |  | 0.1 |  |  |  | (0.2 | ) |  |  | (0.1 | ) |  |  | (0.7 | )
Net (loss) earnings attributable to Modine |  | $ | (4.7 | ) |  | $ | 38.5 |  |  | $ | 3.3 |  |  | $ | 60.5 |
Net (loss) earnings per share attributable to Modine shareholders: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Basic |  | $ | (0.09 | ) |  | $ | 0.76 |  |  | $ | 0.07 |  |  | $ | 1.19 |
Diluted |  | $ | (0.09 | ) |  | $ | 0.75 |  |  | $ | 0.06 |  |  | $ | 1.18 |
Weighted-average shares outstanding: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Basic |  |  | 50.8 |  |  |  | 50.5 |  |  |  | 50.8 |  |  |  | 50.4 |
Diluted |  |  | 50.8 |  |  |  | 51.4 |  |  |  | 51.1 |  |  |  | 51.3 |

The notes to condensed consolidated financial statements are an integral part of these statements.
1

Table of Contents
MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three and six months ended September 30, 2019 and 2018
(In millions)
(Unaudited)

|  | Three months ended September 30, |  |  | Six months ended September 30, |
|  | 2019 |  |  | 2018 |  |  | 2019 |  |  | 2018 |
Net (loss) earnings |  | $ | (4.8 | ) |  | $ | 38.7 |  |  | $ | 3.4 |  |  | $ | 61.2 |
Other comprehensive income (loss): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign currency translation |  |  | (19.5 | ) |  |  | (5.4 | ) |  |  | (17.7 | ) |  |  | (30.5 | )
Defined benefit plans, net of income taxes of $0.3, $0.3, $0.6 and $0.6 million |  |  | 1.1 |  |  |  | 1.0 |  |  |  | 2.2 |  |  |  | 2.0 |
Cash flow hedges, net of income taxes of 0.1, $0.2, 0.4 and $0.1 million |  |  | (0.2 | ) |  |  | (0.5 | ) |  |  | (1.0 | ) |  |  | (0.1 | )
Total other comprehensive loss |  |  | (18.6 | ) |  |  | (4.9 | ) |  |  | (16.5 | ) |  |  | (28.6 | )
Comprehensive (loss) income |  |  | (23.4 | ) |  |  | 33.8 |  |  |  | (13.1 | ) |  |  | 32.6 |
Comprehensive loss (income) attributable to noncontrolling interest |  |  | 0.3 |  |  |  | (0.1 | ) |  |  | 0.2 |  |  |  | (0.2 | )
Comprehensive (loss) income attributable to Modine |  | $ | (23.1 | ) |  | $ | 33.7 |  |  | $ | (12.9 | ) |  | $ | 32.4 |

The notes to condensed consolidated financial statements are an integral part of these statements.
2

Table of Contents
MODINE MANUFACTURING COMPANY
CONSOLIDATED BALANCE SHEETS
September 30, 2019 and March 31, 2019
(In millions, except per share amounts)
(Unaudited)

|  | September 30, 2019 |  |  | March 31, 2019 |
ASSETS |  |  |  |  |  |
Cash and cash equivalents |  | $ | 32.3 |  |  | $ | 41.7 |
Trade accounts receivable – net |  |  | 310.4 |  |  |  | 338.6 |
Inventories |  |  | 222.6 |  |  |  | 200.7 |
Other current assets |  |  | 77.1 |  |  |  | 65.8 |
Total current assets |  |  | 642.4 |  |  |  | 646.8 |
Property, plant and equipment – net |  |  | 465.7 |  |  |  | 484.7 |
Intangible assets – net |  |  | 110.3 |  |  |  | 116.2 |
Goodwill |  |  | 166.1 |  |  |  | 168.5 |
Deferred income taxes |  |  | 97.0 |  |  |  | 97.1 |
Other noncurrent assets |  |  | 83.0 |  |  |  | 24.7 |
Total assets |  | $ | 1,564.5 |  |  | $ | 1,538.0 |
LIABILITIES AND SHAREHOLDERS’ EQUITY |  |  |  |  |  |  |  |
Short-term debt |  | $ | 139.4 |  |  | $ | 66.0 |
Long-term debt – current portion |  |  | 93.6 |  |  |  | 48.6 |
Accounts payable |  |  | 260.2 |  |  |  | 280.9 |
Accrued compensation and employee benefits |  |  | 73.5 |  |  |  | 81.7 |
Other current liabilities |  |  | 51.1 |  |  |  | 39.9 |
Total current liabilities |  |  | 617.8 |  |  |  | 517.1 |
Long-term debt |  |  | 232.2 |  |  |  | 335.1 |
Deferred income taxes |  |  | 8.5 |  |  |  | 8.2 |
Pensions |  |  | 96.7 |  |  |  | 101.7 |
Other noncurrent liabilities |  |  | 83.7 |  |  |  | 34.8 |
Total liabilities |  |  | 1,038.9 |  |  |  | 996.9 |
Commitments and contingencies (see Note 17) |  |  |  |  |  |  |  |
Shareholders’ equity: |  |  |  |  |  |  |  |
Preferred stock, $0.025 par value, authorized 16.0 million shares, issued - none |  |  | - |  |  |  | - |
Common stock, $0.625 par value, authorized 80.0 million shares, issued 53.3 million and 52.8 million shares |  |  | 33.2 |  |  |  | 33.0 |
Additional paid-in capital |  |  | 242.9 |  |  |  | 238.6 |
Retained earnings |  |  | 475.4 |  |  |  | 472.1 |
Accumulated other comprehensive loss |  |  | (194.6 | ) |  |  | (178.4 | )
Treasury stock, at cost, 2.5 million and 2.1 million shares |  |  | (37.0 | ) |  |  | (31.4 | )
Total Modine shareholders’ equity |  |  | 519.9 |  |  |  | 533.9 |
Noncontrolling interest |  |  | 5.7 |  |  |  | 7.2 |
Total equity |  |  | 525.6 |  |  |  | 541.1 |
Total liabilities and equity |  | $ | 1,564.5 |  |  | $ | 1,538.0 |

The notes to condensed consolidated financial statements are an integral part of these statements.
3

Table of Contents
MODINE MANUFACTURING COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended September 30, 2019 and 2018
(In millions)
(Unaudited)

|  | Six months ended September 30, |
|  | 2019 |  |  | 2018 |
Cash flows from operating activities: |  |  |  |  |  |
Net earnings |  | $ | 3.4 |  |  | $ | 61.2 |
Adjustments to reconcile net earnings to net cash provided by operating activities: |  |  |  |  |  |  |  |
Depreciation and amortization |  |  | 38.3 |  |  |  | 38.5 |
Loss on sale of assets |  |  | - |  |  |  | 1.7 |
Stock-based compensation expense |  |  | 4.4 |  |  |  | 5.2 |
Deferred income taxes |  |  | (0.5 | ) |  |  | (6.4 | )
Other – net |  |  | 2.0 |  |  |  | 1.6 |
Changes in operating assets and liabilities: |  |  |  |  |  |  |  |
Trade accounts receivable |  |  | 19.9 |  |  |  | (13.2 | )
Inventories |  |  | (26.2 | ) |  |  | (30.4 | )
Accounts payable |  |  | (5.6 | ) |  |  | 25.5 |
Other assets and liabilities |  |  | (18.2 | ) |  |  | (47.0 | )
Net cash provided by operating activities |  |  | 17.5 |  |  |  | 36.7 |
Cash flows from investing activities: |  |  |  |  |  |  |  |
Expenditures for property, plant and equipment |  |  | (41.4 | ) |  |  | (37.9 | )
Proceeds from sale of investment in affiliate |  |  | 3.8 |  |  |  | - |
Other – net |  |  | 1.0 |  |  |  | 0.9 |
Net cash used for investing activities |  |  | (36.6 | ) |  |  | (37.0 | )
Cash flows from financing activities: |  |  |  |  |  |  |  |
Borrowings of debt |  |  | 438.0 |  |  |  | 146.7 |
Repayments of debt |  |  | (413.7 | ) |  |  | (142.2 | )
Dividend paid to noncontrolling interest |  |  | (1.3 | ) |  |  | (1.8 | )
Purchases of treasury stock under share repurchase program |  |  | (2.4 | ) |  |  | - |
Financing fees paid |  |  | (1.1 | ) |  |  | - |
Other – net |  |  | (3.0 | ) |  |  | (3.6 | )
Net cash provided by (used for) financing activities |  |  | 16.5 |  |  |  | (0.9 | )
Effect of exchange rate changes on cash |  |  | (0.9 | ) |  |  | (2.5 | )
Net decrease in cash, cash equivalents and restricted cash |  |  | (3.5 | ) |  |  | (3.7 | )
Cash, cash equivalents and restricted cash – beginning of period |  |  | 42.2 |  |  |  | 40.3 |
Cash, cash equivalents and restricted cash – end of period |  | $ | 38.7 |  |  | $ | 36.6 |

The notes to condensed consolidated financial statements are an integral part of these statements.
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MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the three and six months ended September 30, 2019 and 2018
(In millions)
(Unaudited)

|  | Common stock |  |  | Additional paid-in |  |  | Retained |  |  | Accumulated other comprehensive |  |  | Treasury stock, at |  |  | Non- controlling |  |  |  |
|  | Shares |  |  | Amount |  |  | capital |  |  | earnings |  |  | loss |  |  | cost |  |  | interest |  |  | Total |
Balance, March 31, 2019 |  |  | 52.8 |  |  | $ | 33.0 |  |  | $ | 238.6 |  |  | $ | 472.1 |  |  | $ | (178.4 | ) |  | $ | (31.4 | ) |  | $ | 7.2 |  |  | $ | 541.1 |
Net earnings attributable to Modine |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 8.0 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 8.0 |
Other comprehensive income (loss) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 2.2 |  |  |  | - |  |  |  | (0.1 | ) |  |  | 2.1 |
Stock options and awards |  |  | 0.5 |  |  |  | 0.2 |  |  |  | (0.1 | ) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 0.1 |
Purchase of treasury stock |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (5.6 | ) |  |  | - |  |  |  | (5.6 | )
Stock-based compensation expense |  |  | - |  |  |  | - |  |  |  | 1.7 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 1.7 |
Dividend paid to noncontrolling interest |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (1.3 | ) |  |  | (1.3 | )
Net earnings attributable to noncontrolling interest |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 0.2 |  |  |  | 0.2 |
Balance, June 30, 2019 |  |  | 53.3 |  |  | $ | 33.2 |  |  | $ | 240.2 |  |  | $ | 480.1 |  |  | $ | (176.2 | ) |  | $ | (37.0 | ) |  | $ | 6.0 |  |  | $ | 546.3 |
Net loss attributable to Modine |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (4.7 | ) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (4.7 | )
Other comprehensive loss |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (18.4 | ) |  |  | - |  |  |  | (0.2 | ) |  |  | (18.6 | )
Stock-based compensation expense |  |  | - |  |  |  | - |  |  |  | 2.7 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 2.7 |
Net loss attributable to noncontrolling interest |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (0.1 | ) |  |  | (0.1 | )
Balance, September 30, 2019 |  |  | 53.3 |  |  | $ | 33.2 |  |  | $ | 242.9 |  |  | $ | 475.4 |  |  | $ | (194.6 | ) |  | $ | (37.0 | ) |  | $ | 5.7 |  |  | $ | 525.6 |

|  | Common stock |  |  | Additional paid-in |  |  | Retained |  |  | Accumulated other comprehensive |  |  | Treasury stock, at |  |  | Non- controlling |  |  |  |
|  | Shares |  |  | Amount |  |  | capital |  |  | earnings |  |  | loss |  |  | cost |  |  | interest |  |  | Total |
Balance, March 31, 2018 |  |  | 52.3 |  |  | $ | 32.7 |  |  | $ | 229.9 |  |  | $ | 394.9 |  |  | $ | (140.3 | ) |  | $ | (27.1 | ) |  | $ | 8.4 |  |  | $ | 498.5 |
Adoption of new accounting guidance (Note 1) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (7.6 | ) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (7.6 | )
Net earnings attributable to Modine |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 22.0 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 22.0 |
Other comprehensive loss |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (23.3 | ) |  |  | - |  |  |  | (0.4 | ) |  |  | (23.7 | )
Stock options and awards |  |  | 0.4 |  |  |  | 0.2 |  |  |  | (0.2 | ) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Purchase of treasury stock |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (3.7 | ) |  |  | - |  |  |  | (3.7 | )
Stock-based compensation expense |  |  | - |  |  |  | - |  |  |  | 2.0 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 2.0 |
Dividend paid to noncontrolling interest |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (1.8 | ) |  |  | (1.8 | )
Net earnings attributable to noncontrolling interest |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 0.5 |  |  |  | 0.5 |
Balance, June 30, 2018 |  |  | 52.7 |  |  | $ | 32.9 |  |  | $ | 231.7 |  |  | $ | 409.3 |  |  | $ | (163.6 | ) |  | $ | (30.8 | ) |  |  | 6.7 |  |  | $ | 486.2 |
Net earnings attributable to Modine |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 38.5 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 38.5 |
Other comprehensive loss |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (4.8 | ) |  |  | - |  |  |  | (0.1 | ) |  |  | (4.9 | )
Stock options and awards |  |  | - |  |  |  | 0.1 |  |  |  | 0.1 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 0.2 |
Stock-based compensation expense |  |  | - |  |  |  | - |  |  |  | 3.2 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 3.2 |
Net earnings attributable to noncontrolling interest |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 0.2 |  |  |  | 0.2 |
Balance, September 30, 2018 |  |  | 52.7 |  |  | $ | 33.0 |  |  | $ | 235.0 |  |  | $ | 447.8 |  |  | $ | (168.4 | ) |  | $ | (30.8 | ) |  | $ | 6.8 |  |  | $ | 523.4 |

The notes to condensed consolidated financial statements are an integral part of these statements.
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Table of Contents
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
Note 1: General
The accompanying condensed consolidated financial statements were prepared in conformity with generally accepted accounting principles (“GAAP”) in the United States applied on a basis consistent with those principles used in the preparation of the annual consolidated financial statements of Modine Manufacturing Company (“Modine” or the “Company”) for the fiscal year ended March 31, 2019, except in regard to the new accounting guidance adopted, as described below. 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 2020 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, 2019.
Sale of Nikkei Heat Exchanger Company, Ltd. (“NEX”)
During the second quarter of fiscal 2020, the Company completed the sale of its 50 percent ownership interest in NEX for a selling price of $3.8 million. Prior to the sale, the Company accounted for its investment in this non-consolidated affiliate using the equity method. As a result of this sale, the Company recorded a gain of $0.1 million, which included the write-off of accumulated foreign currency translation gains of $0.6 million, within other income and expense on the consolidated statements of operations.
Sale of AIAC Air Conditioning South Africa (Pty) Ltd.
During the second quarter of fiscal 2019, the Company completed the sale of its AIAC Air Conditioning South Africa (Pty) Ltd. business, which was reported within the Building HVAC Systems segment, for a selling price of $0.5 million. As a result of this transaction, the Company recorded a loss of $1.7 million, which included the write-off of accumulated foreign currency translation losses of $0.8 million. The Company reported this loss on sale of assets as a separate line on the consolidated statements of operations. Annual net sales attributable to this disposed business were less than $2.0 million.
New Accounting Guidance Adopted in Fiscal 2020
Leases
In February 2016, the FASB issued new comprehensive lease accounting guidance that supersedes existing lease accounting guidance and requires balance sheet recognition for most leases. The Company adopted this guidance effective April 1, 2019 using a modified-retrospective transition method, under which it elected not to adjust comparative periods. The Company elected the package of practical expedients permitted under the new guidance, and, as a result, the Company did not reassess the classification of existing leases or initial direct costs thereof, or whether existing contracts contain leases. In addition, the Company elected accounting policies to not record short-term leases on the balance sheet and to not separate lease and non-lease components. The Company did not elect the hindsight practical expedient.
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MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
The Company assessed its global lease portfolio and implemented a new lease accounting software solution and new processes and controls to account for leases in accordance with the new guidance. The Company’s most significant leases represent leases of real estate, such as manufacturing facilities, warehouses, and office buildings. The Company also leases certain manufacturing and IT equipment and vehicles. Upon adoption of this new guidance on April 1, 2019, the Company recognized right-of-use assets for operating leases totaling $61.3 million and corresponding current and noncurrent operating lease liabilities of $12.4 million and $48.9 million, respectively. In addition, the Company assessed two existing build-to-suit arrangements, for which it had recorded property, plant and equipment and long-term debt on its consolidated balance sheet as of March 31, 2019. The Company determined these arrangements represent operating leases under the new accounting guidance. As a result, the Company derecognized the previously-recorded balances and recorded $5.2 million of operating lease right-of-use assets and corresponding lease liabilities. As a result of adopting the new guidance, there was not a significant impact on the Company’s accounting for its previously-recorded capital leases, which are now classified as finance leases under the new guidance. In addition, there was no impact to retained earnings. Also, the adoption did not have a material impact on the Company’s consolidated statement of operations or consolidated statement of cash flows. See Note 15 for additional information regarding the Company’s leases.
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
In February 2018, the FASB issued new guidance related to the accounting for certain stranded income tax effects in accumulated other comprehensive income (loss) resulting from tax reform legislation that was enacted in the U.S. in December 2017. This guidance provided companies the option to reclassify stranded income tax effects to retained earnings. The Company adopted this guidance as of April 1, 2019 and chose not to reclassify stranded income tax effects; therefore, the adoption of this guidance did not impact the Company’s consolidated financial statements.
New Accounting Guidance Adopted in Fiscal 2019
Revenue Recognition
In May 2014, the FASB issued new guidance that outlines a comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The core principle of the new guidance is that companies are to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company adopted this new guidance as of April 1, 2018, and, as a result, recorded an increase of $0.7 million to retained earnings.
Income Taxes: Intra-Entity Transfers of Assets Other than Inventory
In October 2016, the FASB issued new guidance related to income tax accounting for intercompany asset transfers. This new guidance requires companies to recognize the income tax effects of intercompany asset transfers other than inventory at the transaction date. The income tax effects of these transfers were previously deferred. The Company adopted this new guidance as of April 1, 2018, and, as a result, recorded a decrease to retained earnings of $8.3 million.
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MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
Note 2: Revenue Recognition
Disaggregation of Revenue
The table below presents revenue for each of the Company’s business segments, Vehicular Thermal Solutions (“VTS”), Commercial and Industrial Solutions (“CIS”) and Building HVAC Systems (“BHVAC”). Each segment’s revenue is disaggregated by primary end market, by geographic location and based upon the timing of revenue recognition.

|  | Three months ended September 30, 2019 |  |  | Three months ended September 30, 2018 |
|  | VTS |  |  | CIS |  |  | BHVAC |  |  | Segment Total |  |  | VTS |  |  | CIS |  |  | BHVAC |  |  | Segment Total |
Primary end market: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Automotive |  | $ | 135.1 |  |  | $ | - |  |  | $ | - |  |  | $ | 135.1 |  |  | $ | 136.4 |  |  | $ | - |  |  | $ | - |  |  | $ | 136.4 |
Commercial vehicle |  |  | 81.8 |  |  |  | - |  |  |  | - |  |  |  | 81.8 |  |  |  | 95.8 |  |  |  | - |  |  |  | - |  |  |  | 95.8 |
Off-highway |  |  | 59.6 |  |  |  | - |  |  |  | - |  |  |  | 59.6 |  |  |  | 76.9 |  |  |  | - |  |  |  | - |  |  |  | 76.9 |
Commercial HVAC&R |  |  | - |  |  |  | 115.9 |  |  |  | 46.1 |  |  |  | 162.0 |  |  |  | - |  |  |  | 127.6 |  |  |  | 42.3 |  |  |  | 169.9 |
Data center cooling |  |  | - |  |  |  | 26.7 |  |  |  | 9.5 |  |  |  | 36.2 |  |  |  | - |  |  |  | 36.0 |  |  |  | 8.4 |  |  |  | 44.4 |
Industrial cooling |  |  | - |  |  |  | 11.7 |  |  |  | - |  |  |  | 11.7 |  |  |  | - |  |  |  | 13.1 |  |  |  | - |  |  |  | 13.1 |
Other |  |  | 22.8 |  |  |  | 2.4 |  |  |  | 0.4 |  |  |  | 25.6 |  |  |  | 26.5 |  |  |  | 1.5 |  |  |  | - |  |  |  | 28.0 |
Net sales |  | $ | 299.3 |  |  | $ | 156.7 |  |  | $ | 56.0 |  |  | $ | 512.0 |  |  | $ | 335.6 |  |  | $ | 178.2 |  |  | $ | 50.7 |  |  | $ | 564.5 |
Geographic location: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Americas |  | $ | 144.9 |  |  | $ | 86.0 |  |  | $ | 38.1 |  |  | $ | 269.0 |  |  | $ | 159.2 |  |  | $ | 103.2 |  |  | $ | 31.8 |  |  | $ | 294.2 |
Europe |  |  | 111.0 |  |  |  | 57.5 |  |  |  | 17.9 |  |  |  | 186.4 |  |  |  | 127.3 |  |  |  | 62.0 |  |  |  | 18.9 |  |  |  | 208.2 |
Asia |  |  | 43.4 |  |  |  | 13.2 |  |  |  | - |  |  |  | 56.6 |  |  |  | 49.1 |  |  |  | 13.0 |  |  |  | - |  |  |  | 62.1 |
Net sales |  | $ | 299.3 |  |  | $ | 156.7 |  |  | $ | 56.0 |  |  | $ | 512.0 |  |  | $ | 335.6 |  |  | $ | 178.2 |  |  | $ | 50.7 |  |  | $ | 564.5 |
Timing of revenue recognition: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Products transferred at a point in time |  | $ | 290.7 |  |  | $ | 132.4 |  |  | $ | 56.0 |  |  | $ | 479.1 |  |  | $ | 322.5 |  |  | $ | 142.7 |  |  | $ | 50.7 |  |  | $ | 515.9 |
Products transferred over time |  |  | 8.6 |  |  |  | 24.3 |  |  |  | - |  |  |  | 32.9 |  |  |  | 13.1 |  |  |  | 35.5 |  |  |  | - |  |  |  | 48.6 |
Net sales |  | $ | 299.3 |  |  | $ | 156.7 |  |  | $ | 56.0 |  |  | $ | 512.0 |  |  | $ | 335.6 |  |  | $ | 178.2 |  |  | $ | 50.7 |  |  | $ | 564.5 |

|  | Six months ended September 30, 2019 |  |  | Six months ended September 30, 2018 |
|  | VTS |  |  | CIS |  |  | BHVAC |  |  | Segment Total |  |  | VTS |  |  | CIS |  |  | BHVAC |  |  | Segment Total |
Primary end market: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Automotive |  | $ | 264.3 |  |  | $ | - |  |  | $ | - |  |  | $ | 264.3 |  |  | $ | 281.5 |  |  | $ | - |  |  | $ | - |  |  | $ | 281.5 |
Commercial vehicle |  |  | 180.5 |  |  |  | - |  |  |  | - |  |  |  | 180.5 |  |  |  | 195.5 |  |  |  | - |  |  |  | - |  |  |  | 195.5 |
Off-highway |  |  | 133.5 |  |  |  | - |  |  |  | - |  |  |  | 133.5 |  |  |  | 160.7 |  |  |  | - |  |  |  | - |  |  |  | 160.7 |
Commercial HVAC&R |  |  | - |  |  |  | 246.8 |  |  |  | 84.1 |  |  |  | 330.9 |  |  |  | - |  |  |  | 262.9 |  |  |  | 77.4 |  |  |  | 340.3 |
Data center cooling |  |  | - |  |  |  | 50.9 |  |  |  | 20.1 |  |  |  | 71.0 |  |  |  | - |  |  |  | 70.1 |  |  |  | 18.3 |  |  |  | 88.4 |
Industrial cooling |  |  | - |  |  |  | 23.1 |  |  |  | - |  |  |  | 23.1 |  |  |  | - |  |  |  | 24.6 |  |  |  | - |  |  |  | 24.6 |
Other |  |  | 47.5 |  |  |  | 4.7 |  |  |  | 0.8 |  |  |  | 53.0 |  |  |  | 50.7 |  |  |  | 4.5 |  |  |  | - |  |  |  | 55.2 |
Net sales |  | $ | 625.8 |  |  | $ | 325.5 |  |  | $ | 105.0 |  |  | $ | 1,056.3 |  |  | $ | 688.4 |  |  | $ | 362.1 |  |  | $ | 95.7 |  |  | $ | 1,146.2 |
Geographic location: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Americas |  | $ | 298.2 |  |  | $ | 183.1 |  |  | $ | 67.2 |  |  | $ | 548.5 |  |  | $ | 310.1 |  |  | $ | 208.0 |  |  | $ | 57.1 |  |  | $ | 575.2 |
Europe |  |  | 237.1 |  |  |  | 116.1 |  |  |  | 37.8 |  |  |  | 391.0 |  |  |  | 275.7 |  |  |  | 127.2 |  |  |  | 38.6 |  |  |  | 441.5 |
Asia |  |  | 90.5 |  |  |  | 26.3 |  |  |  | - |  |  |  | 116.8 |  |  |  | 102.6 |  |  |  | 26.9 |  |  |  | - |  |  |  | 129.5 |
Net sales |  | $ | 625.8 |  |  | $ | 325.5 |  |  | $ | 105.0 |  |  | $ | 1,056.3 |  |  | $ | 688.4 |  |  | $ | 362.1 |  |  | $ | 95.7 |  |  | $ | 1,146.2 |
Timing of revenue recognition: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Products transferred at a point in time |  | $ | 609.8 |  |  | $ | 276.3 |  |  | $ | 105.0 |  |  | $ | 991.1 |  |  | $ | 665.3 |  |  | $ | 296.3 |  |  | $ | 95.7 |  |  | $ | 1,057.3 |
Products transferred over time |  |  | 16.0 |  |  |  | 49.2 |  |  |  | - |  |  |  | 65.2 |  |  |  | 23.1 |  |  |  | 65.8 |  |  |  | - |  |  |  | 88.9 |
Net sales |  | $ | 625.8 |  |  | $ | 325.5 |  |  | $ | 105.0 |  |  | $ | 1,056.3 |  |  | $ | 688.4 |  |  | $ | 362.1 |  |  | $ | 95.7 |  |  | $ | 1,146.2 |

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MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
Contract Balances
Contract assets and contract liabilities from contracts with customers were as follows:

|  | September 30, 2019 |  |  | March 31, 2019 |
Contract assets |  | $ | 26.9 |  |  | $ | 22.6 |
Contract liabilities |  |  | 5.8 |  |  |  | 4.0 |

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 $4.3 million increase in contract assets during the first six months of fiscal 2020 primarily resulted from an increase in contract assets for revenue recognized over time.
Contract liabilities, included within other current liabilities in the consolidated balance sheets, consist of payments received in advance of satisfying performance obligations under customer contracts, including contracts for customer-owned tooling. The $1.8 million increase in contract liabilities during the first six months of fiscal 2020 was primarily related to customer contracts for which payment had been received in advance of the Company’s satisfaction of performance obligations.
Note 3: Fair Value Measurements
Fair value is defined as the price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. Fair value measurements are classified under the following hierarchy:

| • | Level 1 – Quoted prices for identical instruments in active markets.

| • | Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets.

| • | Level 3 – Model-derived valuations in which one or more significant inputs are not observable.

When available, the Company uses quoted market prices to determine fair value and classifies such measurements as Level 1. In some cases, where market prices are not available, the Company uses observable market-based inputs to calculate fair value, in which case the measurements are classified as Level 2. If quoted or observable market prices are not available, the Company determines fair value based upon valuation models that use, where possible, market-based data such as interest rates, yield curves or currency rates. These measurements are classified as Level 3.
The carrying values of cash, cash equivalents, restricted cash, short-term investments, trade accounts receivable, accounts payable, and short-term debt approximate fair value due to the short-term nature of these instruments. The Company holds trading securities in deferred compensation trusts to fund obligations under certain non-qualified deferred compensation plans. The securities’ fair values, which are recorded as other noncurrent assets, are determined based upon quoted prices from active markets and classified within Level 1 of the valuation hierarchy. The Company’s deferred compensation obligations, which are recorded as other noncurrent liabilities, are recorded at the fair values of the investments held by the trust. The fair values of the Company’s trading securities and deferred compensation obligations each totaled $4.3 million and $6.0 million as of September 30, 2019 and March 31, 2019, respectively. The $1.7 million decrease in the fair value of the trading securities and deferred compensation obligations from March 31, 2019 was primarily due to participant withdrawals during the first six months of fiscal 2020. The fair value of the Company’s long-term debt is disclosed in Note 16.
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MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
Note 4: Pensions
Pension cost included the following components:

|  | Three months ended September 30, |  |  | Six months ended September 30, |
|  | 2019 |  |  | 2018 |  |  | 2019 |  |  | 2018 |
Service cost |  | $ | 0.1 |  |  | $ | 0.1 |  |  | $ | 0.2 |  |  | $ | 0.2 |
Interest cost |  |  | 2.2 |  |  |  | 2.4 |  |  |  | 4.5 |  |  |  | 4.8 |
Expected return on plan assets |  |  | (2.9 | ) |  |  | (3.1 | ) |  |  | (5.9 | ) |  |  | (6.1 | )
Amortization of unrecognized net loss |  |  | 1.5 |  |  |  | 1.4 |  |  |  | 3.0 |  |  |  | 2.8 |
Net periodic benefit cost |  | $ | 0.9 |  |  | $ | 0.8 |  |  | $ | 1.8 |  |  | $ | 1.7 |

During the six months ended September 30, 2019 and 2018, the Company contributed $1.7 million and $3.7 million, respectively to its U.S. pension plans.
Note 5: Stock-Based Compensation
The Company’s stock-based incentive programs consist of the following: (1) a long-term incentive compensation program for officers and other executives that consists of stock awards, stock options, and performance-based stock awards granted for retention and performance, (2) a discretionary equity program for other management and key employees, and (3) stock awards for non-employee directors.
The Company calculates compensation expense based upon the fair value of the instruments at the time of grant and subsequently recognizes expense ratably over the respective vesting periods of the stock-based awards. The Company recognized stock-based compensation expense of $2.7 million and $3.2 million for the three months ended September 30, 2019 and 2018, respectively. The Company recognized stock-based compensation expense of $4.4 million and $5.2 million for the six months ended September 30, 2019 and 2018, respectively. The performance component of awards granted under the Company’s long-term incentive plan during the first quarter of fiscal 2020 is based upon both a target three-year average cash flow return on invested capital and a target three-year average revenue growth at the end of the three-year performance period.
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MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
The fair value of stock-based compensation awards granted during the six months ended September 30, 2019 and 2018 were as follows:

|  | Six months ended September 30, |
|  | 2019 |  |  | 2018 |
|  | Shares |  |  | Fair Value Per Award |  |  | Shares |  |  | Fair Value Per Award |
Stock options |  |  | 0.3 |  |  | $ | 5.56 |  |  |  | 0.2 |  |  | $ | 7.81 |
Restricted stock awards |  |  | 0.3 |  |  | $ | 13.26 |  |  |  | 0.2 |  |  | $ | 17.90 |
Performance stock awards |  |  | 0.3 |  |  | $ | 13.26 |  |  |  | 0.2 |  |  | $ | 17.90 |
Unrestricted stock awards |  |  | 0.1 |  |  | $ | 14.50 |  |  |  | 0.1 |  |  | $ | 17.60 |

The Company used the following assumptions in determining fair value for stock options:

|  | Six months ended September 30, |
|  | 2019 |  |  | 2018 |
Expected life of awards in years |  |  | 6.3 |  |  |  | 6.3 |
Risk-free interest rate |  |  | 2.2 | % |  |  | 2.8 | %
Expected volatility of the Company’s stock |  |  | 39.2 | % |  |  | 39.7 | %
Expected dividend yield on the Company’s stock |  |  | 0.0 | % |  |  | 0.0 | %

As of September 30, 2019, unrecognized compensation expense related to non-vested stock-based compensation awards, which will be amortized over the remaining service periods, was as follows:

|  | Unrecognized Compensation Expense |  |  | Weighted-Average Remaining Service Period in Years |
Stock options |  | $ | 3.1 |  |  |  | 2.9 |
Restricted stock awards |  |  | 7.1 |  |  |  | 2.8 |
Performance stock awards |  |  | 3.8 |  |  |  | 2.1 |
Total |  | $ | 14.0 |  |  |  | 2.6 |

Note 6: Restructuring Activities
The Company’s restructuring actions during the first six months of fiscal 2020 consisted primarily of targeted headcount reductions in Europe and the Americas within the VTS segment and plant consolidation activities. The headcount reductions support the Company’s objective to reduce operational and selling, general and administrative (“SG&A”) cost structures. In addition, the Company is in the process of transferring product lines associated with the merger of its North American coils business into the CIS segment in order to accelerate operational improvements and organizational efficiencies.
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MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
Restructuring and repositioning expenses were as follows:

|  | Three months ended September 30, |  |  | Six months ended September 30, |
|  | 2019 |  |  | 2018 |  |  | 2019 |  |  | 2018 |
Employee severance and related benefits |  | $ | 1.8 |  |  | $ | - |  |  | $ | 3.3 |  |  | $ | 0.1 |
Other restructuring and repositioning expenses |  |  | 0.5 |  |  |  | - |  |  |  | 0.8 |  |  |  | 0.1 |
Total |  | $ | 2.3 |  |  | $ | - |  |  | $ | 4.1 |  |  | $ | 0.2 |

Other restructuring and repositioning expenses primarily consist of equipment transfers and plant consolidation costs.
The Company accrues severance in accordance with its written plans, procedures, and relevant statutory requirements. Changes in accrued severance were as follows:

|  | Three months ended September 30, |
|  | 2019 |  |  | 2018 |
Beginning balance |  | $ | 7.8 |  |  | $ | 4.8 |
Additions |  |  | 1.8 |  |  |  | - |
Payments |  |  | (2.0 | ) |  |  | (1.4 | )
Effect of exchange rate changes |  |  | (0.2 | ) |  |  | - |
Ending balance |  | $ | 7.4 |  |  | $ | 3.4 |

|  | Six months ended September 30, |
|  | 2019 |  |  | 2018 |
Beginning balance |  | $ | 10.0 |  |  | $ | 11.0 |
Additions |  |  | 3.3 |  |  |  | 0.1 |
Payments |  |  | (5.7 | ) |  |  | (7.2 | )
Effect of exchange rate changes |  |  | (0.2 | ) |  |  | (0.5 | )
Ending balance |  | $ | 7.4 |  |  | $ | 3.4 |

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MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
Note 7: Other Income and Expense
Other income and expense consisted of the following:

|  | Three months ended September 30, |  |  | Six months ended September 30, |
|  | 2019 |  |  | 2018 |  |  | 2019 |  |  | 2018 |
Equity in earnings of non-consolidated affiliate (a) |  | $ | 0.1 |  |  | $ | 0.2 |  |  | $ | 0.2 |  |  | $ | 0.4 |
Interest income |  |  | 0.1 |  |  |  | 0.1 |  |  |  | 0.2 |  |  |  | 0.3 |
Foreign currency transactions (b) |  |  | (0.8 | ) |  |  | (0.1 | ) |  |  | (1.4 | ) |  |  | (0.9 | )
Net periodic benefit cost (c) |  |  | (0.7 | ) |  |  | (0.7 | ) |  |  | (1.4 | ) |  |  | (1.4 | )
Total other expense - net |  | $ | (1.3 | ) |  | $ | (0.5 | ) |  | $ | (2.4 | ) |  | $ | (1.6 | )

| (a) | The amounts reported in fiscal 2020 include a $0.1 million gain recorded as a result of the Company's sale of its ownership interest in NEX. See Note 1 for additional information.

| (b) | Foreign currency transactions primarily consist of foreign currency transaction gains and losses on the re-measurement or settlement of foreign currency-denominated assets and liabilities, including intercompany loans and transactions denominated in a foreign currency, along with gains and losses on certain foreign currency exchange contracts.

| (c) | Net periodic benefit cost for the Company’s pension and postretirement plans is exclusive of service cost.

Note 8: Income Taxes
The Company’s effective tax rate for the three months ended September 30, 2019 and 2018 was (336.4) percent and (144.9) percent, respectively. The Company’s effective tax rate for the six months ended September 30, 2019 and 2018 was 66.0 percent and (41.3) percent, respectively. The effective tax rates for the fiscal 2019 periods were favorably impacted by income tax benefits of $10.8 million related to the Company’s accounting for the Tax Cuts and Jobs Act (the “Tax Act”) and income tax benefits of $13.6 million related to the recognition of tax assets for foreign tax credits. In fiscal 2019, the effective tax rate was also favorably impacted by an income tax benefit recorded for a manufacturing deduction in the United States. Compared with the prior year, the Company’s effective tax rate for fiscal 2020 was negatively impacted by the global intangible low taxed income (“GILTI”) provision of the Tax Act, changes in the mix of foreign and domestic earnings, and changes in the valuation allowances in certain jurisdictions.
As of September 30, 2019, valuation allowances against deferred tax assets in certain foreign jurisdictions totaled $37.6 million and valuation allowances against certain U.S. deferred tax assets totaled $7.4 million, as it is more likely than not these assets will not be realized based upon historical financial results. The Company will continue to provide a valuation allowance against its net deferred tax assets in each of the applicable jurisdictions until the need for a valuation allowance is eliminated. The need for a valuation allowance is eliminated when the Company determines it is more likely than not the deferred tax assets will be realized.
Accounting policies for interim reporting require the Company to adjust its effective tax rate each quarter to be consistent with its estimated annual effective tax rate. Under this methodology, the Company applies its estimated annual income tax rate to its year-to-date ordinary earnings to derive its income tax provision each quarter. The Company records the tax impacts of certain significant, unusual or infrequently occurring items in the period in which they occur. The Company excluded the impact of its operations in certain foreign locations from the overall effective tax rate methodology and recorded them discretely based upon year-to-date results because the Company anticipates net operating losses for the full fiscal year in these jurisdictions. The Company does not anticipate a significant change in unrecognized tax benefits during the remainder of fiscal 2020.
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MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
Note 9: Earnings Per Share
The components of basic and diluted earnings per share were as follows:

|  | Three months ended September 30, |  |  | Six months ended September 30, |
|  | 2019 |  |  | 2018 |  |  | 2019 |  |  | 2018 |
Net (loss) earnings attributable to Modine |  | $ | (4.7 | ) |  | $ | 38.5 |  |  | $ | 3.3 |  |  | $ | 60.5 |
Less: Undistributed earnings attributable to unvested shares |  |  | - |  |  |  | (0.1 | ) |  |  | - |  |  |  | (0.2 | )
Net (loss) earnings available to Modine shareholders |  | $ | (4.7 | ) |  | $ | 38.4 |  |  | $ | 3.3 |  |  | $ | 60.3 |
Weighted-average shares outstanding - basic |  |  | 50.8 |  |  |  | 50.5 |  |  |  | 50.8 |  |  |  | 50.4 |
Effect of dilutive securities |  |  | - |  |  |  | 0.9 |  |  |  | 0.3 |  |  |  | 0.9 |
Weighted-average shares outstanding - diluted |  |  | 50.8 |  |  |  | 51.4 |  |  |  | 51.1 |  |  |  | 51.3 |
(Loss) earnings per share: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net (loss) earnings per share - basic |  | $ | (0.09 | ) |  | $ | 0.76 |  |  | $ | 0.07 |  |  | $ | 1.19 |
Net (loss) earnings per share - diluted |  | $ | (0.09 | ) |  | $ | 0.75 |  |  | $ | 0.06 |  |  | $ | 1.18 |

For the three and six months ended September 30, 2019, the calculation of diluted earnings per share excluded 0.9 million and 0.8 million stock options, respectively, because they were anti-dilutive. For both the three and six months ended September 30, 2018, the calculation of diluted earnings per share excluded 0.4 million stock options because they were anti-dilutive. For the three months ended September 30, 2019, the total number of potentially-dilutive securities was 0.3 million. However, these securities were not included in the computation of diluted net loss per share since to do so would have decreased the loss per share.
Note 10: Cash, Cash Equivalents and Restricted Cash
Cash, cash equivalents and restricted cash consisted of the following:

|  | September 30, 2019 |  |  | March 31, 2019 |
Cash and cash equivalents |  | $ | 32.3 |  |  | $ | 41.7 |
Restricted cash |  |  | 6.4 |  |  |  | 0.5 |
Total cash, cash equivalents and restricted cash |  | $ | 38.7 |  |  | $ | 42.2 |

As of September 30, 2019, the Company reported $6.1 million of restricted cash within other current assets in the consolidated balance sheet, which primarily consists of a short-term deposit associated with a legal entity restructuring in Europe. The Company reported $0.3 million and $0.5 million of restricted cash as of September 30, 2019 and March 31, 2019, respectively, within other noncurrent assets in the consolidated balance sheets. These noncurrent restricted cash balances consist primarily of deposits for contractual guarantees or commitments required for rents, import and export duties, and commercial agreements.
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MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
Note 11: Inventories
Inventories consisted of the following:

|  | September 30, 2019 |  |  | March 31, 2019 |
Raw materials |  | $ | 133.8 |  |  | $ | 122.8 |
Work in process |  |  | 36.5 |  |  |  | 32.2 |
Finished goods |  |  | 52.3 |  |  |  | 45.7 |
Total inventories |  | $ | 222.6 |  |  | $ | 200.7 |

Note 12: Property, Plant and Equipment
Property, plant and equipment, including depreciable lives, consisted of the following:

|  | September 30, 2019 |  |  | March 31, 2019 |
Land |  | $ | 20.1 |  |  | $ | 20.7 |
Buildings and improvements (10-40 years) |  |  | 281.6 |  |  |  | 285.9 |
Machinery and equipment (3-15 years) |  |  | 863.9 |  |  |  | 848.7 |
Office equipment (3-10 years) |  |  | 93.5 |  |  |  | 92.0 |
Construction in progress |  |  | 42.3 |  |  |  | 57.4 |
|  |  | 1,301.4 |  |  |  | 1,304.7 |
Less: accumulated depreciation |  |  | (835.7 | ) |  |  | (820.0 | )
Net property, plant and equipment |  | $ | 465.7 |  |  | $ | 484.7 |

Note 13: Goodwill and Intangible Assets
Changes in the carrying amount of goodwill were as follows:

|  | VTS |  |  | CIS |  |  | BHVAC |  |  | Total |
Goodwill, March 31, 2019 |  | $ | 0.5 |  |  | $ | 153.9 |  |  | $ | 14.1 |  |  | $ | 168.5 |
Effect of exchange rate changes |  |  | - |  |  |  | (1.7 | ) |  |  | (0.7 | ) |  |  | (2.4 | )
Goodwill, September 30, 2019 |  | $ | 0.5 |  |  | $ | 152.2 |  |  | $ | 13.4 |  |  | $ | 166.1 |

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MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
Intangible assets consisted of the following:

|  | September 30, 2019 |  |  | March 31, 2019 |
|  | Gross |  |  |  |  |  | Net |  |  | Gross |  |  |  |  |  | Net |
|  | Carrying |  |  | Accumulated |  |  | Intangible |  |  | Carrying |  |  | Accumulated |  |  | Intangible |
|  | Value |  |  | Amortization |  |  | Assets |  |  | Value |  |  | Amortization |  |  | Assets |
Customer relationships |  | $ | 60.5 |  |  | $ | (10.7 | ) |  | $ | 49.8 |  |  | $ | 61.5 |  |  | $ | (9.1 | ) |  | $ | 52.4 |
Trade names |  |  | 58.2 |  |  |  | (14.7 | ) |  |  | 43.5 |  |  |  | 58.9 |  |  |  | (13.5 | ) |  |  | 45.4 |
Acquired technology |  |  | 23.5 |  |  |  | (6.5 | ) |  |  | 17.0 |  |  |  | 23.9 |  |  |  | (5.5 | ) |  |  | 18.4 |
Total intangible assets |  | $ | 142.2 |  |  | $ | (31.9 | ) |  | $ | 110.3 |  |  | $ | 144.3 |  |  | $ | (28.1 | ) |  | $ | 116.2 |

The Company recorded amortization expense of $2.2 million and $2.3 million for the three months ended September 30, 2019 and 2018, respectively. The Company recorded amortization expense of $4.4 million and $4.6 million for the six months ended September 30, 2019 and 2018, respectively. The Company estimates that it will record $4.4 million of amortization expense during the remainder of fiscal 2020 and approximately $8.0 million of annual amortization expense in fiscal 2021 through 2025.
Note 14: Product Warranties
Changes in accrued warranty costs were as follows:

|  | Three months ended September 30, |
|  | 2019 |  |  | 2018 |
Beginning balance |  | $ | 9.1 |  |  | $ | 8.7 |
Warranties recorded at time of sale |  |  | 1.2 |  |  |  | 1.3 |
Adjustments to pre-existing warranties |  |  | (0.3 | ) |  |  | 0.2 |
Settlements |  |  | (1.7 | ) |  |  | (1.8 | )
Effect of exchange rate changes |  |  | (0.2 | ) |  |  | (0.1 | )
Ending balance |  | $ | 8.1 |  |  | $ | 8.3 |

|  | Six months ended September 30, |
|  | 2019 |  |  | 2018 |
Beginning balance |  | $ | 9.2 |  |  | $ | 9.3 |
Warranties recorded at time of sale |  |  | 2.6 |  |  |  | 2.7 |
Adjustments to pre-existing warranties |  |  | (0.9 | ) |  |  | (0.2 | )
Settlements |  |  | (2.6 | ) |  |  | (3.1 | )
Effect of exchange rate changes |  |  | (0.2 | ) |  |  | (0.4 | )
Ending balance |  | $ | 8.1 |  |  | $ | 8.3 |

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MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
Note 15: Leases
Effective April 1, 2019, the Company adopted new lease accounting guidance and, as a result, recorded $61.3 million of right-of-use (“ROU”) assets and corresponding lease liabilities for operating leases on its consolidated balance sheet. The condensed consolidated financial statements for the three and six months ended September 30, 2019 reflect the adoption of this new guidance; however, the comparable prior-year periods have not been adjusted. See Note 1 for additional information regarding the Company’s adoption of the new guidance.
Significant Accounting Policy
The Company determines if an arrangement is a lease at contract inception. The lease term begins upon lease commencement, which is when the Company takes possession of the asset, and may include options to extend or terminate the lease when it is reasonably certain that such options will be exercised. The Company uses the lease term within its determination of the appropriate lease classification, either as an operating lease or as a finance lease, and to calculate straight-line lease expense for its operating leases.
ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. The Company recognizes ROU assets and lease liabilities at the commencement date, based upon the present value of lease payments over the lease term. As its lease agreements typically do not provide an implicit rate, the Company primarily uses an incremental borrowing rate based upon the information available at lease commencement. In determining the incremental borrowing rate, the Company considers its current borrowing rate, the term of the lease, and the economic environments where the lease activity is concentrated. The Company believes this method effectively estimates a borrowing rate that it could obtain for a debt instrument with similar terms as the lease agreement.
Based upon its accounting policy, the Company does not separate lease and non-lease components for any asset class. In addition, the Company does not record short-term leases (i.e. leases with an initial term of 12 months or less) on its consolidated balance sheets and recognizes payments for these leases as lease expense.
Certain leases require the Company to pay taxes, insurance, maintenance, and other operating expenses associated with the leased asset. Such amounts are not included in the measurement of the lease liability to the extent they are variable in nature. These variable lease costs are recognized as variable lease expense when incurred. The depreciable life of the ROU assets and related leasehold improvements are limited by the expected lease term, unless the lease contains a provision to transfer title to the Company or a purchase option that the Company expects to execute.
The Company’s most significant leases represent leases of real estate, such as manufacturing facilities, warehouses, and office buildings. In addition, the Company leases certain manufacturing and IT equipment and vehicles. The Company’s most significant leases have remaining lease terms of 1 to 15 years. Certain leases contain renewal options for varying periods, which are at the Company’s discretion. If reasonably certain of exercise, the Company includes the renewal periods within the calculation of ROU assets and lease liabilities. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
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MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
Lease Assets and Liabilities
The following table provides a summary of leases recorded on the consolidated balance sheet.

| Balance Sheet Location | September 30, 2019
Lease Assets |  |  |
Operating lease ROU assets | Other noncurrent assets | $ | 64.7
Finance lease ROU assets (a) | Property, plant and equipment - net |  | 8.6
Lease Liabilities |  |  |
Operating lease liabilities | Other current liabilities | $ | 10.1
Operating lease liabilities | Other noncurrent liabilities |  | 53.1
Finance lease liabilities | Long-term debt - current portion |  | 0.3
Finance lease liabilities | Long-term debt |  | 3.5

| (a) | Finance lease ROU assets were recorded net of accumulated amortization of $1.5 million as of September 30, 2019.

Components of Lease Expense
The Company records operating lease expense as either cost of sales or SG&A expenses within its consolidated statements of operations, depending upon the nature and use of the ROU assets. The Company records finance lease expense as depreciation expense within cost of sales or SG&A expenses, depending upon the nature and use of the ROU assets, and as interest expense in its consolidated statements of operations.
The components of lease expense were as follows:

|  | Three months ended September 30, 2019 |  |  | Six months ended September 30, 2019 |
Operating lease expense (a) |  | $ | 5.2 |  |  | $ | 10.4 |
Finance lease expense: |  |  |  |  |  |  |  |
Depreciation of ROU assets |  |  | 0.1 |  |  |  | 0.2 |
Interest on lease liabilities |  |  | 0.1 |  |  |  | 0.1 |
Total lease expense |  | $ | 5.4 |  |  | $ | 10.7 |

| (a) | For the three and six months ended September 30, 2019, operating lease expense included short-term lease expense of $1.0 million and $1.9 million, respectively. Variable lease expense was not significant.

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MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
Supplemental Cash Flow Information

|  | Three months ended September 30, 2019 |  |  | Six months ended September 30, 2019 |
Cash paid for amounts included in the measurement of lease liabilities: |  |  |  |  |  |
Operating cash flows for operating leases |  | $ | 4.2 |  |  | $ | 7.9 |
Financing cash flows for finance leases |  |  | 0.1 |  |  |  | 0.2 |
ROU assets obtained in exchange for lease liabilities |  |  |  |  |  |  |  |
Operating leases |  | $ | 5.1 |  |  | $ | 5.4 |
Finance leases |  |  | 0.1 |  |  |  | 0.1 |

Lease Term and Discount Rates

| September 30, 2019
Weighted-average remaining lease term: |
Operating leases | 9.3 years
Finance leases | 9.3 years
Weighted-average discount rate: |
Operating leases | 3.5%
Finance leases | 4.8%

Maturity of Lease Liabilities under New Lease Accounting Guidance
Future minimum rental payments for leases with initial non-cancellable lease terms in excess of one year were as follows at September 30, 2019:

Fiscal Year |  | Operating Leases |  |  | Finance Leases |
Remainder of fiscal 2020 |  | $ | 6.0 |  |  | $ | 0.3 |
2021 |  |  | 12.1 |  |  |  | 0.5 |
2022 |  |  | 10.6 |  |  |  | 0.5 |
2023 |  |  | 8.6 |  |  |  | 0.5 |
2024 |  |  | 6.1 |  |  |  | 0.5 |
2025 and beyond |  |  | 31.1 |  |  |  | 2.4 |
Total lease payments |  |  | 74.5 |  |  |  | 4.7 |
Less: Interest |  |  | (11.3 | ) |  |  | (0.9 | )
Present value of lease liabilities |  | $ | 63.2 |  |  | $ | 3.8 |

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MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
Maturity of Lease Liabilities under Previous Lease Accounting Guidance
Future minimum rental payments for operating leases with initial non-cancellable lease terms in excess of one year were as follows at March 31, 2019:

Fiscal Year |  |  |
2020 |  | $ | 14.2 |
2021 |  |  | 12.4 |
2022 |  |  | 9.1 |
2023 |  |  | 7.1 |
2024 |  |  | 4.7 |
2025 and beyond |  |  | 22.9 |
Total |  | $ | 70.4 |

The Company recorded $19.3 million and $18.5 million of rental expense related to operating leases in fiscal 2019 and 2018, respectively.
Note 16: Indebtedness
In June 2019, the Company executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $250.0 million revolving credit facility expiring in June 2024, which modified the Company’s then-existing revolver that would have expired in November 2021. As a result of the credit agreement modification, the Company deferred debt issuance costs of $1.1 million, which will be amortized over the term of the debt. In addition, this credit agreement provides for both U.S. dollar- and euro-denominated term loan facilities. At September 30, 2019, the Company’s term loan borrowings totaled $195.4 million, with repayments continuing into fiscal 2025. These term loans replaced the previously-existing term loans with repayments scheduled through fiscal 2022. Borrowings under both the revolving credit and term loan facilities bear interest at a variable rate, based upon the applicable reference rate and including a margin percentage dependent upon the Company’s leverage ratio, as described below. At September 30, 2019, the weighted-average interest rates for revolving credit facility borrowings and the term loans were 3.4 percent and 3.3 percent, respectively.
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MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
Long-term debt consisted of the following:

|  | Fiscal year of maturity |  |  | September 30, 2019 |  |  | March 31, 2019 |
Term loans |  | 2025 |  |  | $ | 195.4 |  |  | $ | 238.4 |
6.8% Senior Notes |  | 2021 |  |  |  | 77.0 |  |  |  | 85.0 |
5.8% Senior Notes |  | 2027 |  |  |  | 50.0 |  |  |  | 50.0 |
Other (a) |  |  | - |  |  |  | 7.1 |  |  |  | 14.3 |
|  |  |  |  |  |  | 329.5 |  |  |  | 387.7 |
Less: current portion |  |  |  |  |  |  | (93.6 | ) |  |  | (48.6 | )
Less: unamortized debt issuance costs |  |  |  |  |  |  | (3.7 | ) |  |  | (4.0 | )
Total long-term debt |  |  |  |  |  | $ | 232.2 |  |  | $ | 335.1 |

(a) | Other long-term debt primarily includes borrowings by foreign subsidiaries and finance lease obligations.

Long-term debt matures as follows:

Fiscal Year |  |  |
Remainder of 2020 |  | $ | 15.9 |
2021 |  |  | 84.5 |
2022 |  |  | 21.6 |
2023 |  |  | 21.6 |
2024 |  |  | 21.6 |
2025 & beyond |  |  | 164.3 |
Total |  | $ | 329.5 |

As of September 30, 2019 and March 31, 2019, the Company reported its revolving credit facility borrowings of $111.7 million and $47.1 million, respectively, as short-term debt on the consolidated balance sheets. At September 30, 2019, domestic letters of credit totaled $5.3 million, resulting in available borrowings under the Company’s revolving credit facility of $133.0 million. The Company also maintains credit agreements for its foreign subsidiaries, with outstanding short-term borrowings at September 30, 2019 and March 31, 2019 of $27.7 million and $18.9 million, respectively.
Provisions in the Company’s credit agreement, Senior Note agreements, and various foreign credit agreements require the Company to maintain compliance with various covenants and include certain cross-default clauses. Under its primary debt agreements in the U.S., the Company has provided liens on substantially all domestic assets. In addition, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales. The Company is also subject to a leverage ratio covenant, which requires the Company to limit its consolidated indebtedness, less a portion of its 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”). The Company is also subject to an interest expense coverage ratio covenant, which requires the Company to maintain Adjusted EBITDA of at least three times consolidated interest expense. The Company was in compliance with its debt covenants as of September 30, 2019.
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MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
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, 2019 and March 31, 2019, the carrying value of the Company’s long-term debt approximated fair value, with the exception of the Senior Notes, which had an aggregate fair value of approximately $129.6 million and $137.2 million, respectively. The fair value of the Company’s long-term debt is categorized as Level 2 within the fair value hierarchy. Refer to Note 3 for the definition of a Level 2 fair value measurement.
Note 17: Contingencies and Litigation
Environmental
The Company has recorded environmental investigation and remediation accruals related to soil and groundwater contamination at manufacturing facilities in the United States, one of which the Company currently owns and operates, and at its former manufacturing facility in the Netherlands, along with accruals for lesser environmental matters at certain other facilities in the United States and Brazil. These accruals generally relate to facilities where past operations followed practices and procedures that were considered acceptable under then-existing regulations, or where the Company is a successor to the obligations of prior owners, and current laws and regulations require investigative and/or remedial work to ensure sufficient environmental compliance. The accruals for these environmental matters totaled $18.6 million and $18.9 million as of September 30, 2019 and March 31, 2019, respectively. As additional information becomes available, the Company will re-assess the liabilities related to these matters and revise the estimated accruals, if necessary. Based upon currently available information, the Company believes the ultimate outcome of these matters, individually and in the aggregate, will not have a material adverse effect on its financial position. However, these matters are subject to inherent uncertainties, and unfavorable outcomes could occur, including significant monetary damages.
Other Litigation
In the normal course of business, the Company and its subsidiaries are named as defendants in various lawsuits and enforcement proceedings by private parties, governmental agencies and/or others in which claims are asserted against Modine. The Company believes that any additional loss in excess of amounts already accrued would not have a material effect on the Company’s consolidated balance sheet, results of operations, and cash flows. In addition, management expects that the liabilities which may ultimately result from such lawsuits or proceedings, if any, would not have a material adverse effect on the Company’s financial position.
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MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
Note 18: Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss were as follows:

|  | Three months ended September 30, 2019 |  |  | Six months ended September 30, 2019 |
|  | Foreign Currency Translation |  |  | Defined Benefit Plans |  |  | Cash Flow Hedges |  |  | Total |  |  | Foreign Currency Translation |  |  | Defined Benefit Plans |  |  | Cash Flow Hedges |  |  | Total |
Beginning balance |  | $ | (40.7 | ) |  | $ | (135.2 | ) |  | $ | (0.3 | ) |  | $ | (176.2 | ) |  | $ | (42.6 | ) |  | $ | (136.3 | ) |  | $ | 0.5 |  |  | $ | (178.4 | )
Other comprehensive loss before reclassifications |  |  | (18.7 | ) |  |  | - |  |  |  | (0.6 | ) |  |  | (19.3 | ) |  |  | (16.8 | ) |  |  | - |  |  |  | (1.6 | ) |  |  | (18.4 | )
Reclassifications: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Amortization of unrecognized net loss (a) |  |  | - |  |  |  | 1.4 |  |  |  | - |  |  |  | 1.4 |  |  |  | - |  |  |  | 2.8 |  |  |  | - |  |  |  | 2.8 |
Realized losses - net (b) |  |  | - |  |  |  | - |  |  |  | 0.3 |  |  |  | 0.3 |  |  |  | - |  |  |  | - |  |  |  | 0.2 |  |  |  | 0.2 |
Foreign currency translation gains (c) |  |  | (0.6 | ) |  |  | - |  |  |  | - |  |  |  | (0.6 | ) |  |  | (0.6 | ) |  |  | - |  |  |  | - |  |  |  | (0.6 | )
Income taxes |  |  | - |  |  |  | (0.3 | ) |  |  | 0.1 |  |  |  | (0.2 | ) |  |  | - |  |  |  | (0.6 | ) |  |  | 0.4 |  |  |  | (0.2 | )
Total other comprehensive income (loss) |  |  | (19.3 | ) |  |  | 1.1 |  |  |  | (0.2 | ) |  |  | (18.4 | ) |  |  | (17.4 | ) |  |  | 2.2 |  |  |  | (1.0 | ) |  |  | (16.2 | )
Ending balance |  | $ | (60.0 | ) |  | $ | (134.1 | ) |  | $ | (0.5 | ) |  | $ | (194.6 | ) |  | $ | (60.0 | ) |  | $ | (134.1 | ) |  | $ | (0.5 | ) |  | $ | (194.6 | )

|  | Three months ended September 30, 2018 |  |  | Six months ended September 30, 2018 |
|  | Foreign Currency Translation |  |  | Defined Benefit Plans |  |  | Cash Flow Hedges |  |  | Total |  |  | Foreign Currency Translation |  |  | Defined Benefit Plans |  |  | Cash Flow Hedges |  |  | Total |
Beginning balance |  | $ | (30.2 | ) |  | $ | (133.9 | ) |  | $ | 0.5 |  |  | $ | (163.6 | ) |  | $ | (5.5 | ) |  | $ | (134.9 | ) |  | $ | 0.1 |  |  | $ | (140.3 | )
Other comprehensive loss before reclassifications |  |  | (6.1 | ) |  |  | - |  |  |  | (0.7 | ) |  |  | (6.8 | ) |  |  | (30.8 | ) |  |  | - |  |  |  | (0.2 | ) |  |  | (31.0 | )
Reclassifications: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Amortization of unrecognized net loss (a) |  |  | - |  |  |  | 1.3 |  |  |  | - |  |  |  | 1.3 |  |  |  | - |  |  |  | 2.6 |  |  |  | - |  |  |  | 2.6 |
Foreign currency translation losses (d) |  |  | 0.8 |  |  |  | - |  |  |  | - |  |  |  | 0.8 |  |  |  | 0.8 |  |  |  | - |  |  |  | - |  |  |  | 0.8 |
Income taxes |  |  | - |  |  |  | (0.3 | ) |  |  | 0.2 |  |  |  | (0.1 | ) |  |  | - |  |  |  | (0.6 | ) |  |  | 0.1 |  |  |  | (0.5 | )
Total other comprehensive income (loss) |  |  | (5.3 | ) |  |  | 1.0 |  |  |  | (0.5 | ) |  |  | (4.8 | ) |  |  | (30.0 | ) |  |  | 2.0 |  |  |  | (0.1 | ) |  |  | (28.1 | )
Ending balance |  | $ | (35.5 | ) |  | $ | (132.9 | ) |  | $ | - |  |  | $ | (168.4 | ) |  | $ | (35.5 | ) |  | $ | (132.9 | ) |  | $ | - |  |  | $ | (168.4 | )

| (a) | Amounts are included in the calculation of net periodic benefit cost for the Company’s defined benefit plans, which include pension and other postretirement plans. See Note 4 for additional information about the Company’s pension plans.

| (b) | Amounts represent net gains and losses associated with cash flow hedges that were reclassified to net earnings.

| (c) | As a result of the sale of its investment in NEX during the second quarter of fiscal 2020, the Company wrote off $0.6 million of accumulated foreign currency translation gains.

| (d) | As a result of the sale of a business in South Africa during the second quarter of fiscal 2019, the Company wrote off $0.8 million of accumulated foreign currency translation losses.

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MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
Note 19: Segment Information
The following is a summary of net sales, gross profit, operating income, and total assets by segment:

|  | Three months ended September 30, |
|  | 2019 |  |  | 2018 |
|  | External Sales |  |  | Inter-segment Sales |  |  | Total |  |  | External Sales |  |  | Inter-segment Sales |  |  | Total |
Net sales: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
VTS |  | $ | 288.8 |  |  | $ | 10.5 |  |  | $ | 299.3 |  |  | $ | 321.5 |  |  | $ | 14.1 |  |  | $ | 335.6 |
CIS |  |  | 155.7 |  |  |  | 1.0 |  |  |  | 156.7 |  |  |  | 177.4 |  |  |  | 0.8 |  |  |  | 178.2 |
BHVAC |  |  | 55.7 |  |  |  | 0.3 |  |  |  | 56.0 |  |  |  | 50.0 |  |  |  | 0.7 |  |  |  | 50.7 |
Segment total |  |  | 500.2 |  |  |  | 11.8 |  |  |  | 512.0 |  |  |  | 548.9 |  |  |  | 15.6 |  |  |  | 564.5 |
Corporate and eliminations |  |  | - |  |  |  | (11.8 | ) |  |  | (11.8 | ) |  |  | - |  |  |  | (15.6 | ) |  |  | (15.6 | )
Net sales |  | $ | 500.2 |  |  | $ | - |  |  | $ | 500.2 |  |  | $ | 548.9 |  |  | $ | - |  |  | $ | 548.9 |

|  | Six months ended September 30, |
|  | 2019 |  |  | 2018 |
|  | External Sales |  |  | Inter-segment Sales |  |  | Total |  |  | External Sales |  |  | Inter-segment Sales |  |  | Total |
Net sales: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
VTS |  | $ | 601.4 |  |  | $ | 24.4 |  |  | $ | 625.8 |  |  | $ | 659.8 |  |  | $ | 28.6 |  |  | $ | 688.4 |
CIS |  |  | 323.6 |  |  |  | 1.9 |  |  |  | 325.5 |  |  |  | 360.9 |  |  |  | 1.2 |  |  |  | 362.1 |
BHVAC |  |  | 104.2 |  |  |  | 0.8 |  |  |  | 105.0 |  |  |  | 94.3 |  |  |  | 1.4 |  |  |  | 95.7 |
Segment total |  |  | 1,029.2 |  |  |  | 27.1 |  |  |  | 1,056.3 |  |  |  | 1,115.0 |  |  |  | 31.2 |  |  |  | 1,146.2 |
Corporate and eliminations |  |  | - |  |  |  | (27.1 | ) |  |  | (27.1 | ) |  |  | - |  |  |  | (31.2 | ) |  |  | (31.2 | )
Net sales |  | $ | 1,029.2 |  |  | $ | - |  |  | $ | 1,029.2 |  |  | $ | 1,115.0 |  |  | $ | - |  |  | $ | 1,115.0 |

|  | Three months ended September 30, |  |  | Six months ended September 30, |
|  | 2019 |  |  | 2018 |  |  | 2019 |  |  | 2018 |
|  | $'s |  |  | % of sales |  |  | $'s |  |  | % of sales |  |  | $'s |  |  | % of sales |  |  | $'s |  |  | % of sales |
Gross profit: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
VTS |  | $ | 35.3 |  |  |  | 11.8 | % |  | $ | 44.6 |  |  |  | 13.3 | % |  | $ | 80.3 |  |  |  | 12.8 | % |  | $ | 98.6 |  |  |  | 14.3 | %
CIS |  |  | 22.9 |  |  |  | 14.6 | % |  |  | 28.3 |  |  |  | 15.9 | % |  |  | 47.2 |  |  |  | 14.5 | % |  |  | 56.9 |  |  |  | 15.7 | %
BHVAC |  |  | 17.7 |  |  |  | 31.7 | % |  |  | 15.0 |  |  |  | 29.5 | % |  |  | 31.4 |  |  |  | 29.9 | % |  |  | 26.6 |  |  |  | 27.8 | %
Segment total |  |  | 75.9 |  |  |  | 14.8 | % |  |  | 87.9 |  |  |  | 15.6 | % |  |  | 158.9 |  |  |  | 15.0 | % |  |  | 182.1 |  |  |  | 15.9 | %
Corporate and eliminations |  |  | (0.2 | ) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 0.2 |  |  |  | - |  |  |  | 0.1 |  |  |  | - |
Gross profit |  | $ | 75.7 |  |  |  | 15.1 | % |  | $ | 87.9 |  |  |  | 16.0 | % |  | $ | 159.1 |  |  |  | 15.5 | % |  | $ | 182.2 |  |  |  | 16.3 | %

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MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)

|  | Three months ended September 30, |  |  | Six months ended September 30, |
|  | 2019 |  |  | 2018 |  |  | 2019 |  |  | 2018 |
Operating income: |  |  |  |  |  |  |  |  |  |  |  |
VTS |  | $ | 7.4 |  |  | $ | 14.1 |  |  | $ | 24.7 |  |  | $ | 39.6 |
CIS |  |  | 8.5 |  |  |  | 12.9 |  |  |  | 17.5 |  |  |  | 26.1 |
BHVAC |  |  | 8.8 |  |  |  | 4.8 |  |  |  | 14.1 |  |  |  | 8.0 |
Segment total |  |  | 24.7 |  |  |  | 31.8 |  |  |  | 56.3 |  |  |  | 73.7 |
Corporate and eliminations |  |  | (18.7 | ) |  |  | (9.0 | ) |  |  | (32.2 | ) |  |  | (16.1 | )
Operating income |  | $ | 6.0 |  |  | $ | 22.8 |  |  | $ | 24.1 |  |  | $ | 57.6 |

|  | September 30, 2019 |  |  | March 31, 2019 |
Total assets: (a) |  |  |  |  |  |
VTS |  | $ | 755.3 |  |  | $ | 749.9 |
CIS |  |  | 612.8 |  |  |  | 604.2 |
BHVAC |  |  | 103.4 |  |  |  | 89.4 |
Corporate and eliminations |  |  | 93.0 |  |  |  | 94.5 |
Total assets |  | $ | 1,564.5 |  |  | $ | 1,538.0 |

(a) | The Company adopted new lease accounting guidance and, as a result, recorded $61.3 million of operating lease assets on its consolidated balance sheet on April 1, 2019. See Note 1 for additional information.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
When we use the terms “Modine,” “we,” “us,” the “Company,” or “our” in this report, we are referring to Modine Manufacturing Company. Our fiscal year ends on March 31 and, accordingly, all references to quarters refer to our fiscal quarters. The quarter ended September 30, 2019 was the second quarter of fiscal 2020.
Second Quarter Highlights
Net sales in the second quarter of fiscal 2020 decreased $48.7 million, or 9 percent, from the second quarter of fiscal 2019, primarily due to lower sales in our Vehicular Thermal Solutions (“VTS”) and Commercial and Industrial Solutions (“CIS”) operating segments, partially offset by higher sales in our Building HVAC Systems (“BHVAC”) segment. Cost of sales decreased $36.5 million, or 8 percent from the second quarter of fiscal 2019, primarily due to lower sales volume. Gross profit decreased $12.2 million and gross margin declined 90 basis points to 15.1 percent. Selling, general and administrative (“SG&A”) expenses increased $4.0 million, primarily due to $11.9 million of costs associated with our review of strategic alternatives for the VTS segment’s automotive business. Operating income during the second quarter of fiscal 2020 decreased $16.8 million to $6.0 million, primarily due to lower gross profit and higher SG&A expenses.
Year-to-date Highlights
Net sales in the first six months of fiscal 2020 decreased $85.8 million, or 8 percent, from the same period last year, primarily due to lower sales in our VTS and CIS operating segments, partially offset by higher sales in our BHVAC segment. Cost of sales decreased $62.7 million, or 7 percent, from the same period last year, primarily due to lower sales volume. Gross profit decreased $23.1 million and gross margin declined 80 basis points to 15.5 percent. SG&A expenses increased $8.2 million, primarily due to $20.2 million of costs associated with our review of strategic alternatives for the VTS segment’s automotive business. Operating income during the first six months of fiscal 2020 decreased $33.5 million to $24.1 million, primarily due to lower gross profit and higher SG&A expenses.
We previously announced our evaluation of strategic alternatives for the automotive business within our VTS segment and that we are engaged in a formal sale process with potential buyers. While the sale process is taking longer than anticipated due to challenging economic conditions, we are working diligently towards a sale of the automotive business. We remain committed to our strategy of becoming a more diversified industrial company and executing on the best strategic alternative for the automotive business in order to both optimize our VTS segment’s financial performance and maximize shareholder value.
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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, 2019 and 2018:

|  | Three months ended September 30, |  |  | Six months ended September 30, |
|  | 2019 |  |  | 2018 |  |  | 2019 |  |  | 2018 |
(in millions) |  | $'s |  |  | % of sales |  |  | $'s |  |  | % of sales |  |  | $'s |  |  | % of sales |  |  | $'s |  |  | % of sales |
Net sales |  | $ | 500.2 |  |  |  | 100.0 | % |  | $ | 548.9 |  |  |  | 100.0 | % |  | $ | 1,029.2 |  |  |  | 100.0 | % |  | $ | 1,115.0 |  |  |  | 100.0 | %
Cost of sales |  |  | 424.5 |  |  |  | 84.9 | % |  |  | 461.0 |  |  |  | 84.0 | % |  |  | 870.1 |  |  |  | 84.5 | % |  |  | 932.8 |  |  |  | 83.7 | %
Gross profit |  |  | 75.7 |  |  |  | 15.1 | % |  |  | 87.9 |  |  |  | 16.0 | % |  |  | 159.1 |  |  |  | 15.5 | % |  |  | 182.2 |  |  |  | 16.3 | %
Selling, general and administrative expenses |  |  | 67.4 |  |  |  | 13.5 | % |  |  | 63.4 |  |  |  | 11.5 | % |  |  | 130.9 |  |  |  | 12.7 | % |  |  | 122.7 |  |  |  | 11.0 | %
Restructuring expenses |  |  | 2.3 |  |  |  | 0.4 | % |  |  | - |  |  |  | - |  |  |  | 4.1 |  |  |  | 0.4 | % |  |  | 0.2 |  |  |  | - |
Loss on sale of assets |  |  | - |  |  |  | - |  |  |  | 1.7 |  |  |  | 0.3 | % |  |  | - |  |  |  | - |  |  |  | 1.7 |  |  |  | 0.1 | %
Operating income |  |  | 6.0 |  |  |  | 1.2 | % |  |  | 22.8 |  |  |  | 4.2 | % |  |  | 24.1 |  |  |  | 2.3 | % |  |  | 57.6 |  |  |  | 5.2 | %
Interest expense |  |  | (5.8 | ) |  |  | -1.1 | % |  |  | (6.5 | ) |  |  | -1.2 | % |  |  | (11.7 | ) |  |  | -1.1 | % |  |  | (12.7 | ) |  |  | -1.1 | %
Other expense – net |  |  | (1.3 | ) |  |  | -0.3 | % |  |  | (0.5 | ) |  |  | -0.1 | % |  |  | (2.4 | ) |  |  | -0.2 | % |  |  | (1.6 | ) |  |  | -0.1 | %
(Loss) earnings before income taxes |  |  | (1.1 | ) |  |  | -0.2 | % |  |  | 15.8 |  |  |  | 2.9 | % |  |  | 10.0 |  |  |  | 1.0 | % |  |  | 43.3 |  |  |  | 3.9 | %
(Provision) benefit for income taxes |  |  | (3.7 | ) |  |  | -0.7 | % |  |  | 22.9 |  |  |  | 4.2 | % |  |  | (6.6 | ) |  |  | -0.6 | % |  |  | 17.9 |  |  |  | 1.6 | %
Net (loss) earnings |  | $ | (4.8 | ) |  |  | -1.0 | % |  | $ | 38.7 |  |  |  | 7.1 | % |  | $ | 3.4 |  |  |  | 0.3 | % |  | $ | 61.2 |  |  |  | 5.5 | %

Comparison of Three Months Ended September 30, 2019 and 2018
Second quarter net sales of $500.2 million were $48.7 million, or 9 percent, lower than the second quarter of the prior year, primarily due to lower sales in our VTS and CIS segments and a $10.9 million unfavorable impact of foreign currency exchange rate changes, partially offset by higher sales in our BHVAC segment. Sales decreased $36.3 million and $21.5 million in our VTS and CIS segments, respectively. Sales increased $5.3 million in our BHVAC segment.
Second quarter cost of sales decreased $36.5 million, or 8 percent, primarily due to lower sales volume and a $9.4 million favorable impact of foreign currency exchange rate changes. As a percentage of sales, cost of sales increased 90 basis points to 84.9 percent and was negatively impacted by approximately 90 basis points due to higher labor and inflationary costs and, to a lesser extent, by unfavorable customer pricing and sales mix. These negative impacts were partially offset by favorable material costs, which impacted costs of sales by approximately 50 basis points.
As a result of lower sales and higher cost of sales as a percentage of sales, second quarter gross profit decreased $12.2 million and gross margin declined 90 basis points to 15.1 percent.
Second quarter SG&A expenses increased $4.0 million. The increase in SG&A expenses was primarily due to $11.9 million of costs recorded at Corporate associated with our review of strategic alternatives for the VTS segment’s automotive business, which primarily related to third-party professional services and included costs incurred in the process of preparing for a potential sale of the automotive business assets. This increase was partially offset by lower compensation-related expenses, which decreased approximately $3.0 million, lower environmental charges related to a previously-owned manufacturing facility in the U.S, which decreased approximately $2.0 million, and a $1.0 million favorable impact from foreign currency exchange rate changes.
Restructuring expenses totaled $2.3 million in the second quarter of fiscal 2020 and primarily consisted of severance expenses in the VTS segment.
Operating income of $6.0 million in the second quarter of fiscal 2020 decreased $16.8 million compared with the second quarter of fiscal 2019. This decrease was primarily due to $11.9 million of costs associated with our review of strategic alternatives for our automotive business and lower earnings in our VTS and CIS segments, which decreased $6.7 million and $4.4 million, respectively, partially offset by higher earnings in our BHVAC segment, which increased $4.0 million.
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The provision for income taxes was $3.7 million in the second quarter of fiscal 2020, compared with a benefit for income taxes of $22.9 million during the same period in the prior year. The $26.6 million change was primarily due to income tax benefits totaling $24.4 million recorded during the prior year resulting from our accounting for the Tax Cuts and Jobs Act (the “Tax Act”) and the recognition of tax assets for foreign tax credits.
Comparison of Six Months Ended September 30, 2019 and 2018
Fiscal 2020 year-to-date net sales of $1,029.2 million were $85.8 million, or 8 percent, lower than the same period last year, primarily due to lower sales in our VTS and CIS segments and a $28.7 million unfavorable impact of foreign currency exchange rate changes, partially offset by higher sales in our BHVAC segment. Sales decreased $62.6 million and $36.6 million in our VTS and CIS segments, respectively. Sales increased $9.3 million in our BHVAC segment.
Fiscal 2020 year-to-date cost of sales of $870.1 million decreased $62.7 million, or 7 percent, primarily due to lower sales volume and a $24.5 million favorable impact of foreign currency exchange rate changes. As a percentage of sales, cost of sales increased 80 basis points to 84.5 percent and was negatively impacted by approximately 90 basis points due to higher labor and inflationary costs and, to a lesser extent, by unfavorable customer pricing and sales mix. These negative impacts were partially offset by favorable material costs, which impacted costs of sales by approximately 30 basis points. The favorable material costs primarily resulted from lower commodity pricing, which more than offset the negative impacts of tariffs.
As a result of lower sales and higher cost of sales as a percentage of sales, fiscal 2020 year-to-date gross profit decreased $23.1 million and gross margin declined 80 basis points to 15.5 percent.
Fiscal 2020 year-to-date SG&A expenses increased $8.2 million. The increase in SG&A expenses was primarily due to $20.2 million of costs associated with our review of strategic alternatives for our automotive business, which primarily related to third-party professional services and included costs incurred in the process of preparing for a potential sale of the automotive business assets. This increase was partially offset by lower compensation-related expenses, which decreased approximately $6.0 million, lower environmental charges related to a previously-owned manufacturing facility in the U.S, which decreased approximately $3.0 million, and a $2.6 million favorable impact from foreign currency exchange rate changes.
Restructuring expenses of $4.1 million during the first six months of fiscal 2020 increased $3.9 million compared with the same period last year, primarily due to higher severance expenses in our VTS segment.
Operating income of $24.1 million during the first six months of fiscal 2020, decreased $33.5 million compared with the same period last year. This decrease was primarily due to the $20.2 million of costs associated with our review of strategic alternatives for our automotive business and lower earnings in our VTS and CIS segments, which decreased $14.9 million and $8.6 million, respectively, partially offset by higher earnings in our BHVAC segment, which increased $6.1 million.
The provision for income taxes was $6.6 million during the first six months of fiscal 2020, compared with a benefit for income taxes of $17.9 million during the same period in the prior year. The $24.5 million change was primarily due to income tax benefits totaling $24.4 million recorded during the prior year resulting from our accounting for the Tax Act and the recognition of tax assets for foreign tax credits.
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SEGMENT RESULTS OF OPERATIONS
The following is a discussion of our segment results of operations for the three and six months ended September 30, 2019 and 2018:
Vehicular Thermal Solutions

|  | Three months ended September 30, |  |  | Six months ended September 30, |
|  | 2019 |  |  | 2018 |  |  | 2019 |  |  | 2018 |
(in millions) |  | $'s |  |  | % of sales |  |  | $'s |  |  | % of sales |  |  | $'s |  |  | % of sales |  |  | $'s |  |  | % of sales |
Net sales |  | $ | 299.3 |  |  |  | 100.0 | % |  | $ | 335.6 |  |  |  | 100.0 | % |  | $ | 625.8 |  |  |  | 100.0 | % |  | $ | 688.4 |  |  |  | 100.0 | %
Cost of sales |  |  | 264.0 |  |  |  | 88.2 | % |  |  | 291.0 |  |  |  | 86.7 | % |  |  | 545.5 |  |  |  | 87.2 | % |  |  | 589.8 |  |  |  | 85.7 | %
Gross profit |  |  | 35.3 |  |  |  | 11.8 | % |  |  | 44.6 |  |  |  | 13.3 | % |  |  | 80.3 |  |  |  | 12.8 | % |  |  | 98.6 |  |  |  | 14.3 | %
Selling, general and administrative expenses |  |  | 26.0 |  |  |  | 8.7 | % |  |  | 30.5 |  |  |  | 9.1 | % |  |  | 52.1 |  |  |  | 8.3 | % |  |  | 58.9 |  |  |  | 8.5 | %
Restructuring expenses |  |  | 1.9 |  |  |  | 0.6 | % |  |  | - |  |  |  | - |  |  |  | 3.5 |  |  |  | 0.6 | % |  |  | 0.1 |  |  |  | - |
Operating income |  | $ | 7.4 |  |  |  | 2.5 | % |  | $ | 14.1 |  |  |  | 4.2 | % |  | $ | 24.7 |  |  |  | 3.9 | % |  | $ | 39.6 |  |  |  | 5.8 | %

Comparison of Three Months Ended September 30, 2019 and 2018
VTS net sales decreased $36.3 million, or 11 percent, from the second quarter of fiscal 2019 to the second quarter of fiscal 2020, primarily due to lower sales volume, a $6.6 million unfavorable impact of foreign currency exchange rate changes, and, to a lesser extent, unfavorable customer pricing largely resulting from contractually-scheduled price-downs. Sales to global off-highway and commercial vehicle customers decreased $17.3 million and $14.0 million, respectively.
VTS cost of sales decreased $27.0 million, or 9 percent, from the second quarter of fiscal 2019 to the second quarter of fiscal 2020, primarily due to lower sales volume and a $5.8 million favorable impact of foreign currency exchange rate changes. As a percentage of sales, cost of sales increased 150 basis points to 88.2 percent. Beyond the unfavorable impact of the lower sales volume, higher labor and inflationary costs and unfavorable customer pricing negatively impacted cost of sales by approximately 100 basis points and 70 basis points, respectively. Higher depreciation costs, primarily resulting from recent manufacturing capacity expansion in China and Hungary, also negatively impacted cost of sales to a lesser extent. These negative impacts were partially offset by favorable material costs, which impacted cost of sales by approximately 90 basis points, and improved operating efficiencies. The favorable material costs primarily resulted from lower commodity pricing, which more than offset the negative impacts of tariffs.
As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $9.3 million and gross margin declined 150 basis points to 11.8 percent.
SG&A expenses decreased $4.5 million, or 40 basis points as a percentage of sales, primarily due to lower compensation-related expenses, which decreased approximately $2.0 million, lower environmental charges related to a previously-owned manufacturing facility in the U.S, which decreased approximately $2.0 million, and a $0.5 million favorable impact of foreign currency exchange rate changes.
Restructuring expenses during the second quarter of fiscal 2020 totaled $1.9 million and primarily consisted of severance expenses resulting from targeted headcount reductions in Europe and in the Americas.
Operating income decreased $6.7 million to $7.4 million during the second quarter, primarily due to lower gross profit and higher restructuring expenses, partially offset by lower SG&A expenses.
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Comparison of Six Months Ended September 30, 2019 and 2018
VTS year-to-date net sales decreased $62.6 million, or 9 percent, from the same period last year, primarily due to lower sales volume, an $18.7 million unfavorable impact of foreign currency exchange rate changes, and, to a lesser extent, unfavorable customer pricing largely resulting from contractually-scheduled price-downs. Sales to customers in Europe decreased $38.6 million and sales to off-highway customers in Asia and North America decreased $14.5 million and $7.2 million, respectively.
VTS year-to-date cost of sales decreased $44.3 million, or 8 percent, primarily due to lower sales volume and a $16.1 million favorable impact of foreign currency exchange rate changes. As a percentage of sales, cost of sales increased 150 basis points to 87.2 percent. Beyond the unfavorable impact of the lower sales volume, higher labor and inflationary costs and unfavorable customer pricing negatively impacted cost of sales by approximately 100 basis points and 70 basis points, respectively. These negative impacts were partially offset by favorable material costs, which impacted cost of sales by approximately 50 basis points, and improved operating efficiencies. The favorable material costs primarily resulted from lower commodity pricing, which more than offset the negative impacts of tariffs.
As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $18.3 million and gross margin declined 150 basis points to 12.8 percent.
VTS year-to-date SG&A expenses decreased $6.8 million, or 20 basis points as a percentage of sales, primarily due to lower compensation-related expenses, which decreased approximately $4.0 million, lower environmental charges related to a previously-owned manufacturing facility in the U.S, which decreased approximately $3.0 million, and a $1.5 million favorable impact of foreign currency exchange rate changes.
Restructuring expenses increased $3.4 million, primarily due to higher severance expenses resulting from targeted headcount reductions in Europe and in the Americas during the current year.
Operating income decreased $14.9 million to $24.7 million, primarily due to lower gross profit and higher restructuring expenses, partially offset by lower SG&A expenses.
Commercial and Industrial Solutions

|  | Three months ended September 30, |  |  | Six months ended September 30, |
|  | 2019 |  |  | 2018 |  |  | 2019 |  |  | 2018 |
(in millions) |  | $'s |  |  | % of sales |  |  | $'s |  |  | % of sales |  |  | $'s |  |  | % of sales |  |  | $'s |  |  | % of sales |
Net sales |  | $ | 156.7 |  |  |  | 100.0 | % |  | $ | 178.2 |  |  |  | 100.0 | % |  | $ | 325.5 |  |  |  | 100.0 | % |  | $ | 362.1 |  |  |  | 100.0 | %
Cost of sales |  |  | 133.8 |  |  |  | 85.4 | % |  |  | 149.9 |  |  |  | 84.1 | % |  |  | 278.3 |  |  |  | 85.5 | % |  |  | 305.2 |  |  |  | 84.3 | %
Gross profit |  |  | 22.9 |  |  |  | 14.6 | % |  |  | 28.3 |  |  |  | 15.9 | % |  |  | 47.2 |  |  |  | 14.5 | % |  |  | 56.9 |  |  |  | 15.7 | %
Selling, general and administrative expenses |  |  | 14.0 |  |  |  | 9.0 | % |  |  | 15.4 |  |  |  | 8.7 | % |  |  | 29.1 |  |  |  | 8.9 | % |  |  | 30.7 |  |  |  | 8.5 | %
Restructuring expenses |  |  | 0.4 |  |  |  | 0.2 | % |  |  | - |  |  |  | - |  |  |  | 0.6 |  |  |  | 0.2 | % |  |  | 0.1 |  |  |  | - |
Operating income |  | $ | 8.5 |  |  |  | 5.4 | % |  | $ | 12.9 |  |  |  | 7.2 | % |  | $ | 17.5 |  |  |  | 5.4 | % |  | $ | 26.1 |  |  |  | 7.2 | %

Comparison of Three Months Ended September 30, 2019 and 2018
CIS net sales decreased $21.5 million, or 12 percent, from the second quarter of fiscal 2019 to the second quarter of fiscal 2020, primarily due to lower sales volume and a $3.3 million unfavorable impact of foreign currency exchange rate changes. Sales to commercial HVAC&R and data center cooling customers decreased $11.7 million and $9.3 million, respectively.
CIS cost of sales decreased $16.1 million, or 11 percent from the second quarter of fiscal 2019 to the second quarter of fiscal 2020, primarily due to lower sales volume and a $2.8 million favorable impact of foreign currency exchange rate changes. As a percentage of sales, cost of sales increased 130 basis points to 85.4 percent, primarily due to the unfavorable impact of lower sales volume and unfavorable sales mix.
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As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $5.4 million and gross margin declined 130 basis points to 14.6 percent.
SG&A expenses decreased $1.4 million compared with the prior year yet increased 30 basis points as a percentage of sales. The decrease in SG&A was primarily due to lower compensation-related expenses, which decreased approximately $1.0 million, and cost-control initiatives.
Operating income decreased $4.4 million to $8.5 million during the second quarter, primarily due to lower gross profit, partially offset by lower SG&A expenses.
Comparison of Six Months Ended September 30, 2019 and 2018
CIS year-to-date net sales decreased $36.6 million, or 10 percent, from the same period last year, primarily due to lower sales volume and a $7.9 million unfavorable impact of foreign currency exchange rate changes. Sales to data center cooling and commercial HVAC&R customers decreased $19.2 million and $16.1 million, respectively.
CIS year-to-date cost of sales decreased $26.9 million, or 9 percent, primarily due to lower sales volume and a $6.8 million favorable foreign currency exchange rate impact. As a percentage of sales, cost of sales increased 120 basis points to 85.5 percent, primarily due to the unfavorable impact of lower sales volume and unfavorable sales mix.
As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $9.7 million and gross margin declined 120 basis points to 14.5 percent.
CIS year-to-date SG&A expenses decreased $1.6 million compared with the prior year yet increased 40 basis points as a percentage of sales. The decrease in SG&A was primarily due to a $0.7 million favorable impact of foreign currency exchange rate changes, cost-control initiatives, and lower compensation-related expenses.
Operating income decreased $8.6 million to $17.5 million, primarily due to lower gross profit.
Building HVAC Systems

|  | Three months ended September 30, |  |  | Six months ended September 30, |
|  | 2019 |  |  | 2018 |  |  | 2019 |  |  | 2018 |
(in millions) |  | $'s |  |  | % of sales |  |  | $'s |  |  | % of sales |  |  | $'s |  |  | % of sales |  |  | $'s |  |  | % of sales |
Net sales |  | $ | 56.0 |  |  |  | 100.0 | % |  | $ | 50.7 |  |  |  | 100.0 | % |  | $ | 105.0 |  |  |  | 100.0 | % |  | $ | 95.7 |  |  |  | 100.0 | %
Cost of sales |  |  | 38.3 |  |  |  | 68.3 | % |  |  | 35.7 |  |  |  | 70.5 | % |  |  | 73.6 |  |  |  | 70.1 | % |  |  | 69.1 |  |  |  | 72.2 | %
Gross profit |  |  | 17.7 |  |  |  | 31.7 | % |  |  | 15.0 |  |  |  | 29.5 | % |  |  | 31.4 |  |  |  | 29.9 | % |  |  | 26.6 |  |  |  | 27.8 | %
Selling, general and administrative expenses |  |  | 8.9 |  |  |  | 15.9 | % |  |  | 8.5 |  |  |  | 16.7 | % |  |  | 17.3 |  |  |  | 16.5 | % |  |  | 16.9 |  |  |  | 17.7 | %
Loss on sale of assets |  |  | - |  |  |  | - |  |  |  | 1.7 |  |  |  | 3.4 | % |  |  | - |  |  |  | - |  |  |  | 1.7 |  |  |  | 1.8 | %
Operating income |  | $ | 8.8 |  |  |  | 15.8 | % |  | $ | 4.8 |  |  |  | 9.4 | % |  | $ | 14.1 |  |  |  | 13.4 | % |  | $ | 8.0 |  |  |  | 8.3 | %

Comparison of Three Months Ended September 30, 2019 and 2018
BHVAC net sales increased $5.3 million, or 10 percent, from the second quarter of fiscal 2019 to the second quarter of fiscal 2020, primarily due to higher sales volume, partially offset by a $1.0 million unfavorable impact of foreign currency exchange rate changes. Sales of ventilation and heating products in North America increased $3.6 million and $2.8 million, respectively.
BHVAC cost of sales increased $2.6 million, or 7 percent from the second quarter of fiscal 2019 to the second quarter of fiscal 2020, primarily due to higher sales volume, partially offset by a $0.9 million favorable impact of foreign currency exchange rate changes. As a percentage of sales, cost of sales decreased 220 basis points to 68.3 percent and was positively impacted by favorable sales mix and customer pricing.
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As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $2.7 million and gross margin improved 220 basis points to 31.7 percent.
SG&A expenses increased $0.4 million from the prior year, yet decreased 80 basis points as a percentage of sales.
During the second quarter of fiscal 2019, we sold our business in South Africa and, as a result, recorded a loss of $1.7 million.
Operating income of $8.8 million increased $4.0 million, primarily due to higher gross profit and the loss on sale of the South African business in the prior year.
Comparison of Six Months Ended September 30, 2019 and 2018
BHVAC year-to-date net sales increased $9.3 million, or 10 percent from the same period last year, primarily due to higher sales volume, partially offset by a $2.1 million unfavorable impact of foreign currency exchange rate changes. Sales of ventilation and heating products in North America increased $6.9 million and $3.8 million, respectively.
BHVAC year-to-date cost of sales increased $4.5 million, or 7 percent from the same period last year, primarily due to higher sales volume, partially offset by a $1.8 million favorable impact of foreign currency exchange rate changes. As a percentage of sales, cost of sales decreased 210 basis points to 70.1 percent, primarily due to favorable sales mix and customer pricing.
As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8 million and gross margin improved 210 basis points to 29.9 percent.
BHVAC year-to-date SG&A expenses increased $0.4 million from the prior year yet decreased 120 basis points as a percentage of sales.
Operating income of $14.1 million increased $6.1 million, primarily due to higher gross profit and the loss on sale of our South African business in the prior year.
Liquidity and Capital Resources
Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents as of September 30, 2019 of $32.3 million, and an available borrowing capacity of $133.0 million under our revolving credit facility. Given our extensive international operations, approximately $29.0 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 have not encountered, and do not expect to encounter, any difficulty meeting the liquidity requirements of our global operations.
Net cash provided by operating activities for the six months ended September 30, 2019 was $17.5 million, which represents a $19.2 million decrease compared with $36.7 million of net cash provided by operating activities during the same period in the prior year. This decrease in operating cash flow was primarily due to lower operating earnings in the current year and payments associated with our strategic review of alternatives for the VTS segment’s automotive business, partially offset by favorable net changes in working capital. The favorable changes in working capital during the first six months of fiscal 2020, compared with the same period in the prior year, included lower employee benefit and incentive compensation payments. Capital expenditures of $41.4 million during the first six months of fiscal 2020 increased $3.5 million compared with the same period in the prior year, primarily due to capital investments associated with preparing for the potential sale of our automotive business.
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Debt
Our debt agreements require us to maintain compliance with various covenants. As specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales. In addition, under our primary debt agreements in the U.S., we are subject to a leverage ratio covenant, which 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, 2019, our leverage ratio and interest coverage ratio were 2.3 and 8.7, respectively. We were in compliance with our debt covenants as of September 30, 2019 and expect to remain in compliance during the balance of fiscal 2020 and beyond.
Forward-Looking Statements
This report, including, but not limited to, the discussion under Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains statements, including information about future financial performance, accompanied by phrases such as “believes,” “estimates,” “expects,” “plans,” “anticipates,” “intends,” and other similar “forward-looking” statements, as defined in the Private Securities Litigation Reform Act of 1995. Modine’s actual results, performance or achievements may differ materially from those expressed or implied in these statements, because of certain risks and uncertainties, including, but not limited to, those described under “Risk Factors” in Item 1A. in Part I. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2019. Other risks and uncertainties include, but are not limited to, the following:
Market Risks:

| • | Economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including, in particular, foreign currency exchange rate fluctuations, tariffs (and potential trade war impacts resulting from tariffs or retaliatory actions), inflation, changes in interest rates, recession and recovery therefrom, restrictions and uncertainty associated with cross-border trade, 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 United States or by its trade partners, as well as continuing uncertainty regarding the timing and the short- and long-term implications of “Brexit”;

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

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

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Operational Risks:

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

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

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

| • | Unanticipated product or manufacturing difficulties or operating inefficiencies, including unanticipated program launch and product transfer challenges and warranty claims;

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

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

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

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

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

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

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

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

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

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

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

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Strategic Risks:

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

| • | Our ability to successfully separate and sell our automotive business within our VTS segment at a price that is sufficient to maximize the value of the business, and in order to optimize the segment’s future financial performance;

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

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

Financial Risks:

| • | Our ability to fund our global liquidity requirements efficiently for Modine’s current operations and meet our long-term commitments in the event of an unexpected disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

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

| • | Our ability to maintain our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) in our target range of 1.5 to 2.5 in an efficient manner;

| • | 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.
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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, 2019. The Company’s market risks have not materially changed since the fiscal 2019 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, at the direction of the General Counsel and under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Vice President, Finance and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon that evaluation, the President and Chief Executive Officer and Vice President, Finance and Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of September 30, 2019.
Changes in Internal Control Over Financial Reporting
There have been no changes in internal control over financial reporting during the second quarter of fiscal 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II. OTHER INFORMATION

Item 6. | Exhibits.

(a) | Exhibits:

Exhibit No. | Description | Incorporated Herein By Reference To | Filed Herewith
10.1 | Form of Fiscal 2020 Modine Non-Employee Director Restricted Stock Unit Award Agreement |  | X
31.1 | Rule 13a-14(a)/15d-14(a) Certification of Thomas A. Burke, President and Chief Executive Officer. |  | X
31.2 | Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Vice President, Finance and Chief Financial Officer. |  | X
32.1 | Section 1350 Certification of Thomas A. Burke, President and Chief Executive Officer. |  | X
32.2 | Section 1350 Certification of Michael B. Lucareli, Vice President, Finance and Chief Financial Officer. |  | X
101.INS | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). |  | X
101.SCH | Inline XBRL Taxonomy Extension Schema |  | X
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document |  | X
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document |  | X
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document |  | X
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document |  | X
104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) |  | X

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Table of Contents
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
MODINE MANUFACTURING COMPANY
(Registrant)
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Vice President, Finance and
Chief Financial Officer*
Date: November 8, 2019
* Executing as both the principal financial officer and a duly authorized officer of the Company
38